A stronger Japan can emerge from the disaster's wake

In 1995, the Japanese city of Kobe was struck by a 6.9 magnitude earthquake. More than 6,000 people lost their lives. Damage was estimated at more than $100 billion (Dh367.3 billion), or 2.5 per cent of Japanese national income. Yet, within 18 months, economic activity in the Kobe region re-attained its pre-quake level. A state-of-the-art offshore port facility was constructed, the housing stock was modernised and a grimy port city was turned into a showpiece.

Last week's earthquake in the Tohoku region of northern Japan exceeded the Kobe earthquake in magnitude, and is likely when the final toll is counted, in deaths and destruction as well. Yet even as authorities struggle to contain the damage done to nuclear reactors, the world has been impressed by how the Japanese people have pulled together in the face of adversity, and the Kobe experience stands as a useful reminder of the capacity of Japan's resilient populace to overcome terrible tragedies.

At this juncture, the Japanese economy faces several fundamental uncertainties. One is the ongoing difficulties in resolving the problems at the nuclear facilities. A second is the possibility that aftershocks could either further damage the reactors or strike major population centres south and west of the affected region such as Tokyo. Either event would deal a terrible blow to confidence. The third is that if disruptions to the power grid remain unpredictable and propagate economic problems beyond the immediately affected region for a sustained period of time, impeding the resumption of economic activity and damaging morale.

These possibilities should not be minimised. But if, as is reasonable to expect, the nuclear reactor containment chambers hold, and the event is closer in outcome to the 1979 mishap at Three Mile Island than the 1986 disaster in Chernobyl, then what the country faces is the task of rebuilding from a conventional natural disaster.

Admittedly the starting point for this rebuilding effort is poor. Decades of wasteful spending, driven by cozy relationships between rural politicians, constructions companies and government bureaucrats, have left Japan saddled with debts more than twice national income. But the government holds a few cards.

Some of the rebuilding can be financed by simply redirecting spending from white elephants to the higher priority of rebuilding the Tohoku region. It should not be difficult for Prime Minister Naoto Kan to call for national belt-tightening and a redirection of spending after such a disaster. The quality of public investment will improve, perhaps permanently, if the episode contributes to a fundamental re-balancing of Japanese politics.

Even with such expenditure switching, it is likely that the government will need to issue additional debt. The ownership of Japan's debt is not footloose, however. Much of it is owned by government entities and is backed by assets, such as toll roads, that generate considerable revenue streams.

The more relevant net debt figure is about half as big as the gross figure, still not good, but not double national income. Ninety-five per cent is owned by Japanese citizens, not foreign hedge funds. It is highly unlikely that Japanese citizens will dump their government bonds if more are issued to rebuild the city of Sendai. From a financial standpoint, the government of Japan has greater room for manoeuvre than might be immediately apparent. The statement by the ratings agency Moody's that it did not anticipate any need to downgrade Japanese government debt in light of the likely issuance of rebuilding bonds amounts to a welcome vote of confidence in this regard.

For the last 10 to 20 years Japan has experienced an extraordinary concentration of economic activity in Tokyo. Hundreds of Japanese corporations have moved their headquarters from cities like Osaka. Rebuilding Sendai will not reverse this process, but at the margin it could contribute to a greater dispersion of economic activity across the country. If pursued creatively, rebuilding could contribute to the formation of a growth pole in northern Japan.

Ultimately, what is at stake is the very structure of Japanese politics. A single party, the Liberal Democratic Party (LDP), has ruled more or less continuously since the re-establishment of self-rule in 1952 with the end of the United States military occupation that followed the Second World War. The LDP was turned out of office in 2009, but the inexperienced Democratic Party of Japan (DPJ) has struggled to govern successfully. If the incumbent DPJ effectively manages this crisis, their performance could go a long way to reassure voters and cement a two-party system of truly contestable political power. However, if the government does a poor job in the crisis, a Japanese version of the Bush administration's inept performance during Hurricane Katrina, it could send voters flocking back to the LDP, closing the window on this most recent episode of political opening and re-establishing the single party-dominant system.

The humanitarian, economic and political dimensions of the challenges that Japan confronts are huge.

Marcus Noland is the deputy director at the Peterson Institute for International Economics in Washington and a senior fellow at the East-West Center