Will the Japanese Disaster Tank the World’s Economy?

Forrest ChristianChange, Financial crisis Leave a Comment

The disaster in Japan is devastating to see. Although my friends in Japan are all safe, many of their friends and family are still missing. The death count is high. The destruction is staggering.

I don’t want to make light of the horrible tragedy, and indeed I pray for them and wonder what we can do to help. This is a discussion about some of the after effects based on scenarios run years ago.

The prognosis is bad.Many years ago, a variety of different people were running the Tokyo Earthquake scenario. In it, a earthquake of 8.0 magnitude or greater hits Tokyo, greatly destroying the city. Several social and economic models were used, taking into account Japanese values and historical precedents.

This scenario was always laughed off, and those who ran it were seen as cranks and naysayers. Back when I was modeling this (just as an intellectual exercise) the Japanese economy was just beginning its collapse. China had not risen anywhere near to being the world’s second largest economy. The US had not hit a mortgage crisis. Even the Internet bubble hadn’t quite taken off.

It was a long time ago.

Here’s what people came up with.

In the scenario, Japan was faced with a scope of internal infrastructure destruction and markets disruption that is hard to fathom. The numbers weren’t of a 23 foot wall of water moving at 500 mph into the coast but simply on a massive earthquake focused on Tokyo. So everyone came up short on that one.

The Japanese practice of Just In Time Inventory (JIT) meant that no stockpiles of many real use existed. Factories that weren’t damaged and still had the ability to get to markets were unable to proceed because they didn’t have the incoming goods. The effects were immediate.

The infrastructure damage around Tokyo was thought to be extensive in this scenario. Shipping was disrupted as was rail, although other centers could be activated. For example, Hakodate had a large port that for economic reasons was never used after its construction. In the scenario, these ports were opened and extended to handle the travel that would already be in the oceans.

The deaths of large numbers of the elite in Tokyo would create a set of power vacuums. The deaths of large numbers of ordinary Japanese cried out for a rationale, some reason to make their deaths make sense. Stories develop relating to Japan leaving its destiny to dominate AsiaPac. Other factions start religious revivals. Current leadership is called to task for allowing the various shortcuts that increased the death toll.

The extent of the damage would be in the trillions of USD. This would require massive investments internally by the Japanese government, which in turn required the pull back of massive amounts of Japanese investment in foreign shores. Most likely would be the requirement to get their money out of the US federal bonds and other securities. They would essentially be calling the loan.

The US scrambled but got the money. However, it took massive amounts of the booming economy.

Japan likewise pulled their investments out of the west coast of Asia. Even then, Japan was a major investor in the rising Chinese and other Tiger economies. This pull out led to economic collapses in the region, with concurrent rise in revolutionary fervor in a variety of countries. Much of this would be religiously instigated because religion makes sense of the world.

A different arm of the scenario had Japan, in desperate need of building resources that it did not have, looking back towards its historical enemies as places to grow its power again.

There was also the revitalizing of Japanese armed forces with aggressive capacity, justified because they needed to fend off the Chinese, Russians and North Koreans, who would see this as an opportunity to expand their spheres of influence.

And then there was the costs of the aging population, already in play.

I am always amazed at how we can never think bad enough to get things right. We likely under-estimated the damage that actually from the earthquake by an order of magnitude. Or two. What we thought would be a trillion (1995 USD) will likely be more. The death toll that we thought would be centered on Tokyo is more widespread, farther north. The devastation to the great nation of Japan is beyond any of the horrible scenarios.

The old scenarios didn’t include the current financial vulnerability. The United States, whose economy still dominates the world’s, almost teeters on another market collapse. Its debt is staggering. The future costs of the aging population are denied. Current attempts to curb pensionary costs are half-hearted and not fairly distributed.

The middle east is in turmoil, with the rise of Iran as the dominant force in the region almost a foregone conclusion now. The threat of Bahrain’s revolution to the West’s security (and oil security) is massive. There is no balancer to Iran any longer now that the United States has destroyed Iraq’s ability to wage war.

I just don’t see how we get out of the problems that these earlier — and much less horrible than reality — scenarios concluded as likely.

It’s an interesting time.

There are a few wild cards. India is the world’s largest economy and has the ability to do some interesting things. However, they are mountain-locked as a nation, reducing their ability to influence the military reality of the region. China’s west coast is heavily Japan-looking (they get a lot of money from there) and it could make a lot of money. However, traditional hatred of Japan, and the memory of their atrocities of the second world war, could drive Chinese conservatives to look for a new way to secure themselves against their traditional enemy.

So will the Japanese disaster tank the world’s economy? My answer would be “probably, but it may take a year to take hold”. The run on Northern Rock made it clear that the mortgage crisis would tank the world’s economy in September 2007 and that took several months to become obvious to everyone.

Keep your day job. Be thankful that you are alive.

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