Yet again, we are reminded of our extreme frailty

 
Allister Heath
LITY

LITY is the only appropriate response in the face of the horrendous human tragedy, grief and destruction unleashed on Japan. We are fortunate to be living in Britain, a temperate country largely immune from the destruction regularly unleashed by natural forces on the rest of the world. With the death toll mounting towards ever-more horrific levels, it will take weeks to ascertain the human cost of the catastrophe; but the effect on the world economy is a little clearer.

Most spectacularly of all, the nuclear industry energy has once again been thrust under the spotlight: for the first time ever, several reactors in several different plants have been damaged at the same time, in some cases very badly. Many of the reactors are old, dating back to the 1970s. But even though the messages from the Japanese authorities have been confused and the situation could yet become very serious, cautious optimism appeared to be in order last night. This is no Chernobyl. Yet many questions will rightly be asked about the positioning and security of the affected reactors. All countries that operate nuclear power plants need to use this as an opportunity to review safety standards and tighten up on procedures. This is vital: the last thing we need is this catastrophe to discredit nuclear energy at a time of growing question marks over the reliability and price of oil and gas. The world needs more nuclear power plants, not fewer; but such an expansion can only be acceptable if plants remain safe even in the most extreme circumstances.

For the global economy, such a catastrophe comes at a bad time. China was already slowing and plenty of observers will worry that Japan’s woes will trigger a serious global slowdown. But the impact on Japanese activity – while nasty at first – is likely to dissipate relatively quickly. The real problem will be that Japan’s government will borrow even more, adding to its already huge national debt. This could rattle credit rating agencies, for good reason.

Mark Skidmore, an economist at Michigan State, and Hideki Toya, from Nagoya City University, examined data for 151 countries over 1960-2003. Those with higher income, education and financial development suffered fewer losses from natural disasters, partly because resources were devoted to safety and partly because economies rich in human capital bounce back exceptionally fast. Take the Kobe earthquake in January 1995: it killed 6,400 people, caused damage of 10 trillion yen, or 2 per cent of Japan’s GDP and debilitated the world’s sixth-largest container port. Yet Japan’s industrial production, after falling 2.6 per cent in January 1995, rose 2.2 per cent that February and another 1.0 per cent in March. GDP for the first quarter of 1995 rose at an annualised rate of 3.4 per cent. Even though one of Japan’s great cities lay devastated, this didn’t even register in GDP data. Similarly massive catastrophes, such as 9/11, also didn’t have anything like as large a direct economic impact as was originally feared. The real story is one of appalling human suffering, not economics.

It is worth recalling what happened after Kobe. The Nikkei fell 6.6 per cent in the first week, 5.26 per cent during the next month, and 15 per cent over the next three months. Six months later, it had lost 25 per cent – but by the end of 1995, it had regained all of its losses. What about today? Tokyo opened heavily down, suggesting shares may fall faster this time around.

Japan is a huge importer of raw materials so a temporary drop in demand could push down the price of oil and other commodities. Insurers could be hit for $35bn, though a Japanese government guarantee means the losses to the City may not be as large as for a similar event in another country. Japan is the second-biggest holder of US government bonds, with $900bn in reserves. Some of these will be sold to pay for repairs, especially by Japanese insurers; there will be less demand for US Treasuries in the months ahead, pushing up dollar yields. If overseas assets are sold and repatriated to Japan, this could put upwards pressure on the yen. All of this could be negated by the Bank of Japan: it will flood the markets with yen, starting today.

So much for the economics. As Alice Morse Earle once wrote, “Yesterday is history. Tomorrow is a mystery. Today is a gift. That’s why it is called the present.” As Japan mourns its dead, the rest of us could do worse than to reflect on such wise words.

allister.heath@cityam.com
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