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As Japan struggles with a humanitarian crisis, damage from the earthquake also threatens its economy. Production of cars, computer chips and other goods has been disrupted. A discussion of the disaster’s impact on the world’s third largest economy and the possible rippling effects on a fragile global recovery.
- Nicholas Szechenyi Deputy director of the Japan Chair at Center for Strategic and International Studies, where he is also a senior fellow, former news producer for Fuji Television in Washington, D.C.
- Greg Ip U.S. economics editor, The Economist, and author of "The Little Book of Economics: How the Economy Works in the Real World."
- Peter Morici A professor of International Business at the University of Maryland, former Director of Economics at the U.S. International Trade Commission.
- Tom Gjelten Correspondent, NPR, and author of "Bacardi and the Long Fight for Cuba: The Biography of a Cause."
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Japan's humanitarian crisis following last week's earthquake and tsunami is raising fears of an economic crisis. The troubles with the country's nuclear plants have caused power issues that have in turn shut down much of its industrial production. This could have an impact on other countries who depend on Japan for those parts.
MS. DIANE REHMJoining me in the studio to talk about the potential consequences, Nicholas Szechenyi of the Center for Strategic and International Studies, Tom Gjelten of NPR, Greg Ip of The Economist and Professor Peter Morici of the University of Maryland. Do join us, 800-433-8850. Send us your e-mail. Join us on Facebook. Send us a tweet. Good morning, gentlemen.
MR. NICHOLAS SZECHENYIGood morning, Diane.
MR. GREG IPGood morning.
PROF. PETER MORICIGood morning.
MR. TOM GJELTENGood morning.
REHMTom Gjelten, your story on NPR yesterday pose the question, will Japan's disaster hurt the global economy? So how much is what's happening there affecting what's happening to the world markets?
GJELTENDiane, it's already affecting the global economy. And first off, in the way that you mentioned already, which is that so much global production is split among different countries that shutting down a factory in Japan that makes a component part either for an automobile or for iPhone, for a camera, is going to affect production in other countries. We've already seen some of the Japanese automakers who have -- do assembly in the United States cutting back on some of their production here in the United States as a direct result. So that's obviously the first way that what's happened in Japan is affecting the whole global economy.
GJELTENThere are a couple of others minor ways. One is, as Japanese investors who have invested overseas repatriate their capital in order to help rebuild Japan, there's gonna be less demand for U.S. treasuries and other securities, so you may see some effect. Very conceivably, you could see an increase in U.S. interest rates as a result to this. Of course, there are a lot of factors that affect interest rates. And then as to the extent that global -- that Japanese production is down, the Japanese economy shrinks. That's the shrinkage of demand that may affect the world economy. However, I think that all of these are likely to be relatively short-term effects. I don't think there's going to be a huge impact on the global economy yet.
REHMTom Gjelten of NPR. Greg Ip of The Economist, do you agree?
IPYeah. Now, we know from experience with disasters of this nature in the past, like the Kobe earthquake in '95 in Japan, even 9/11 in our own case, is that you have a big shot of confidence, and then there is a spurt of rebuilding and construction, and sometimes, that can actually lead to a short-term burst in growth. But there's a big caveat there, which is that we can only start to quantify these impacts once we know how serious the disaster is. While the disaster is still unfolding, which is the case now in Japan, uncertainty just saturates everybody.
IPOne of the reasons you've seen global markets sell off in the last few days is that they're still trying to grapple with how serious this disaster is, how big will the evacuations have to be, how long will the production shutdowns end up being, how much of Japan's productive capacity will be out for the long run. Because we still don't know the answers to those things, the tendency of people, both households and businesses, is to delay and to sort of pull back.
REHMGreg Ip of The Economist. And turning to you now, Nicholas Szechenyi. Japan's major exports, as Tom has already said, certainly include automobiles, consumer electronics. But what about petrochemicals, pharmaceuticals, all those other things?
SZECHENYII'm not too familiar with the details of the petrochemical industry. Suffice it to say that there are gonna be some short-term disruptions of -- as we've already heard, but I think linked to this is the question about energy supply. We have this nuclear emergency going on at this plant. The government is talking about temporary power outages to conserve energy. And I think that's a real wildcard in this case affecting industry overall. If this persists for several months, that might add to the cost associated with this disaster. And that's obviously a unique circumstance this time around, so we have to watch that very carefully.
