Recovery may break nation's dogged stagnation

By Sean O'Grady

Provided the natural disasters do not turn into nuclear disasters, then the crisis in Japan does offer the authorities an opportunity, albeit for the worst possible reasons, to boost and reform their economy.

First, the reconstruction efforts will boost spending and output and help to break the economic stagnation that has dogged Japan for two decades.

Simply restoring the national stock of productive assets will raise gross domestic product (GDP).

The destruction will force the hands of families that have preferred to save their cash rather than buy a house or a car because they were worried about the future - a classic case of deflationary psychology.

Again, for admittedly the most grim of reasons, the economic impact of this disaster could end up more benign than many might now dare to imagine.

There are plenty of precedents, too - not least in Japan after World War II and the 1995 Kobe earthquake. In the gruesome calculus of these things, the 2 to 3 per cent loss of GDP now could easily be outweighed by higher future growth.

Second, seasoned observers of the Japanese scene suggest the crisis will enable the Government to actually reduce the country's in-built structural government budget deficit even as the relief programme is being launched.

The credit ratings agency Moody's has said that Japan's economy could absorb the impact of the shock, but warned that it might reach a "tipping point" if the financial markets demand a risk premium on its government debt. That would push up the cost of Japan's borrowing, at a difficult time.

Thus, the argument runs, the amount that Japan spends on, for example, subsiding inefficient farmers and supporting an often bloated state bureaucracy will have to be reduced to pay for reconstruction. An overall emergency package could tackle the worst excesses of the public sector.

Katsuya Okada, the secretary-general of the ruling Democratic Party of Japan, has already indicated that the Government would like to do just that; the opposition Liberal Democratic Party has also said it wants to cut government spending.

Japan's deficit is as big, proportionately, as Britain's at 10 per cent of national income. The national debt, at 200 per cent of GDP, is about four times as large as the UK's. So far it has easily been funded by hard-saving Japanese workers and their pension funds, but in the longer term this is unsustainable. Hence the need to couple reconstruction with fixing Japan's wobbly public finances.

Lastly, Japan's crisis may stay the hand of central banks worldwide and help protect a tentative global recovery. Added to the turmoil in the Middle East, policymakers may not wish to add to the lethal mix of uncertainty around the world.

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