Over half a month has passed since the devastating earthquake and tsunami in northeast Japan. Yet the crisis at the Fukushima nuclear reactor continues, and 15,000 people are still missing. Thousands of displaced persons are waiting for the supply of necessities to resume.
Most ominously, there is still a major electricity shortage in Japan, and this will persist for the foreseeable future. Prime Minister Naoto Kan will face even greater challenges in coming months.
After a natural period in which Japanese seemed to give the benefit of the doubt to the prime minister, doubts about his leadership are growing. Mr. Kan has lashed out at Tokyo Electric Power Company, which operates the stricken Fukushima plant, but hasn't provided clear leadership. Nearly 60% of Japanese polled by Kyodo News disapprove of his handling of the nuclear crisis.
Mr. Kan has yet to set foot in the devastated area or to visit any of the hundreds of thousands living in temporary emergency shelters. He has flown over the region, but a plan to finally visit, nearly three weeks after the catastrophe, was shelved due to poor weather.
The appearance of political disarray has drawn increasingly barbed criticism. The governor of Fukushima prefecture has sharply questioned Mr. Kan's disaster plan and urged the government to give more complete information on the ongoing nuclear crisis. Mr. Kan's decision to give broad responsibility to Yoshihito Sengoku, his former chief cabinet secretary, for disaster relief operations may have been a wise administrative move. But it raises the perception that Mr. Kan is disengaged from active participation in emergency activities.
Given the scale of the disaster, perhaps all this is unfair to Mr. Kan. By any measure, his government is performing far better than the Liberal Democratic Party government did after the 1995 Kobe earthquake, where a completely dysfunctional response seriously undercut LDP legitimacy. However, Mr. Kan faces two enormous and related obstacles in coming months: electricity and economic growth. Japan has lost 20,000 megawatts of nuclear and thermal power generation capacity due to the quake, which has reduced the national supply by 20%. The resulting electricity shortages have caused automobile, petrochemical and electronic components manufacturers to curtail or even temporarily shut down production.
Goldman Sachs estimates that Japan's automotive industry alone is losing nearly $1.5 billion a week. Among other production activities, Japan is Asia's second-largest petrochemical producer and supplies more than half the world's wafers used in making integrated circuits. These closures and slowdowns will not only have a significant short-term effect on Japan's economy, but will reverberate through the global supply chain.
For example, some analysts have claimed that the Apple iPad 2 may be delayed in being released globally should the Japanese producers of several of its key components be unable to fill orders. If electricity supply is not restored by the summer, Japan will face a possibly crippling slowdown of economic activity, not to mention daily activity, as citizens are forced to cope as best they can with the high heat and humidity with reduced air conditioning.
Japan's economic strength over the past decade has largely come through inserting itself into global supply chains and providing crucial industrial components. An extended period of inactivity or undersupplying these parts will leave Japanese companies at risk of losing customers. South Korean and Taiwanese companies, as well as some European ones, may well benefit from Japan's difficulties.
Here is where Mr. Kan will be most challenged: getting the economy right. So far, he is sending mixed signals. On the positive side, he has indicated that the government will forgo plans to try to increase the amount of child allowances to families, which have long been criticized as an unnecessary drain on the government's fiscal resources. Yet worryingly, Mr. Kan has stated that he has not ruled out a tax increase and is considering scrapping a plan to cut the corporate tax rate to 35% from the current 40%.
Reflecting Japanese solidarity in the face of the crisis, one poll indicated nearly 70% of the public would support a tax increase. Even the head of the Japan Business Federation indicated he supported keeping corporate taxes at their current rates.
Laudable as these self-sacrificing sentiments are, tax increases are not what Japan needs. Its companies must become even more competitive in the face of this crisis, and a tax cut will help them reinvest earnings, recapitalize plants, and devote more to research and development. Similarly, Japan has long suffered from underconsumption and raising the individual income or sales tax would likely further depress consumer spending, hurting companies focused on the domestic market.
Tokyo should give tax breaks to companies that decide to invest in the affected region by building factories or sourcing from damaged areas. Banks should ease lending for local rebuilding efforts. The Ministry of Economy, Trade and Investment should encourage local entrepreneurs to start up small businesses in the most damaged areas.
Much of this will have to wait for disaster relief operations to conclude and reconstruction to begin. But Mr. Kan would be giving a powerful signal to the business community, the financial markets and the world by aggressively embracing a growth strategy for recovery and not a tax strategy for national austerity. He will be judged not merely by how he responded in the early, confused days after the earthquake, but whether he positioned Japan to emerge as strongly as possible from this catastrophe.