REHMNicholas Szechenyi, he's at the Center for Strategic and International Studies. Peter Morici, so far, a large portion of the nation's electrical supply, 10 percent by some estimates has been lost for the foreseeable future. How long might it take to get these plants or some other source of energy up and running?
MORICIOh, I think you can X these plants off the map for a while.
MORICIYeah. But there are other alternatives. Industrialized countries like Japan, the United States, do have slack in the system. And they can substitute oil, coal. Coal stocks are up this week in the United States because the Japanese are gonna be buying coal to generate their electricity. Once they get the problem contained and they, you know, basically count the damage, they'll be able to get their grid up and running again. And Japanese industry, much of it, will return to some level of normal behavior, say, within a month.
MORICIUntil then, most of what Japan makes for the world, there are other sources of supply. The problem is getting them certified. For example, if the Japanese are exporting a certain grade of steel to China to incorporate in a General Motors vehicle, that steel has to be certified. There are 700 different kinds of steel. The same thing applies to the semiconductors. There are substitutes in Korea, but the stuff has to get certified or else manufacturers -- they have to go through ISO or else the manufacturers will be concerned that products will come back to them later on.
REHMPeter Morici, he's professor of international business at the University of Maryland. Do join us, 800-433-8850. What about other countries? To what extent, Peter Morici, might they step in to fill the gap?
MORICIWell, you're sitting in one of those countries. There was a time when there were not ready substitutes for Japanese automobiles in the minds of consumers. Today, you can buy a Fusion -- a lot of American automobile manufacturers are gonna gain from this in the sense there'll be people that don't buy Toyotas and Nissans that buy American cars, and then are surprised. I had breakfast Saturday with the president of Ford, and the last time I had a meal with him I was really coming down on him. That was about four years ago.
MORICIOn Saturday, I was congratulating him. Well, people that buy those Fusions are gonna be very pleased. Also, Korea, the Korean automobile manufacturers have come a long way. With regard to semiconductors, petrochemicals and so forth, again, Korea. Electronic components and so forth, Japan. Think of the big four industrialized countries plus the South Asia, and those are the folks that are going to gain because they all compete with the Japanese these days.
REHMSo, Greg Ip, could Japan lose those clients for good?
IPIt all depends on how long this lasts. I mean, most of the car companies, for example, have announced temporary shutdowns. They all hope to be up and running again in a matter of weeks. If that's the case, then no, that probably would not lead to permanently loses of market share. And also, a lot of the specialized components that Japan produces such as flash memory for things like iPhones and so forth, these are relatively specialized components, and they are part of supplier networks that depend on long-term relationships that have been built up over time.
IPSo the users of those components will hesitate before dumping, say, Toshiba or Fujitsu and then moving off to a Korean company. They'll wanna see how this goes along. If, however, it turns out that the lost of productive capacity is a lasting affair, then yeah, you will see the customers of these companies start to look to other customers -- other countries for supply.
GJELTENWell, you know, I think it varies from sector to sector.
GJELTENI think that consumers are very brand conscious more than, you know, more than factories are. So if you take something like luxury cars, for example, BMW right now and Mercedes are going to be pushing very hard in places like China to sort of change consumer brand loyalty to get people who were previously going to buy a Lexus, for example, to consider buying a BMW. And, you know, that, you know, brand preference can change. And so I think that's the kind of change that could be more long lasting. When you're talking about very specific component parts, those decisions, like Greg said and like Peter said, are going to be decisions about changing components there are going to be taken far more carefully, strategically, rationally.
REHMWhat about prices, Peter Morici?
MORICIThe prices will go up. Let's take one of those components. High-end German automobile manufacturers source Japanese gearboxes. They can find alternative sources to supply for those, but they'll have to pay a lot to get them because it takes time to normally ramp up additional production and meet the specifications of their models. But you can speed that up if you're willing to pay for it. With something like flash memory, you can speed that up if you're willing to pay for it. We're gonna find the things that contain Japanese components to be -- go up in prices. Also, we're gonna find the substitute products for consumers like cars will go up in prices somewhat if this goes on for a while.
REHMBut does that mean those prices would come down once Japan is back at full throttle?
MORICIIn some cases, they may more than come down because then Japan will have new competitors.
REHMDo you agree with that, Tom?
GJELTENYeah. Well, Peter is an economist. I can't predict what's gonna happen in the marketplace, but that certainly makes sense, doesn't it?
REHMBut what about the large numbers of people fleeing Japan right now? How might that affect the economy, Nicholas Szechenyi?
