How the disaster changed Japan’s economy

In this Weekly we look at how last year’s disaster has changed Japan’s economy in the long-term. In our view, the legacy stems mainly from the nuclear catastrophe which will have lasting effects on the energy sector, industry, trade and public finances.

Prior to the meltdown at Fukushima, nuclear power was at the core of Japan’s energy plan, but its future in Japan is now uncertain. If the country follows Germany and decides to phase out nuclear altogether, it will become more reliant on imported fuel, more vulnerable to energy shocks, and it will struggle to meet its environmental targets. On the plus side, investment in renewable energy will increase, which could drive globally-beneficial research.

There are two long term effects on industry, both with the same result. First, disruption to global supply chains raised concerns about the concentration of production in Japan. Industry will look to diversify this risk through sourcing from competitors and Japanese firms establishing plants abroad. Second, power shortages, rising energy costs and the lack of a clear plan for future power needs will discourage firms from investing in Japan. The net result will be an acceleration of industrial hollowing out.

Lower energy self-sufficiency means an upward shift in the volume of fossil fuel imports, which is likely to cause a repeat of last year’s trade deficit in 2012 and probably beyond. This will reduce the size of Japan’s current account surplus at a time when other structural pressures are also building. Finally, government borrowing to fund reconstruction spending will add to the already unsustainable level of public debt.