Analysis: Nuclear crisis carries big risks for Japan economy

By Linda Sieg

TOKYO (Reuters) – Nuclear experts can’t agree what the worst-case scenario for Japan’s nuclear crisis might be, so predicting the impact of the disaster on the world’s third-largest economy with any accuracy is an impossible task.

But even if a catastrophic nuclear meltdown is averted, a drawn-out battle to stabilize the earthquake-crippled Fukushima plant poses a serious risk to an economy already burdened with huge public debt, an aging population and a big bill to rebuild from a quake and tsunami disaster that caused damages possibly topping $300 billion.

“What is the worst-case scenario? Most people think it’s a mushroom cloud. But the worst-case scenario is that this drags on, not one month or two months or six months, but for two years, or indefinitely,” said Jesper Koll, director of equity research at JPMorgan Securities in Tokyo. “Japan will be bypassed. That is the real nightmare scenario.”

Hundreds of engineers have been toiling for nearly three weeks to cool the plant’s reactors and avert a meltdown of fuel rods, although that scenario seems to have become less likely.

“There is no ‘best case’ but the base case assumption is that things will be controlled and the long-term negative effects will be locally contained and won’t affect the national economy — and most importantly, the psyche of the people of one of the largest urban areas in the world,” Koll added, referring to the capital of Tokyo with its population of some 13 million.

Fukushima plant operator Tokyo Electric Power Co (TEPCO) said on Wednesday that it would likely take a “fairly long time” to finally stabilize damaged reactors at the plant but company Chairman Tsunehisa Katsumata was unable to be more specific about the timeline.

That means, for now, the biggest threat for companies and consumers alike is uncertainty.


A prolonged lack of clarity would add to pressure on Japanese firms to shift production overseas while further decreasing the attraction of Japan as an investment destination for foreign companies, already put off by the spectre of earthquakes, a strong yen and a sluggish economy.

The hollowing-out of Japan’s economy has already seen overseas production rise to 20 percent of total output from 6 percent over the past two decades.

“It’s not just companies outside Japan but companies in Japan that would become reluctant to make decisions to invest,” said Takuji Okubo, chief economist at Societe Generale Securities in Tokyo.

Ironically, perhaps, that might help Japanese corporate profits if not the domestic economy.

“Japanese companies relocating faster overseas will increase profit margins, since overseas profit margins are three to five times higher than at domestic facilities,” Koll said.

Simmering anxiety about the nuclear crisis and its impact on health through a spreading contamination of food and the atmosphere with radiation could also dampen consumer spending, economists said — though, again, to what extent is difficult to gauge.

“Uncertainty is disliked by consumers and businesses,” said Robert Feldman, chief economist at Morgan Stanley MUFG Securities in Tokyo. “The longer the uncertainty continues, the harder it is for demand to revive.”

New readings announced on Wednesday showed a spike in radioactive iodine in the sea off the plant to 3,355 times the legal limit, although experts say the vastness of the ocean and a powerful current should dilute the levels and limit the danger to fish and other marine life.

Radiation above legal limits has also been found in vegetables, milk and tap water in areas outside the 20 km (12 mile) evacuation zone around the nuclear complex, and an extended crisis would increase concerns about food. Worries about atmospheric contamination, even if unfounded, could incline people to stay home rather than eat out or entertain.


However, it is difficult to quantify just how spending habits would change.

“We tend to think eating out and drinking or other activities outside account for a lot, but it isn’t that people would stop living in their houses, and they still have to eat,” Okubo said, noting that restaurants, accommodation and travel accounted for about 8 percent of Japanese consumption compared to 25 percent for housing and utilities.

“People would find other ways to consume and spend their money. Maybe people would spend more in health or they might start buying cars because they don’t like walking on the street.”

Travel, tourism and trade would also be affected.

Several countries have already banned milk and produce from areas near the damaged nuclear plant because of contamination fears, although food makes up only 1 percent of Japan’s exports. Broadcaster NHK said that even the city of Kyoto, a long distance from the nuclear plant, had seen overseas orders for Japanese tea shrink.

“When we are faced with uncertainty, we tend to overestimate the cost and damage, so I’d say even if the whole affair lasts something like a year, if I were to quantify the damage, I’d say 1 percent of GDP could be lost because of the prolonged nuclear problem,” Okubo said. “I’ve forecast 1 percent growth this year, so I might have to forecast marginally negative growth.”

Even forecasting the impact of the quake and tsunami disaster alone is tough, given questions about the timing, content and financing of a reconstruction package that will be the biggest since Japan’s devastating defeat in World War Two.

Forecasts in a poll of 10 economists for calendar 2011 ranged from 1.5 percent growth to a drop of 1.2 percent.

Perhaps more worrisome than the direct economic impact is the possible damage to the “Japan Brand,” an asset that is as invaluable as it is hard to quantify. “The ultimate question is what happens to the ‘Cool Japan’ brand,” Koll said.

“It’s an intangible. Japan does have brand value, but now Japan may become viewed in world eyes as ‘kawaiso’ (pitiful) and a victim … There was an aura about Japan that definitely did work.”

(Editing by John Chalmers)

Analysis: Nuclear crisis carries big risks for Japan economy