September 15, 2011
Purchasingb2b: July/August 2011
In 1995, when an earthquake hit the industrial city of Kobe, Japan’s government and economy recovered quickly. Within 15 months, economic activity in the area returned to about 98 percent of pre-quake levels, and the cleanup was largely completed within two years.
Now, says a report from McKinsey Quarterly, Japan’s massive earthquake, tsunami and damaged nuclear reactors have persuaded some that natural disasters have compounded the country’s long-term economic woes.
Yet there’s little reason to fear recovery will be more difficult or longer than that of the disaster in Kobe, the report says. As before, reconstruction efforts will stimulate both immediate industrial activity and long-term investment in housing and in commercial and industrial infrastructure, while excess manufacturing capacity will help Japan cope with temporary capacity losses.
As well, the report notes the country’s industrial core lies outside the region most badly hit so long-term damage will likely be limited. Even worst-case scenarios for the Fukushima meltdown show the event will have little impact on long-term economic recovery.
Net government debt hovers above 100 percent of GDP, says the report. The Bank of Japan will ensure adequate funding to financial institutions to finance recovery efforts.
Long term, generating economic growth in Japan will require a substantial restructuring of its economy, including deregulatory efforts to promote competition, says the report. It is unclear how much progress the government will make in the near future, given political inertia and the immediate needs of the disaster response. But the trajectory of Japanese politics remains towards an embrace of greater openness over the next decade.
Japan’s attractiveness as an investment destination will remain in flux for some time, the report says, since the triple disaster is likely to quicken efforts to shift production overseas. But that trend has been well established for nearly two decades.
By contrast, as Japan’s economy becomes less export oriented, opportunities the country offers to the outside world will change. A more open Japan will intensify local competition and improve opportunities for more efficient corporations, both Japanese and foreign the report states. Improving productivity should eventually pay off for domestic and foreign investors in equities.
Despite the natural disasters and a declining population, Japan’s economy need not continue to slump. As efficient as the country’s export industries have been, the report says there is still room for improving productivity.