Japan riddled with toxic waste sites

Alex Kerr, in the book Dogs and Demons, documents how Japan has “only the most primitive regulation of toxic waste” (p. 57), and for comparison describes how “There are more than a thousand controlled hazardous substances in the United States” where as in Japan “only a few dozen substances were subject to government controls” (p. 58).

Further, “Japanese laws do not call for environmental-impact studies before towns or prefectures approve industrial projects. In having no environmental-impact law, Japan is alone among the twenty eight members of the…OECD”. (p. 58)

Kerr goes on to describe how Japan’s “industrial policy factored waste treatment out of the equation. There are few legal or monetary costs for poisoning the environment, and Japanese companies have consequently felt no need to develop techniques for handling wastes”. (p. 65)

A United Nations document backs up this analysis, stating that:

“In the 1970s the production of iron and steel along the shores of the Inland Sea reached 70 million tons, an amount equal to that produced by France and the United Kingdom combined. Daily processing of petroleum reached over 1,600,000 barrels, equal to the production levels of the United Kingdom. Petroleum chemistry brought the production of 1,800,000 tons of ethylene annually, with this also equalling British output. The Inland Sea has an area of about 17,000 square kilometres, which is about the same size as Lake Ontario, the smallest of the five great lakes in the USA. All of this production capacity was concentrated in this area and, in the 1960s, pollution-prevention technologies were very little used; as a result the problems of air and water pollution were serious in the extreme. In the case of Tokyo Bay, an area which is one-tenth the size of the Inland Sea, the production of ethylene from the concentrated petrochemical industries was 1,500,000 tons annually, which is very close to the total production in and around the Inland Sea.”

The UN report continues noting that:

“corporations, local and national governments, and city administrators lacked the wisdom and understanding necessary to prevent serious environmental problems. During the high-economic-growth period, production efficiency was the primary concern in the uncritical and rapid adaptation of new technologies. This stance resulted in unprecedented damage to natural ecosystems and to human health and well-being.”

One aspect of Japan’s rise to industrial competitiveness with the USA can reasonably said to have been the avoidance of environmental protection costs. It was certainly difficult for American manufacturers required to incorporate the costs of waste handling into their product prices to compete with Japanese equivalents.

China is operating with a model similar to that of Japan; that is to say it is ignoring the costs of rampant environmental and health destruction in order to maintain export levels to the rest of the world.

Prospects for dissaving in Japan and inheritance tax

In the book "Dogs and Demons: Tales from the Dark Side of Japan", Alex Kerr notes that Japan has very high inheritance taxes relative to other developed countries. This could be a significant factor in Japan's public and private economic future, as larger numbers of Japanese pass away leaving substantial savings from their estates.

BusinessWeek identified the issue back in 1999 in an essay "Commentary: Inheritance Taxes Are Draining Japan's Lifeblood", providing examples of how this is a problem. The essay explains that:

"Many small and midsize companies cannot afford to expand and keep up with tax payments at the same time. Yet many cannot sell assets, since potential buyers are also scarce. And as Japan's population ages, more entrepreneurs are frustrated at their inability to hand their businesses over to their children without also sentencing them to lifetimes of tax payments."

and yet

"the government relies on inheritance taxes for $18 billion annually, or 4% of its budget, which runs a large deficit".

More recently (April 2011), researchers pointed out that the inheritance tax is still an issue:

"With its rapidly aging society, nowhere is inheritance tax more important than in Japan. Over the past decade, an unexpected segment of Japan’s population has been impacted. Although originally aimed at the wealthy, inheritance tax now impacts regular Japanese salary men and retirees who own land and whose other assets’ value has nominally increased over the years. The inheritance tax bill often comes as a shock to the heirs. As a result, any change to Japan’s inheritance tax regime is important not only to the wealthy, but also to the average Japanese homeowner."

Apparently reforms are being discussed in Japan's legislative body that would:

"promote the transfer of trillions of yen from the nation’s conservative, money-conscious elderly to the free-spending younger generation.

Beginning in April 2011, a reduction in the inheritance tax exemption will be effectively coupled with a change in the gift tax regime. The policy change would see a significant rise in inheritance tax, as well as a reduction of gift tax by almost half. This makes it attractive to give money away now, instead of waiting and having a future inheritance taxed at higher rates. The essence of the tax reform is encouraging elderly Japanese to gift their assets now instead of waiting to bequeath it in a will. As an economic stimulus measure, the success of this plan hinges on a hope that the younger generation will open their wallets and spend more freely than their savings-conscious parents or grandparents."

This is dis-saving as a policy tool. It is an open question whether reforms will take place and if so whether the impact will be significant to Japan's overall economy.

