It is still too early to comment definitively on the impact Japan's disaster will have on its economy, but, amidst the crisis, there is an opportunity for Japan's leaders to start a new era of regeneration and economic reform.
The direct economic impact of the crisis so far is not as devastating as the images on our television screens might suggest. The three prefectures that were most severely hit by the earthquake and tsunami - Iwate, Miyagi and Fukushima - collectively account for only 4.0% of GDP in Japan. The regional economy in this part of Japan is comprised largely of agriculture and fishing, and industrial output is relatively low. Cars, for instance, shipped from these prefectures and the Ibaraki prefecture account for only 1.8% of the total auto industry.
Furthermore, the financial situation of Japanese companies and banks is relatively healthy. In the past 10 to 15 years, companies have made significant progress in paying down corporate debt and can draw on sizeable funds available for investment or absorbing costs. The ratio of non-servicing loans banks hold is now down to almost 2% The private sector has a degree of stamina that should be able to help the economy endure difficulties caused by the disaster.
However, the mid to long-term effect of damages to the power plants, and possible changes in nuclear energy policy, may have a more profound effect on the economy. There is a real risk of a reduction in the capacity of the electrical grid and an increase in the cost of energy for industry, which could in turn have a detrimental effect on the economy.
The opportunity for regeneration and economic reform comes as Japan moves from crisis response to recovery. The costs of reconstruction in the areas affected by the earthquake are likely to be enormous, even compared to what was needed in the aftermath of the 1995 Hanshin-Awaji earthquake. Reconstruction will be replacing capital stock rather than a programme of new investment, but it will provide a powerful stimulus for the Japanese economy for years to come. But the scope for regeneration goes well beyond rebuilding homes to renewal of the role of the state and much needed public service and expenditure reform.
While the Japanese government is likely to spend what is necessary to restore the ill-fated areas, there are concerns about whether it can afford the reconstruction effort when government debt is already notoriously high. The fact that Japan is still a huge creditor country and nearly 95% of the Japanese Government Bonds are held by domestic investors may provide some comfort. Yet, the reconstruction programme will shine a spotlight on fiscal discipline in Japan. There will inevitably be strong pressure on the government to cut back on expenditure and introduce robust austerity measures. Arguments to abandon give-away polices, such as excessive child benefits, have already started. Crucially, this fiscal pressure may provide the jolt for much needed economic and public service reform, particularly making headway on long postponed social welfare system reform and tax reform.
That Japan faces the most serious challenge since the end of the Second World War is in no doubt. Joint intervention to the foreign exchange market by G7 countries to help Japan, is an example of international solidarity that will be appreciated in Japan, but the responsibility for seizing opportunity from crisis falls onto Japan's own leaders. There is a proverb in Japan that goes 'turn a misfortune into a blessing'. As a Japanese citizen, I sincerely hope that these devastating events will be a starting point to renew and revitalize the Japanese economy.