Putting Tohoku into perspective: the negative global effects are being exaggerated.

• Author: Nakamae, Tadashi

As Japan rebuilds the Tohoku region, devastated by an earthquake and tsunami in March, it will have to invest a considerable amount in infrastructure. Thus, amid the dark clouds, there is an economic silver lining: the twin disaster could serve as a catalyst for investment-led growth.

This would make a significant contribution to the global economy. However, several misconceptions about the impact of the twin disasters on Japan need to be addressed. For example, there is a general perception that the investment required for reconstruction will need to be so large that it will stimulate the whole economy. Similarly, there is a widely held belief that Japanese imports will surge, benefiting the global economy.

Another misperception is that massive costs of rebuilding will create financing problems for a government that is already burdened with a huge budget deficit. As the need for additional funding grows, the government and the private sector will be forced to sell foreign assets, such as U.S. Treasury bonds, in order to repatriate enough funds to finance the large-scale investment needed to rebuild the Tohoku region. This will have a negative impact on the global financial market.

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However, it is unlikely that Japan, the largest creditor nation in the world, which has a sizeable current account surplus ([yen] 17 trillion; $210 billion in 2010), will see its surplus disappear. The increase in imports due to reconstruction will not be large enough to tip the current account balance to deficit. On the contrary, the magnitude of investment required to rebuild the disaster area is actually quite manageable relative to the size of the overall Japanese economy. According to an estimate by the Cabinet Office, [yen] 16 trillion--[yen] 25 trillion (3-5 percent of Japan's GDP) in assets were destroyed, of which [yen] 9 trillion-[yen] 16 trillion were non-residential private-sector assets. The remaining [yen] 7 trillion-[yen] 9 trillion in losses were to social infrastructure including houses, ports, roads, and bridges.

Assuming the total damage is roughly [yen] 25 trillion and it will take three years to rebuild the affected areas, annual investment will be roughly [yen] 8 trillion, which is 8 percent of the [yen] 100 trillion Japan spends every year on total investment (including housing, non-residential private sector investment, and government investment). Even though capacity utilization in the construction industry was low...