SZECHENYIWell, in my observations obviously from afar, I don't think there's a whole much -- that much flight going on. I think one of the important aspects obviously not quantifiable is the resilience of the Japanese people. And they are very calm and orderly, and they're gonna respond to this. So I don't see flight as an issue in this case.
REHMNicholas Szechenyi, he's at the Center for Strategic and International Studies.
REHMAnd a number of you have been asking why we're focused on -- focusing on the economic issues and not the human issues. Actually, we did that on Monday. We have now turned to the economic issues worldwide. So if you're particularly concerned about the human issues, please go back and listen to our program on Monday. Here is an e-mail, and it's from Eduardo, who says, "Japan is second only to China in the list of lenders to the U.S. They hold some 880 billion in bonds. The Bank of Japan has already put some 15 trillion yen -- about $182 billion -- on the street. Are they printing it, which would devalue their currency, or are they cashing in U.S. bonds holding?" Greg Ip.
IPIn the short term, the Bank of Japan is indeed printing money, and essentially what has happened is that there's a huge demand for funds. Banks, for example, may be less willing to lend to each other. In those situations where there's a shortage of cash, the Bank of Japan simply creates more. If this went on and on for a number of years, yes, it might eventually devalue the currency. But in the short run, it probably will not have that effect. The Fed did something very similar after 9/11. They temporarily printed money to make sure there was no shortage of cash in the system.
MORICIDiane, if you are afraid and you put some cash in the mattress, and the Fed prints some new cash and gives it to your bank, there's no appreciable effect. And then when you take the cash out of your mattress and start to spend it, and the Fed starts to withdraw funds, again there's no effect. That's what's going on right now. They're putting this, Alan Greenspan would say, money in the bank window to calm markets. So, right now, I wouldn't worry too much about them printing money as long as they exercise prudence down the road.
MORICINow, as they rebuild, as they rebuild and they repatriate funds, that will drive up treasury rates in the United States and comparable asset rates in other places. However, the Fed and the European Central Bank can exercise more quantitative easing to bring those rates to where they would have been. And that won't be inflationary to the extent that there's slight capacity to provide the goods and services that Japan needs. With regard to commodities like lumber, drywall, copper, things like that, there isn't, so it's gonna be inflationary. With regard to ensuring adequate demand in the United States, say, to keep the housing market going, not so much of a problem. So it's a mixed bag. This -- these kinds of events can create some inflation, but it's either that or don't rebuild.
IPI might add that Japan has had the unusual problem for the last 20 years. They've been suffering deflation. Prices have actually been declining. So if this surge of rebuilding, financed by the Bank of Japan, essentially printing money, created a little bit of inflation, it might actually be a good thing in the long run.
MORICIYou know, wars are enormously stimulative to economic activity because of the transformative aspects of the new technologies. Some analysts have already said, you know, maybe this is the thing that kick starts Japan finally. Japan has enormous untapped potential that has been constrained by the absence of demand. This may actually release dynamism in Japan 'cause the Japanese aren't fleeing the country. They've already started rebuilding in peripheral areas where things have calmed down. It's amazing what's going on over there. This may actually jumpstart Japan.
GJELTENWell, you know, I think one of the things that's interesting about the kind of projection that Peter is making right now is that it's reminiscent of the debate over the fiscal stimulus in the United States, the question of whether government spending can sort of reboost an economy. I mean, this brings up all the whole debate over whether John Maynard Keynes was right or wrong. And it's actually -- there is actually a debate going on right now. I mean, I think that everyone agrees that rebuilding will provide at least a temporary boost in the Japanese economy, but it's at the cost of what else?
GJELTENIt means at the cost of perhaps other productive investments that Japan -- that the Japanese could have been making. So I think that we're about to see play out here sort of a test case of, you know, what does stimulus spending -- whether it's deliberate, the way it was in the United States, or as a result of necessity in Japan -- what does stimulus spending really do to an economy over a long term.
SZECHENYIWell, I would just point out that prior to the earthquake, there was a heated debate in Japanese political circles on this very question, the right way to stimulate the economy. And I think neither of the major political parties were willing to make the difficult decisions necessary to let Japan innovate and recapture some of the dynamism we've seen in the economy in recent years. Prime Minister Kan raised the issue of a trade agreement that's being negotiated in the Asia Pacific region.
