Masaaki Shirakawa: Great East Japan Earthquake - resilience of society
and determination to rebuild
Remarks by Mr Masaaki Shirakawa, Governor of the Bank of Japan, at the Council on
Foreign Relations, New York, 14 April 2011.
* * *
I. Introduction
I am privileged to have the opportunity to speak before the Council on Foreign Relations
today. Before beginning my speech, I would like to extend my heartfelt gratitude to the
government and people of the United States for the support and encouragement concerning
the tragic Great East Japan Earthquake. The situation in the areas close to the earthquake
epicenter, particularly coastal areas that were hit hard by the tsunami, is disastrous. The
disaster claimed about 13 thousand lives and more than 15 thousand people are still
missing. Residents of areas near the Fukushima Daiichi nuclear power plant have been
directed to evacuate, and are forced to spend restless days and nights in shelters. In this
way, Japan has faced a trying time since the earthquake struck. At the same time, however,
Japanese society has shown resilience. The work of rebuilding has started to get under way,
gradually but steadily. In my remarks today, I will talk about the situation in Japan in the
month after the earthquake and the work being done to rebuild Japan's economy.
II. Experience in the month after the earthquake
A good place to start is what happened in the financial markets, the area I am familiar with. The
earthquake struck at 2:46 p.m. on Friday, March 11. At the time, I was being briefed by staff in
preparation for the Monetary Policy Meeting scheduled to be held at the beginning of the
following week. Even in Tokyo, about 250 miles away from the earthquake epicenter, the
shaking from the earthquake was the strongest that I had ever experienced and continued for
more than two minutes. The earthquake's magnitude at the epicenter was 9.0, which makes it
the largest on record in Japan, and the energy released was enormous (Chart 1). Based on
previously formulated emergency procedure, the Bank of Japan immediately set up a disaster
management team with me as head. This task was completed 14 minutes after the earthquake
struck. The most important thing for a central bank during a crisis is to ensure the stability of
settlement systems and financial markets. The Bank of Japan Financial Network System, or
BOJ-NET - Japan's core settlement system for funds and government securities - has been
operating without any problems the entire time since the earthquake struck. The Bank of
Japan's Fukushima branch, which is about 40 miles away from the Fukushima Daiichi nuclear
plant, has been conducting its business as usual, and has been providing cash, including on
the weekend immediately after the earthquake. Financial market stability has been maintained.
I would also note that trading on the Tokyo Stock Exchange has been perfectly normal.
Looking beyond the world of settlement systems and financial markets, the people in the
disaster areas have been calm and composed and full of a spirit of mutual cooperation,
despite such a difficult living environment. In Tokyo, although electricity shortages are
causing some inconvenience, people have accepted these new realities and adapted
immediately. One of the visible changes is that people are increasingly deciding themselves
to cancel parties or other events, as a mark of respect to the victims of the disaster and out
of consideration for the feelings of the people affected. Another change is a substantial
decline in visitors from overseas.
III. Effects on Japan's economy
Next, let me turn to the effects on Japan's economy of the disastrous events - namely, the
earthquake, tsunami, and nuclear accident. Something that has not been recognized so
much is that Japan's economy in 2010 performed best among the G-7 economies in terms of
both growth rate and unemployment rate (Chart 2). The disaster occurred at a time when
Japan's economy was gradually returning to a recovery path, albeit a moderate one. In the
short run, it is inevitable that the earthquake will significantly affect production and other
economic activity through its damage to supply capacity. The four prefectures most affected
by the earthquake and tsunami in total account for about 6 percent of Japan's GDP (Chart 3).
In the case of the Kobe Earthquake, which occurred in January 1995, real GDP did not
decline, even in the quarter when the earthquake occurred. In contrast, the March 11
earthquake will have a greater impact on production for the following reasons.
First, this was not just an earthquake that was huge in magnitude and geographically
widespread. It also triggered tsunami, which, together with the earthquake, caused a nuclear
accident.
Second, hard-to-replace parts and material produced in factories in the disaster areas are
integral to supply chains. A typical example is electronic parts, the shortage of which has
been having a severe impact on automobile production even in non-affected areas. The
effects might go beyond the domestic sphere. The economies of Japan, China and the
United States have become interdependent, in that Japan produces the parts, China
assembles them, and the United States develops the finished consumer products. Therefore,
the impact on supply chains could spread internationally (Chart 4).
Third, Japan's power generating facilities have been significantly impaired. The problems
associated with nuclear power generation have been a subject of intense scrutiny due to the
accident at the Fukushima Daiichi nuclear power plant, but it is worth noting that the
earthquake also caused serious damage to thermal power plants (Charts 5 and 6). Measures
are currently being taken to curtail demand through various efforts such as asking
businesses and households to conserve electricity, and at the same time, steps are being
taken to restore generating capacity. The power shortages will be temporarily eased due to
seasonal factors, but electricity could run short again in Tokyo Electric Power Company's
service area when demand peaks in the summer. For historical reasons, Japan has two
frequency domains and there is little room for surplus electricity to be delivered across
domains.
The impact of such supply constraints will be serious in the short term. But at the same time,
we should remember that the impact of the disaster can be mitigated by human wisdom and
determination. Let me give you two examples of how the impact is being and will be
mitigated.
