Japan's Massive Reconstruction TabBy
First came the nuclear reactor meltdown, then the financial one. The Nikkei 225 Stock Average fell a combined 16 percent on Mar. 14 and 15 as investors assessed the damage from an earthquake and tsunami that ripped through northeast Japan. The Nikkei has since recouped some of those losses. Explosions, partial meltdowns, and radiation leaks at Tokyo Electric Powers Fukushima Dai-Ichi nuclear power complex, however, forced companies to suspend operations nationwide and cut output, prompting economists to trim 2011 growth forecasts.
The question now is what Bank of Japan Governor Masaaki Shirakawa and Prime Minister Naoto Kan can do to begin funding reconstruction efforts and avert an outright recession. Three days after the Mar. 11 quake, the Bank of Japan poured a record 15 trillion yen ($184 billion) of cash into the banking system and another 8 trillion yen on Mar. 15. The central bank also decided to double an existing program to buy government and corporate bonds, as well as other assets from banks, to 10 trillion yen.
To put that number in perspective, that 5 trillion yen increase is about one-tenth the size of the U.S. Federal Reserve's current Treasury-buying program to sustain America's economic recovery. Some Tokyo economists want the BOJ to do more. "The Bank of Japan is missing the chance of doing something more aggressive," says Masaaki Kanno, chief Japan economist at JPMorgan Chase (JPM) in Tokyo and a former BOJ official. "What the BOJ should do now is to anchor investors' sentiment" with accelerated asset purchases beyond what it has announced so far, according to Kanno. Susumu Kato, chief economist for Japan at Crédit Agricole CIB, says the market chaos won't calm down "unless the BOJ will take more bold actions."
Governor Shirakawa said on Mar. 14 that the BOJ had to avoid buying debt directly from the government or risk undermining its credibility with the bond markets. Japanese government debt is set to reach 210 percent of gross domestic product in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development, compared with an estimated 101 percent for the U.S.
Before the quake, Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch, had forecast that Japan's GDP would rise 1.7 percent this year. Now, lost production from the quake, tsunami, and power outages has prompted Kichikawa to shave one half of a percentage point off of his 2011 growth estimate. He may need to revisit that forecast again if the nuclear crisis worsens. "Everything depends on how this situation with the nuclear power plants evolves," says Kichikawa. Kyohei Morita, chief economist at Barclays Capital (BCS) in Tokyo, says the power of monetary policy is now limited and what investors are looking for is more government spending. "It may be too early for the government to know what to include in any recovery plan, but things are unlikely to settle down until we start to see at least more discussion of a stimulus," says Morita. Given the extensive damage in northeast Japan, the reconstruction tab could reach 16 trillion yen, 1.6 times the amount of the earthquake that devastated the port city of Kobe in 1995, Goldman Sachs (GS) estimates.
Short term, chief government spokesman Yukio Edano and Finance Minister Yoshihiko Noda have both indicated they will use 200 billion yen in leftover funds from the current year's budget for relief spending. Kan's cabinet has refrained from talking about the scale of any supplementary budget that might come later in 2011.
"This is a horrible shock, with lasting repercussions," says Stephen Roach, nonexecutive chairman of Morgan Stanley Asia. "You can't look at reconstruction as a plus for any society, you're simply replacing something that has unfortunately been destroyed."
The bottom line: Preliminary estimates for reconstruction reach 16 trillion yen, 1.6 times the cost of the 1995 Kobe earthquake.