Can Japan Overcome Economic Hurdles?

It's estimated that the cost of damage from the giant earthquake and tsunami in Japan could exceed $300 billion. That doesn't include the costs to the economy from lost production. On top of that, Japan faces an ongoing power shortage caused by its nuclear crisis and an already huge government debt burden.

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MELISSA BLOCK, host:

This is ALL THINGS CONSIDERED from NPR News. I'm Melissa Block.

And in this part of the program, the huge challenges facing Japan's businesses and its entire economy. First, the big picture. Damage from the earthquake and tsunami could exceed $300 billion and that doesn't count the cost of disruption to the economy, caused both by the natural disaster and the crisis at the nuclear plant.

From Tokyo, NPR's John Ydstie has this story on how Japan's economy will try to recover from the setback.

JOHN YDSTIE: Japan is the third largest economy in the world. It's a rich country, so there's little doubt it will recover. The question is, will it end up hobbled by even higher government debt and slow growth or will the response to this ordeal propel Japan to a higher growth trajectory?

Even before this disaster, the Japanese government was deeply indebted. That's in stark contrast to appearances in a fancy downtown Tokyo hotel; its upscale shops suggest the country is very rich indeed.

This is where I met economist Naoyuki Yoshino, a professor at Keio University in Tokyo, to talk about the country's economic challenges.

Professor NAOYUKI YOSHINO (Economics, Keio University): Japan looks like a very wealthy country, yes. But, however, we are indebted very much. Japan government debt is almost twice as much as GDP.

YDSTIE: That means the debt equals two years' worth of the total output of the Japanese economy. That's led some analysts to wonder whether Japan can reasonably finance what it needs to pay for the recovery. The only way to do it, says Yoshino, is to raise taxes. After all, he says, taxes are quite low in Japan.

Prof. YOSHINO: So there is room for Japanese people to pay for their reconstruction.

YDSTIE: Will the Japanese people agree to that?

Prof. YOSHINO: We have to do it because there are so many people who have suffered.

YDSTIE: But even if Japan can financed the hundreds of billions of dollars needed to rebuild, its economy is still likely to be hurt seriously by a long-term electrical shortage, caused by the crippling damage to the nuclear plant at Fukushima. Some analysts predict the Japanese economy will contract this year by nearly a full percentage point because of the power shortage.

Professor Yoshino agrees it's a serious situation.

Prof. YOSHINO: Energy is one of the key issues in Japan. Tokyo and other regions has a power shortage so that will damage for many, many industries including services and financial industries.

YDSTIE: Manufacturers including electronics factories and auto production lines may be hurt the most. Nissan, for instance, has delayed production of its all-electric vehicle, the Leaf, because the utility TEPCO has instituted rolling blackouts that could continue through the summer.

While in the next year or so things may be difficult, Professor Tatsuo Hatta, president of the National Graduate Institute for Policy Studies in Tokyo, says the disaster may be a catalyst for reform that could help the economy in the long run.

Professor TATSUO HATTA (President, National Graduate Institute for Policy Studies): There is a huge potential for Japan to grow again.

YDSTIE: A starting point, says Hatta, could be breaking up the big regional electric utilities, which would make energy and production costs cheaper. He says rebuilding the coastal fisheries destroyed by the tsunami is another chance to boost the economy to a higher level. The old fishery was dominated by small-scale, aging fisherman, and inefficient production.

Prof. HATTA: And so, I think this might be the beginning of such restructuring. Not everything can change, but in the fishery and (unintelligible) things might change.

YDSTIE: Michael Alfant, an American entrepreneur who's lived and worked in Japan for 25 years, has no doubt the country will come out of this disaster stronger economically.

Mr. MICHAEL ALFANT (President, Fusion): I am a hundred percent confident. I'm even more than confident, I guarantee it.

YDSTIE: Alfant owns the software company called Fusion and he's also president of the American Chamber of Commerce in Japan. He says the ability to endure and overcome these kinds of challenges is part of the Japanese character.

Mr. ALFANT: Give us three years and we will be back ahead of where we are today. And I think anyone that would opine to the contrary doesn't really know Japan.

YDSTIE: All of these reforms end up being political challenges. Alfant, Hatta and Yoshino believe a generation of young politicians now emerging has a chance to meet those challenges.

John Ydstie, NPR News, Tokyo.

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