You would expect a nation famed for its efficiency and infrastructure to set the world standard for rebuilding. One year after a giant earthquake and tsunami, Japan’s revival has barely begun. In the days after March 11, economists predicted a powerful rebound as construction crews converged on the earthquake-ravaged northeastern Tohoku region, a replay of what happened following the Kobe temblor in 1995. What’s more, many hoped the disaster—20,000 dead, towns wiped out, the worst nuclear crisis since Chernobyl—would break Tokyo’s political paralysis and catalyze major change.
Politicians have spent the two-plus decades since Japan’s bubble burst doubling down on the strategies of the past: massive borrowing to finance public works, ultra-low interest rates, lifetime employment, negligible immigration, a rigid industrial structure favoring exports from a handful of behemoths, compliant banks, and clubby ties between the political and business worlds. Incestuous links between bureaucrats and management at Tokyo Electric Power enabled years of doctored safety reports and underestimated risks. This set the stage for Japan’s nuclear crisis, which is still unfolding; radiation continues to leak out of the Fukushima nuclear plant and serves as a daily symbol of Japanese dysfunction.
It’s long been said that only a huge crisis would nudge Japan onto a more productive course, as occurred following the devastation of World War II. Instead, plans to spend about ¥20 trillion ($250 billion) on reconstruction have been stymied by Prime Minister Yoshihiko Noda’s failure to articulate a grand vision, bureaucrats’ reluctance to make vital decisions, and the realities of the deflationary cycle that deepened over the last 12 months and depressed both companies and consumers. Japan’s new Reconstruction Agency only began operations on Feb. 10, 11 months after the tsunami.
“They have done a great job of neatly piling the debris and tucking it under tarps, but otherwise I see little progress,” says Jeff Kingston, head of the Asian Studies program at Temple University’s Tokyo Campus. “Partly it’s political paralysis and partly bureaucratic indecision about what to rebuild, how to consolidate, and the problem of disposing of that rubbish.”
The wreckage that’s getting the most attention is Japan’s economy. The public debt, long the world’s largest, is more than double the size of its $5.5 trillion economy. Gross domestic product contracted in three of the previous four quarters, the current account surplus shrank in 2011 to a 15-year low, and Japan posted a record ¥1.48 trillion trade deficit in January. The strong yen slammed exporters such as Sony (SNE) and Honda Motor (HMC), hollowing out the industrial sector further. “The government simply didn’t come through, and that hasn’t been lost on the Japanese people,” says Gerard Lyons, London-based chief economist at Standard Chartered Bank (STAN:LN).
With distrust growing, the prime minister’s days appear numbered. In September, Noda, 54, rode to power on a wave of popular support—the right no-nonsense leader at the right moment, not only to rebuild the economy but also reinvent it. Now voters have come to believe he’s no more the man for the job than the five other prime ministers since late 2006. His approval rating is 30 percent, the point at which lawmakers called for his predecessors to go.
With or without Noda, decisions must be made about nationalizing Tepco and firing its top management, whose negligence helped put Japan where it is today. The same goes for taking on the culture that produced the embarrassing accounting scandal at Olympus.
Japan’s prime minister must create a mechanism to decide which towns and villages in Tohoku will be restored and which won’t be. Much of rural Japan has been losing its population and industrial strength for years.
Decentralizing power, which would require a regulatory revolution in the central government, would help the process. Japan has long been a top-down economy: Tokyo bureaucrats call the shots and divvy up the tax revenues; local leaders react accordingly. Those in Tokyo working on revival plans are mired in red tape and too far away from the damaged areas to grasp the complexities of life there. Japan’s depopulated towns need to join forces and share budgets—a move Tokyo is too busy and distracted to make. The biggest mistake would be for Japan to try to recreate what existed on March 10, 2011. Despite what has been a lost year for Japan, the nation still has an opportunity for the kind of reset that doesn’t come along often. It would be a shame if Japan wasted it.