By JACK HOUGH
Japan's main stock index> plunged Monday and Tuesday as investors pondered the cost of Friday's massive earthquake. Early estimates put the death toll at more than 10,000. There will be lost economic growth and steep government costs in a country that can ill afford either.
Car makers Honda (HMC),
Perversely, natural disasters can boost GDP in the short term, often at a cost to government budgets, as firms hire and spend to rebuild. The Kobe earthquake hit early in the second year of a four-year string of rising economic growth for Japan. Two things are different now, however. GDP is shrinking; a day before the recent earthquake, Japan's Cabinet Office said the economy contracted at an annualized rate of 1.3% between October and December, revised from an earlier estimate of 1.1%. Also, compared with the size of its economy, Japan now owes double what it did at the time of the Kobe earthquake.
Japan's net government debt of more than 120% of GDP is the highest of any industrialized nation. (The Organization for Economic Cooperation and Development estimates Japan's gross public debt to be about 200% of GDP.)
To see what's at stake in a difference of a percentage point in Japan's GDP, consider the findings of a January paper by Bank of Japan researchers. Three things can reduce Japan's debt. The first two are fresh taxes and less spending. The third is economic growth. America's last budget surplus a decade ago, for example, occurred after a large tax increase and moderate controls to spending, but it would not have been possible without fast economic growth and a soaring stock market, resulting in a tax revenue windfall.
According to the paper, Japan would need GDP expansion of 6% a year over the next decade to grow its way out of debt by 2030 -- unlikely, considering its feeble growth in recent years. Alternatively, it could pay down its debt by 2030 with 4% growth, provided it permanently increases its consumption tax from 5% to 15%. But few economists see 4% growth in Japan's future, either.
On to the more realistic assumptions, which call for drastic measures: At 2% growth, Japan must both triple its consumption tax and slash government spending by 30%. At 1% growth, a 40% spending cut is needed. At zero growth, none of the researchers' scenarios resulted in declining long-term debt.
It doesn't help that Japan's fourth prime minister in five years has been unable to pass a budget because of political gridlock, or that Standard & Poor's downgraded Japan's credit rating in January, citing the lack of a coherent strategy for addressing its fiscal challenges.
Tragedy can bring resolve and startling improvement. So violent was Friday's earthquake that it shifted planet Earth a half-foot from its axis, geologists say. It will take a change of nearly that scale to right Japan's finances, but there is still hope.