First, top priority is now being placed on fixing the production and supply bottleneck of parts
and materials, with the cooperation of the firms using them. At the same time, we are now
seeing signs that alternate production has started in domestic factories located in places
other than the affected areas. And on the electricity front, efforts are being made to devise
effective measures for curtailing energy use during the high-demand period in summer when
electricity could run short.
Second, as time passes, demand will also emerge for restoring damaged capital stock such
as roads, factories, and houses. While it is difficult to accurately forecast the amount and
time path of rebuilding demand at present, the amount of damage to capital stock due to the
earthquake and tsunami will be about 3 to 5 percent of nominal GDP and 1 to 2 percent of
total capital stock, according to government estimates (Chart 7).
Taking these factors into account, most private economists believe that Japan's GDP growth
rate will turn positive again from the third quarter of 2011 onward. Moreover, from a
longerterm perspective, new demand is expected to emerge. For example, the recent experience of
disruption to supply chains has made us aware of a concentration of risks in particular
regions or with respect to particular firms. This new awareness, through a rethinking of
business strategies, could generate new investment in, for example, computer centers and
distribution depots. The accident at the Fukushima Daiichi nuclear plant has triggered active
global discussion on nuclear power policy, which will highlight the importance of energy
conservation and environmental technologies. And as Japanese firms have an edge in those
areas, such as high-end batteries, there will be great room for them to make contributions.
IV. Tasks ahead for Japan's economic rebuilding
Various challenges lie ahead on the road to overcoming the adverse effects of the
earthquake and rebuilding Japan's economy.
The first challenge is ensuring the necessary financing for rebuilding. In this regard, Japan
has continued to have a current account surplus. In other words, Japan has had an excess of
savings over investment for a protracted period, which means that, from a macroeconomic
perspective, this financing will not be difficult (Chart 8). Japan's capacity for foreign currency
funding is extremely strong, given that the country is the biggest creditor nation in the world,
with net external assets of 2.9 trillion U.S. dollars, or 57 percent of nominal GDP. Private
financial institutions are fully able to meet an increase in financing demand for rebuilding.
Rumors have circulated that Japanese insurance companies would sell foreign currency
assets due to an increase in payments of insurance claims relating to the earthquake and
subsequent events. These companies have ample short-term liquid assets, so they do not
need to sell their foreign currency assets in order to make the payments. Meanwhile,
Japanese government bonds have been issued quite smoothly and long-term interest rates
have remained stable at low levels compared with other countries. As long as Japan
continues to work tirelessly toward rebuilding, it is unlikely financing problems will arise.
The second challenge is raising Japan's potential growth rate. Since 2000, Japan has had
one of the highest GDP growth rates per worker among G-7 countries, although slightly lower
than the United States (Chart 9). However, the decline in the working-age population in
Japan is proceeding at a pace that has no precedent in modern economic history (Chart 10).
As a result, Japan's economic growth has been on a downtrend. Raising the potential growth
rate was the biggest challenge for Japan's economy even before the earthquake, but the
efforts to do so by raising both the labor participation rate and productivity have now become
all the more important. As Japan seeks to rebuild its economy, efforts to raise the potential
growth rate have become even more important. These are certainly not easy challenges, but
we have to take them on with great determination.
V. The Bank of Japan's response
Finally, let me briefly touch on the Bank of Japan's response after the earthquake struck. As
was the case in the financial markets immediately after the failure of Lehman Brothers, when
people's lives and safety are at risk, they sometimes tend to become excessively risk averse,
which makes things worse. Incidentally, while foreign nationals residing in Tokyo increasingly
left Japan for fear of radiation risk, it has tended to be overlooked that the radiation levels in
Tokyo are roughly the same as in other major cities around the world, such as Paris and
Berlin, or they were exposed to more radiation on the airplane than they would have been
exposed to in Tokyo. In the money markets, financial institutions' precautionary demand for
liquidity surged. Rumors have spread among the foreign financial community that the Tokyo
financial markets would close due to fears of radiation risk. The Bank of Japan has been
asked whether there was any truth to the rumors that the Bank of Japan was planning to
retreat to a backup site in the western part of Japan. Of course, these rumors were and are
groundless. As I said, the financial infrastructures are fully functional and there is no reason
for us to relocate from Tokyo.
In such times, the first priority is ensuring calm among market participants, and in this regard
the Bank of Japan has provided ample liquidity on an unprecedented scale day after day.
The very next business day after the earthquake, we decided to significantly increase the
amount of its asset purchases, mainly of risk assets, with a view to preventing any
deterioration in business sentiment or excessive increase in risk aversion from adversely
affecting economic activity. As a result of these measures, financial markets, which became
somewhat jittery in the period immediately after the earthquake occurred, have regained
stability. Needless to say, the Bank of Japan's mission is to ensure price and financial
system stability, thereby contributing to the sustainable growth of Japan's economy. We will
continue to take appropriate measures as the central bank in order to achieve this mission.
VI. Concluding remarks
As I mentioned earlier, nothing is more heartening in a crisis than the encouragement and
support of friends overseas. I would like to conclude by thanking you once again for your
friendship. With the resilience of Japanese society and the determination to rebuild, I am
absolutely convinced that Japan's economy will overcome this trying time, successfully
rebuild and become even better placed with greater growth potential. With that, I would like
to conclude my remarks. Thank you for your attention.
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