Recession returns

Japan's economy has fallen into recession again with two consecutive quarters of negative GDP growth. Gross domestic product contracted 0.9% during the January-March quarter, marking a 3.7% annualized drop, the Cabinet Office reported Thursday. A drop in domestic demand took 0.8 of a percentage point off growth last quarter. Business investment fell 0.9% and consumer spending declined 0.6%. GDP shrank a revised annualized 3.0% in the October-December period. Clearly the earthquake/tsunami/nuclear crisis had a major impact in Q1 2011, but it is intriguing that the drop in that quarter was not that much greater than in Q4 2010. It is very possible that the Q1 figure will be revised to an even greater decrease.

The eastern half of the country will have to deal with severe electricity shortages for quite a while, as electric power is difficult to shift from other parts of the country due to incompatible transmission systems as shown in this chart of the country's power grid from Wikimedia:


The New York Times nicely summarizes the impact of such shortages:

"Besides the dangerously disabled Fukushima Daiichi nuclear power plant, three other nuclear plants, six coal-fired plants and 11 oil-fired power plants were initially shut down, according to PFC Energy, an international consulting firm.

By some measures, as much as 20 percent of the total generating capacity of the region’s dominant utility, the Tokyo Electric Power Company — or an estimated 11 percent of Japan’s total power — is out of service.

Until all the lost or suspended generating capacity is replaced, economists say, factories will operate at reduced levels, untold numbers of cars and other products will go unbuilt and legions of shoppers will cut back their buying "

The power shortages may last quite a long time; some experts are predicting that
Japan's shortage of electricity may last two or three years and that production slowdowns will continue in many sectors such as automotive, semiconductors, electronics, special chemicals, machinery, and precision equipment. This seems likely to reduce the chances that GDP growth in Q2 2011 will be positive year on year.

In addition, it appears that turf battles and government inertia are hobbling the cleanup effort: Focus on local firms slows debris removal : National : DAILY YOMIURI ONLINE (The Daily Yomiuri)

"More than two months after the Great East Japan Earthquake, piles of debris created by the ensuing tsunami remain untouched throughout disaster-hit areas.

Municipal governments have consigned most removal work to local companies, a practice that disaster-management experts say is delaying cleanup efforts. Calls are increasing for the central government to play a more active role and for the debris to be removed more quickly."

It seems to me that the Japanese government has nothing more than ad-hoc responses to this crisis. They've never had any meaningful control of the nuclear crisis since day 1. There are too many simultaneous problems causing cascading additional problems. Their deliberative style of decision-making is a poor fit for a crisis that requires prompt action.

Japan's Economy Struggles For Air

With the arrival of the first real Japanese data since the Tsunami struck the immensity of the tragedy which Japan is passing through is only now gradually becoming apparent. Exports were down by a seasonally adjusted 7.7% in March over February, while imports were only fell by a much more modest 1.4%, with the inevitable consequence that the trade surplus which forms the lifeline for Japan's fragile economy shrank sharply. In particular car production was badly hit, with output at Toyota plunging 62.7% during the month, while Nissan reported a drop of 52.4% and Honda put the shrinkage in its Japanese domestic production at 62.9% adding that output would be at 50 percent of its former projections until at least the end of June.

In fact March output across the whole of Japanese industry fell at a record monthly pace of 15.3%, while household spending declined at the record annual rate of 8.5%.






Large as they are, however, these numbers were to some extent expected. More worrisome from the Japanese point of view is the fact that production may be many months getting back to earlier levels given supply chain problems and the fact that electricity generating capacity will remain problematic, leading to reductions in the level of power available. These delays in restoring production in Japan’s auto industry at a time of substantial economic growth in potential new markets raise the prospect that some of the damage may be permanent, as some part of the Japanese market share goes to the country’s main competitors. Indeed just this point was raised by S&Ps recently when they cut their outlook to negative for all three manufacturers along with suppliers Aisin Seiki, Denso, and Toyota Industries. In their report justifying the move S&P’s stated "The outlook revisions also reflect our opinion that extended production cuts may erode Japanese automakers market shares and competitive positions in the longer term."

Among companies who may well inadvertently benefit from Japan's ill fortune is the US company General Motors, who less than two years after declaring themselves bankrupt now seem poised to reclaim the global auto sales number one spot from their struggling rival Toyota. Japan's car manufacturers have also been hurt by the sharp rise in the value of the yen. After years of a weak yen boosting sales and corporate profits, the Japanese currency has steadily strengthened to 81 yen to the dollar from 112 at the end of 2007. What might have been seen as a temporary development now looks much more permanent, and strategic planning by Japanese corporates will undoubtedly be influenced by this when it comes to decisions on where to locate new plant and capacity. And in the meanwhile, they stand to loose market share in both the US and in the key growth market, China.

