Resurrecting East Asia's Economic Miracle

By Shari, Michael | Global Finance, May 2011 | Go to article overview

Resurrecting East Asia's Economic Miracle


Shari, Michael, Global Finance


Japan

Although it inflicted unspeakable horrors upon an aging, hard-working population, Japan's recent earthquake is breathing new life into a deflationary economy.

The symbolism was lost on no one when the Japanese started using the terse shorthand "3/11" to refer to the Tohoku earthquake, tsunami and nuclear power plant failures that killed at least 13,000 people on March 1 1 and left more than 17,000 others missing. A combined brute force more lethal than any felt in Japan since the atomic bomb attacks on Hiroshima and Nagasaki has left the world's third largest economy at a critical turning point in its history.

Many economists see this jarring blow as being of a sufficient order of magnitude to dislodge Japan from the economic malaise that began in 1991 with the bursting of the bubble of asset inflation. Japan's economy has grown at a dismal average rate of 0.5% to 1.0% a year, compared with Europe's 1.5% to 2.0% and an average of 3.0% in the US, according to Daiwa Capital Markets. Perpetuating this torpor is what Masamichi Adachi, a senior economist at J. P. Morgan in Tokyo, calls a "3-D" structural problem of deflation, debt and demographics.

Optimists believe that under the right leadership, Japan could begin to re-create at least a semblance of the East Asian Economic Miracle that it pioneered in the 1960s, 1970s and 1980s, when its economic growth steamed along at between 4% and 15% a year. That was the result of a World Bank-financed postwar reconstruction effort and an ambitious economic development plan cobbled together by Japanese bureaucrats who "succeeded beyond their wildest dreams," notes Richard Bush, director of the Brookings Center for Northeast Asian Policy Studies in Washington.

The one certainty today is that, after a bitter but short contraction of three to six months, starting with what JPMorgan Securities Japan predicts will be a 3.5% dip in the second quarter of this year, Japan's economy is almost certain to enjoy at least a couple of years of very strong GDP growth. This will be driven by lavish spending to rebuild rail lines, roads, buildings and other infrastructure that was damaged in theTohoku region. The government expects to spend as much as 25 trilHon yen ($297 bilHon), which is about 5% of gross domestic product, with about 10 trülion yen of that amount spent in the coming year, according to Daiwa Capital Markets.

The economic boost from the rebuilding efforts is expected to be about three times that from the massive reconstruction effort that followed the Kobe earthquake in January 1995, the last major temblor to have wrought havoc upon Japan's main island of Honshu. The estimate is based on the fact that the Kobe quake caused only a third as much damage asTohoku, although it killed nearly 6,000 people. The subsequent reconstruction of roads, houses and other damaged infrastructure in southwestern Honshu boosted annual GDP growth by between 50 and 70 basis points for two and a half years, estimates Robert Madsen, a senior fellow at the Massachusetts Institute of Technology's Center for International Studies. The economy also got a boost from higherthan-usual spending in anticipation of a planned tax rate hike in 1997. That would translate into a GDP growth rate of about 1.25% or 1.5% for at least a couple of years, says Madsen: "2012 and 2013 are going to be impressive years. The question is whether it can stretch beyond that."

Madsen estimates that Japan's economy could keep up that relatively brisk pace for several years, although the apparent growth would reflect in part the contraction that Japan is already feeling.

Crisis Provides Opportunity

Unlike the Kobe quake, he says, the Tohoku temblor caused economic damage on a national scale. The reactor faüures led to rolHng blackouts that are cutting deep into manufacturing nationwide because a hertz difference between the power grids in the tsunami -ravaged northeast and the stül-undamaged southwest regions of Honshu prevents them from sending electricity to each other. …

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