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Tragedy into Future Prosperity: Four Aspects of Japan’s Reconstruction

Komine Takao

I took part in a symposium held in Sendai on October 31, 2011. Sponsored by the Japan Center for Economic Research, it was called “Envisaging Specific Visions for the Reconstruction of the Tohoku Region.” Murai Yoshihiro, governor of Miyagi Prefecture, delivered a keynote speech in the symposium, discussing his view on the reconstruction. The symposium got me thinking about reconstruction from the devastation left in the wake of the Great East Japan Earthquake.

First, let me summarize the developments in the Japanese economy that have taken place since the earthquake. Since March 11, the Japanese economy has gone through three phases, which I describe below:

The first phase was the period immediately after the disaster. In this period, the economy noticeably slumped. Japan’s real GDP contracted 3.7% year on year in the March quarter. It was also down 2.1% in the June quarter. These contractions reflected a fall in production nationwide, due to the disruption in the supply chain and consumer reluctance to spend.

The economy then entered the second phase. In contrast to the preceding phase, economic growth actually picked up during this period, thanks to a recovery in production and consumption, and the emergence of demand for reconstruction. GDP for the September quarter was 6% on an annualized basis.

Since October, the economy has entered its third phase. In this period, the economic fluctuations observed since the earthquake will come to an end, and reconstruction will finally get underway.

We must remember, however, that the road to reconstruction will not be easy. In fact, it will be extremely challenging. This is because efforts to reconstruct the areas afflicted by the March 11 disaster involves four individual aspects, described below. The key is to turn the disaster into an opportunity as we proceed along this very challenging path.

The first of the four aspects is that this reconstruction will take place under considerable demographic pressure. Japan is now in a situation where the ratio of working people to the overall population is declining, the result of the rapidly graying society and declining birthrate. The Tohoku region, the area most severely damaged by the disaster, is where the impact of this adverse demographic trend has been felt most significantly. Here, the ratio of workers to overall population has been falling at a rate faster than that of the nation in general, reflecting the continued outflow of productive age people from the region to large cities.

As a result of the earthquake, the demographic pressure on the region is now even more severe, with people of working age moving away from the region in search of job opportunities, leaving only elderly people behind. The creation of employment opportunities through strong policies will be needed to overcome this exodus and achieve reconstruction. If this can be achieved, the Tohoku region will be able to present a forward-looking development model to deal with the demographic issue that the rest of Japan will ultimately confront.

The second aspect is that this reconstruction will take place during a period when policy initiatives are shifting from the central government to local governments. Many people have pointed out that the time has now come for local governments to take on a more leading role. That is indeed what is happening at present, and reconstruction initiatives also need to be taken by local governments. In fact, instead of waiting for support from the central government, certain municipalities have decided their own future, and started work on reconstruction.

Unfortunately, other municipalities are still reliant on the central government for reconstruction initiatives and their financing. The compilation of the supplementary budget was delayed because the central government could not finalize its basic stance on reconstruction, because of the political stalemate. Consequently, both reconstruction plans and the work itself have been delayed in those municipalities that are looking to the central government.

The contrasting positions taken by the municipalities on reconstruction programs can potentially create a disparity in reconstruction progress. However, new movements are emerging among the municipalities. For example, Murai Yoshihiro, the governor of Miyagi Prefecture is proposing to facilitate the entry of private companies into marine culture and other marine product businesses by using a special zone system. If these sorts of unique ideas start competing with each other in the region, some may emerge as growth models for local regions, as a symbol of the advent of the age of local governments.

The third aspect is that this reconstruction will take place during a period when the nation is running a massive fiscal deficit. Reconstructing the affected area will naturally entail a large amount of fiscal spending. But in addition to having the largest public debt among developed nations, Japan also faces a very large burden of payments that must be made by future generations, given the pay-as-you-go social insurance system and a rapidly graying society.

Funds for the reconstruction from a disaster like the March 11 earthquake should really be financed through long-term government bonds. This is because placing the entire burden of a disaster that happens once in a hundred years on the generation that happened to be there at that time will produce generational inequalities. Unfortunately, this logic cannot be applied to Japan, given that even before the disaster, it was already passing huge deficits onto future generations. No matter how difficult it will be, the present generation needs to take on the majority of the burden for reconstruction.

It is quite understandable for people to recoil at a tax hike. But if we continue to dodge reality now, then future generations will only be encouraged to try even harder to do the same. Recognizing this, discussions about raising taxes to finance reconstruction programs have already started. The government should take this opportunity as the starting point for the rehabilitation of the nation’s overall fiscal situation.

The fourth aspect is that this reconstruction will take place during a period of globalization. Many people agree that Japan’s basic strategy for long-term growth is to promote globalization, with a particular emphasis on cooperation with countries in the East Asian region. From this viewpoint, it is natural for Japan to participate in the Trans-Pacific Partnership (TPP) negotiations. There are people who oppose the negotiations and claim that an increase in imports of agricultural products will harm the reconstruction efforts taken in the Tohoku region, which is heavily reliant on the agricultural, forestry and fishery industries.

Not participating in TPP, however, will not necessarily revitalize the agricultural, forestry, and fishery industries. With a grace period of approximately 10 years likely to be given before the complete elimination of import duties, participation in the TPP should be used as an opportunity to initiate measures to revitalize these primary industries over the next 10 years. Tohoku should become a model of these revitalization initiatives.

The recovery from the March 11 disaster needs to be achieved based on the four aspects I have just described. Each aspect presents its own challenging issues, but also offers Japan the chance to turn tragedy into future prosperity.