It’s an odd Bank of Japan policy decision that turns on rains, landslides and floods – conditions which, after all, are not typical debating points for Group of Seven economies. This is Governor Haruhiko Kuroda’s plight as Tokyo counts the economic costs of the most damaging rainfall in three decades.
No, a tragedy that has so far killed more than 150 people won’t derail Asia’s No. 2 economy. But it is highlighting clear and present dangers posed by aging urban infrastructure both to Asian supply chains and Tokyo’s balance sheet.
Take Yamato Transport, the ubiquitous door-to-door shipper that’s a major cog in the wheels of Japanese commerce. With at least 11 portions of the national highway system closed, Yamato stopped accepting orders in large swaths of western Japan. The last time that happened was after a massive 2011 earthquake and tsunami devastated the northeast.
Among manufacturers forced to suspend operations (mostly temporarily): Panasonic’s Okayama plant; Mazda’s plants in Hiroshima and Yamaguchi; Toyota unit Daihatsu Motor’s factories in Kyoto, Oita, Osaka and Shiga; Mitsubishi Fuso truck and bus units in Kawasaki. Some closures were related to direct flooding risks; others to supply shortages.
Lawson, the omnipresent convenience store operator, closed at least 23 locations in affected areas. Seven & i Holdings shuttered 17. Lawmakers also put aside pending debate on casino legislation.
The short-term impacts remain unclear.
It’s simply too early to calculate, regional BOJ officials caution. But one, Toshiro Miyashita from the Western Fukuoka branch, warned: “There will be a substantial impact on production, consumption and tourism.” And Prime Minister Shinzo Abe canceled a long-planned trip to Belgium, Egypt, France and Saudi Arabia, suggesting gross domestic product effects could be notable.
The same goes for corporate results in the current quarter – but the outlook might be rosier than current sentiment suggests.
Investor Peter Boardman of NWQ Investment Management told CNBC, Japan Inc.’s that global supply chain is diversified and “pretty well cushioned.” While the human toll is “quite devastating,” Boardman said, in the end “I don’t think it’s that much of a financial event.”
Japan, after all, snapped back from 2011 relatively quickly. The longer-term implications are easier to assess, and more important to markets.
One problem is the backdrop against which his event occurred. GDP contracted in the January-March period, the first drop in nine quarters. The previous quarter also was revised sharply lower, making the six months from October to March effectively a wash, growth-wise.
More recently, the BOJ’s quarterly “tankan” survey showed a notable downshift, the latest sign Donald Trump’s trade war is sending another kind of storm cloud toward Japan’s export-reliant economy.
Even before recent rainfalls, Tokyo was abuzz with talk of fresh stimuli to avert a recession. Now, there’s talk of a supplemental budget to finance disaster recovery. But the real issue will be finding tens of billions of dollars – if not hundreds of billions – needed to ready Japan’s aging infrastructure for the next deluge.
Government spending on flood control fell to about US$7 billion in fiscal 2018 from a peak of about $12.3 billion in 1997. The public-works drawdown was the work of former Prime Minister Junichiro Koizumi, who from 2001 to 2006 slashed construction budgets. That austerity is now haunting Japan as climate change increases the frequency and ferociousness of storms.
Inadequate disaster planning by corporate executives surely deserves some blame. While Japan Inc. has busily drawn up earthquake procedures, torrential rains aren’t a big part of crisis planning. According to Abe’s Cabinet Office, only about 30% of big companies work flooding into their crisis models.
That will now change, necessitating greater corporate resources. But, it is a drop in the proverbial bucket compared to the public expenditures that lie ahead.
A key pillar of Abenomics was ending Japan’s addiction to ever-rising borrowings. In 2014, Tokyo raised consumption taxes from 5% to 8% to pay down debt. The reverse happened, though. The tax hike slowed growth, complicating Japan’s deflation battle. It required more borrowing to reduce the fallout. Last fiscal year saw Tokyo’s debt rising by roughly the annual GDP of Hungary to 1,087 trillion yen, or nearly $10 trillion.
Infrastructure spending is sure to accelerate that increase, catching the attention of credit analysts at Moody’s, Standard & Poor’s and Fitch. It dovetails, after all, with a rapidly shrinking population and an aging workforce. It comes, too, as Abenomics loses potency and America’s protectionist turn impedes the trade flows on which Japan relies.
While the landslides and floods are abating, the torrential rains are an omen of things to come. Abenomics clearly needs a bigger lifeboat.