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Japan in the Aftermath

17 Mar 2011

Emeritus Professor, International Business,  Frank B. (Ben) Tipton offers his thoughts on what the Japanese crisis means for the world economy.

Twenty thousand dead and still counting.  Entire towns obliterated by massively destructive waves reaching five kilometres inland.  Still to come, the desperate need to overcome the threat of radiation leakage from damaged reactors.  The worst disaster since the Second World War.  What can we expect?  How will Japan cope?  What does it mean for us?  For the rest of the world?

First, keep in mind that Japan is a rich country, the second- or third-largest economy in the world, and more important, with one of the very highest levels of income per capita.  China's economy may be larger, but most of the 1.2 billion Chinese are still poor; the Swiss may be richer, but there are not 120 million of them.

Second, keep in mind that Japan is a well organized country, with experience in handling natural disasters, such as the Kobe earthquake, with ongoing expertise in dealing with extreme weather conditions, such as the regular succession of typhoon storms, and with additional expertise in coping with an earthquake-prone environment.  Consider that Tokyo has just survived, with only minor damage, a much stronger series of quakes than the Great Kanto Earthquake of 1923 and the subsequent fires, which wiped out three-quarters of the city and killed somewhere between 100,000 and 200,000 people.

Two images come to mind.  First, a man walking along a road through the rubble.  Alone, tragic, but also able to move unimpeded through the devastation.  The road has clearly been bulldozed for access.  Second, Australian TV reporters being herded, politely, on to a large bus with double accessible doors, a precaution taken in view of further aftershocks.  The bus is one of half a dozen deployed into this one small district.  Together the images typify the speed of the response, the efficiency of the organizations involved, and the resources that Japan has available to bring to bear on the crisis.

So, at the top level, expect not much of anything.  The earthquakes and tsunami will not alter Japan's political or institutional environment.  Recent reports have had Japan's voters "disgusted" with both major parties, seeking some alternative to an ossified and inflexible system.  That disgust may resurface, but the immediate impact will if anything strengthen the incumbent government - consider the effect of the Queensland floods on the fortunes of government there.  The iron triangle of politicians, bureaucrats, and business leaders, a bit rusty perhaps after the "lost decade" of the 1990s and continued slow growth and stalled reforms, nevertheless remains strong enough to cope, and most Japanese will be content to leave it in place.

A bit further down, there may be some change.  The nuclear industry and the power companies are already coming under the microscope.  The political influence of some of the firms involved may come to be seen as less acceptable, and the bureaucrats' regulation less effective than it should have been, and some accounting may be required.  Conceivably that could shift public attitudes towards a more principled rejection of the deals done among the elite, the members of the three groupings that make up the sides of the triangle.  A failure to move in the direction of greater transparency and accountability could re-ignite the disgust and influence election results.

Economically, despite the destruction, most of Japan's domestic productive capacity and infrastructure remain intact.  It is also worth remembering that much of what is "made in Japan" today is in fact produced by Japanese firms in South Korea, China, Southeast Asia, and for instance in the case of Toyota, in the United States.  Domestically, looking back, reconstruction after the 1923 earthquake provided an important impetus to the economy in the second half of the 1920s.  Japan remains strong, and the opportunities offered by the reconstruction will stimulate investment across a range of sectors.  Internationally, there is no reason to expect Japanese firms to behave any differently than before.

And the rest of us?  A nagging concern for the United States would be a possible sell-off of American bonds by Japanese holders, which could affect American interest rates and impede recovery from the recession.  A more immediate concern for a range of other smaller countries around the world would be a slowing of Japanese investment, and a reduction in Japan's foreign aid programs.  Closer to home, those of us who import directly from Japan will find our supply chains disrupted.  Indirect imports, Japanese automobiles produced in Thailand, for instance, will be unaffected.  Those of us who export to Japan - coal, iron, steel, but a range of other products as well - will benefit as reconstruction begins.  The impact will vary, but as if frequently the case, heartrending individual tragedy will be subsumed under those processes.  And in Japan, with its resources, there is every reason to expect those processes to proceed more rapidly and more smoothly than might be the case elsewhere.

Frank B. (Ben) Tipton is the author of The Rise of Asia (London: Macmillan, 1998) and Asian Firms: History, Institutions and Management (London: Elgar, 2007), and other books and articles on management and public policy in the Asian region.