German manufacturing is also an indirect beneficiary of Japan's ills, and the German April manufacturing PMI once more revealed a very strong performance, underpinned by ex-European demand for capital and intermediate goods.



Obviously the substantial under-performance will continue, as was confirmed by the April manufacturing PMI which showed a second month of sharp contraction, with the indicator registering 45.7 reflecting a deterioration on the already sharp contraction (46.4) registered in March (50 marks the neutral, or no change mark on these indexes). And while after years of deflation and slow growth Japan’s economy may not be what it used to be, it is still the world’s third largest economy, so it should not surprise us if JPMorgan attributed a large part of the fall in their March Global Composite PMI (to a six monthly low of 54.7) to the Japan impact. Without the contraction in Japan, they suggest, the Global Output Index reading would have been in the region of 57.3.



On the other hand, since Japan is an export surplus country, and it is highly likely that the slack left by Japan’s export losses will be taken up by its main competitors, beyond a short-lived supply chain blip there is unlikely to be any major impact on Global economic growth in 2011 following from the disaster. The problem here is very much a Japanese one.

We also now have details of the first instalment of money allocated by the government for the reconstruction programme. As expected the initial spending is modest in relation to the extent of the damage, with an emergency budget of 4 trillion yen ($48.5 billion) while total costs have been estimated as lying more in the region of $300 billion. Further, the government have been at pains to stress that no new debt will be issued to cover this spending, and that the resources will be found from cuts in social programmes and from pension fund resources. In fact the package has been financed using 2.5 trillion yen from the country's pension funds plus money originally intended to increase payments to families with children. Ironically this money had been promised as part of a campaign to try to address the country's long term demographic shortfall, which is now playing a key role in generating the country's evident economic imbalances. In any event, these are hardly "stimulus" measures, although paying for the next round of reconstruction will be much harder without recourse to a new debt issue.

Significantly, no decision seems yet to have been taken on whether to increase consumption tax, since given the ongoing weakness in Japan domestic consumption the application of such a remedy in the current environment may create as many issues as it resolves. The reticence of the Japanese authorities to raise new debt is comprehensible given the fact that the IMF estimates that gross government debt will hit 229% of GDP in 2011 (and net government debt 128%) while the rating agencies are waiting in the wings waving imminent downgrade warnings. Subsequent packages are likely to prove far more challenging in terms of financing, and markets are liable to remain nervous.



It is now more or less universally acknowledged that Japan is in recession, and Bank of Japan governor Masaaki Shirakawa has confirmed this impression by asserting the Bank’s view that the economy will continue to contract throughout the first half of the year. In fact only last Saturday he described the country's economic outlook as "very severe" and asserted that the central bank was resolute in its determination to take appropriate action to support the economy. Most observers interpret this as meaning that the bank will ease further by increasing its asset purchase programme. The BOJ eased policy in the days following the tsunami by doubling to 10 trillion yen the funds it sets aside for purchases of a range of financial assets, such as government bonds and corporate debt, and despite the fact that a proposal from Deputy Governor Kiyohiko Nishimura to expand the programme by 5 trillion yen ($62 billion) was outvoted by the board, the mere fact it was discussed could mean that bank could loosen policy further as early as next month.

It is important to bear in mind that Japan’s recovery from the global crisis was always fragile, and that while post-Lehman growth resumed in Q2 2009, the economy contracted again in Q3 2009, and suffered a further relapse in Q4 2010. At the end of last year economic activity in Japan was still at the same level as in Q1 2006, and the short term impact of the Tsunami will only have served to blow it further back in time.

Thus while it seems pretty clear that growth in Japan will resume in the second half of the year, and that the rebound in manufacturing industry will be pronounced once a normal power supply is restored, the thesis that natural disaster shocks are invariably good for economies with a lethargic track record of pronounced under-performance seems rather questionable. It is entirely possible that Japan will turn into a reference-case-example of a country where this does not happen (particularly given the major differences in the demographic profile between Post WWII Japan and the country today). In addition, while additional government indebtedness and burden sharing from the private sector may well be short term growth positive, the stimulus will be short lived, since what Japan needs is not a “one off” push start, but major structural changes and in particular a new openness to immigration. Further down the road only lie major tax increases (which will surely slow the domestic economy even further) or (ultimately)debt restructuring, since surely, even in the Japan case, the sky is not the limit for sovereign debt, and while any Japan sovereign restructuring would have little external impact given that the Japanese are the main holders of their own debt, Japan's banks (who hold the lion's share) would hardly escape unscathed. But beyond immediate government debt-woe issues, the big question is the extent to which lasting damage is being done to demand for Japanese home-grown products, and whether or not this will make it more rather than less difficult to sustain in the longer term the external surplus the country so badly needs to underpin its fiscal survival.