Why Japan’s economy won’t just bounce back

Read more – Japan: hell on wheels as car giants bear brunt of disaster

The devastation is clearly far worse than experienced in Kobe. The secondary impact on Japan’s economy of a prolonged power shortage is far greater than the temporary loss of an important port. And Japan’s fiscal position is far more concerning than it was in 1995.

First the Kobe parallel. In January 1995, 6,000 people were killed by an earthquake centred on the major port just south of Osaka. As Nomura pointed out on Friday, despite sharp falls in industrial production and consumer confidence in January 95, a rebound in the following months drove Q1 1995 GDP growth up by 0.8 per cent.

In 1996 the Japanese economy soared away with 4 per cent growth built on the back of the rebuilding effort. I visited in 2000, and most of Kobe had been rebuilt. Yet there was a cost, Japan’s national debt jumped from under 80 per cent of GDP to over 100 per cent by 1997, partly on these borrowed rebuilding costs.

Then, few cared about Japan’s fiscal position. Japan borrows its public debts, largely from its own people. Over 90 per cent of Japan’s national debt is held by domestic financial institutions and pension funds, a relic of Japan’s economic nationalism and its high savings ethos. So no nasty international banks asking for their money back just yet.

But two things have changed in the financial backdrop to the Sendai tsunami which makes the comparison with the Kobe earthquake difficult.

First, the fiscal starting position is far worse. Gross debt as a proportion of GDP was 87 per cent in 1995. This year it is set to be 227 per cent (for comparison the UK figure is not small, but small by comparison at 82 per cent).

But the behaviour of Japan’s savers is changing. Japan’s household savings rate was above 10 per cent in 1995 and it is now in 2011 below 3 per cent. Japan’s army of pensioners are beginning to spend their nest-eggs.

Corporates are still hoarding their cash, but this is a sign that Japan cannot fund its borrowing domestically forever. Prime minister Naoto Kan was elected partly to deal with the debt and deficit challenge. He will now have to park that aspiration.

Second is the impact of power outages on the rest of the economy.

The immediate economic destruction caused by the tsunami is clear from the pictures of the container port at Sendai – one estimate today reckoned there would be a hit of about $180 billion to the economy.

But as in all advanced industrial economies, there are tight linkages between manufacturers and their suppliers. Japan’s car manufacturers, always a great strength, have been hit hard: Toyota, the world’s largest car company, has shut all its 12 factories until at least Wednesday. Honda has closed all its sites for a week. Nissan has halted production at all of its 4 factories. Calculations from Goldman suggest Toyota will lose $73 million for each day of closure, while Honda and Nissan will lose $24 million a piece for each day lost.

A key problem is power shortages. With several nuclear power stations shut, utility companies have become rolling blackouts to save energy.

Train companies have helped the power problem by reducing services – but that’s resulted in more chaos on the transport system – trains packed, and commuters switching to road and bike.

Japan’s nuclear industry provides 30 per cent of its electricity. It is essential for everything from the bullet trains to the monuments to electricity that are the Shibuya crossing storefronts in Tokyo.

In the past, outages at Japanese nuclear power stations have been the major factor impacting upon global demand for Liquefied Natural Gas. There were unprecedented diversions of gas tankers from America to Asia then, around 8 million tonnes of LNG went from Trinidad and Africa to Asia to feed Japan’s insatiable demand for power.

Already Jaoan has asked Russia for more energy. So far the Russians are playing ball.

So I am not surprised by the sharp stock market sell off of 6.2 per cent on the Nikkei this morning. It is unsurprising that the Bank of Japan has pumped 22 trillion yen into the banking system (£165bn). It stabilised things for now.

On top of all of this, I have been told that some proportion of the massive insurance payouts will inevitably fall on Japan’s public sector because of the structure of the insurance industry.

So there are big geopolitical, demographic and financial considerations in the background to this awful tragedy.