What The 2011 Disaster Did To Japan's Economy

After the devastating 3/11 earthquake, tsunami, and nuclear catastrophe, the reconstruction efforts to get under way in earnest this year will boost Japan’s gross domestic product, but this does not mean the country will be any better off, according to a report by research consultancy Capital Economics.

The disaster at the Fukushima nuclear power plant has caused a dramatic shift in Japan's energy policy. The long-term impact on the economy is highly dependent on what the country decides to do about nuclear energy, Capital Economics noted. Scrapping nuclear power altogether will have a long-term detrimental impact as energy self-sufficiency falls, energy imports rise, and the cost of generating electricity climbs. The country needs certainty about its energy plan or it risks losing investments.

The immediate effect of less nuclear power has been more reliance on fossil fuels, as well as lower overall power-generating capacity, Capital Economics pointed out. In the long run, decreasing energy self-sufficiency leaves Japan increasingly vulnerable to external shocks, such as oil embargoes or price shocks. In addition, government borrowing to fund reconstruction spending will add to the already unsustainable level of public debt.

Moreover, Japan will not meet its agreed environmental targets without nuclear power, leading to more pollution, the authors of the report stressed.

There are two key long-term effects of the 3/11 triple catastrophe to consider, according to Capital Economics.

First, the disaster raised awareness about the reliance of global supply chains on a small number of manufacturers in Japan. As a results, businesses have become wary of relying too much on single suppliers in single locations, and they are looking to diversify their risks in terms of supply-chain disruptions.

Second, power shortages, rising energy costs, and the lack of a clear plan to fuel the country's future will accelerate the hollowing-out of Japanese industry.

More hopefully, the authors of the report wrote that although the degree to which the catastrophe changed the prospects for the Japanese economy is still very uncertain, it is fairly clear that it has seen the worst of the aftermath.