SZECHENYIProbably can't debate that for several weeks in the wake of this disaster. But nonetheless, he was talking about opening Japan -- that was his theme -- and made the case that Japan -- for Japan to survive economically, it has to compete internationally, and trade liberalization was the answer. And I suspect that in the wake of this disaster, you're gonna see more unity with respect to economic policy and the need to think more creatively about how to recover.
MORICIWhat is different about this situation, though, is that in the case of the United States' stimulus, we had a financial debacle and the destruction of financial assets. There was nothing to rebuild. And they were running around looking for places to spend the money. There'll be no shortages of places to spend the money in Japan at this time, and it provides the opportunity for modernization in places. This will create a jolt that far -- I made my tenure writing about trade agreements, as you know. This will create a far greater immediate jolt than any trade agreement could ever provide.
REHMHelp me to understand why oil prices went down with the crisis in Japan.
MORICIVery simple. Japan is an importer of oil. It doesn't have any. If the economy stops for a while, people stop driving because they can't go any place, or the factories aren't running. Then they don't buy oil. They don't buy gasoline. Japan is big enough on the global stage to drive the price down by 10 cents a gallon. However, downstream, without nuclear power, they will consume more petroleum, so it's gonna have the other effect. So instead of gasoline being, say, 3.60 a gallon this summer in the United States, it could be 3.70, 3.75. That's the order of magnitude we're talking about.
IPDisentangling the impact of Japan on the price of oil from so many other things is quite difficult because, right now, we still have turmoil going on in the Middle East -- the Saudis have just sent troops into Bahrain and so forth. Looking down a very long run, if this disaster forces Japan to reduce its dependence on nuclear power and use more gas and oil, conceivably that could actually put up a pressure over the long run on global oil prices, and that would tend to accentuate a problem that the United States is already dealing with.
IPIf other countries, including, say, the United States and Germany right now, which was actually thinking of extending the life of its nuclear power plants, if they decide to reduce dependence on nuclear power, that again could put up a pressure on the price of carbon-based fuels. But those are very long-term impacts. It's very hard to identify at this point where it goes.
REHMWe're going to talk about the effect on the world's use of nuclear power tomorrow. And Germany has now shut down, what, seven of its older nuclear plants because there has been some reaction since Angela Merkel had refused to do it earlier and now wants to do it. Tom Gjelten.
GJELTENWell, and that's certainly -- there's a hearing in the Congress this morning about the future of nuclear energy. And it certainly -- this event has certainly put advocates of nuclear energy on the defensive. Now, you know, one of the arguments that has been made is that these power plants, these nuclear power plants in Japan -- and, Nick, you probably know a lot about this -- were very old. I mean, 40 years old. And the design of nuclear power plants has really improved since then. And some of the more modern plants built in the United States have more safety features built in than these ones did.
GJELTENSo, you know, there is still an argument to be made that nuclear energy is, by and large, a safe and a promising alternative to fossil fuels. But, you know, it's far more controversial today than it was a week ago.
REHMNicholas Szechenyi, I want to understand who Japan's creditors are.
SZECHENYII'll have to defer to my colleagues on this question.
REHMAll right. Tom.
GJELTENI think -- they're largely the Japanese themselves, and that makes this -- that makes the Japanese debt. Japan is the most indebted of all the major developed countries in the world, but much that debt is owned by Japanese themselves. And that's a critical point because unlike, for example, of Greece or Spain or Portugal, countries that you've talked about in the past, their debt is largely held by big financial institutions, hedge funds, who will drop it at a moment's notice if they think it's too risky. Whereas if the Japanese are holding their own country's debt, they're likely to be a lot more patriotic about it and may even increase their holdings of Japanese debt at a time of risk.
IPJapan has, for many years now, actually saved so much that it's actually exported some of its extra savings to the rest of the world, which is why it buys so many U.S. Treasury bonds.
REHMSo what is this going to do to their savings program?
IPI actually don't think that the -- even -- you know, they're talking about figures as much as $200 billion for the rebuilding. That will dent temporarily the amount of extra savings they have to export to the rest of the world. But against the backdrop of a market that's trillions and trillions of dollars, I don't think it will have much of an identifiable impact. You know, as Peter was saying earlier, we have central banks in the industrialized world right now quite prepared to step in and buy the bonds that the Japanese aren't, because they're still concerned about the weakness of their own economy.
MORICI$200 billion is one-half -- 1 percent of the Japanese economy, if my math is correct in my head very quickly, because it's over $4 trillion dollars. That's what these disasters generally come down to. Almost every one of these disasters I get called. They've been saying, how much is it gonna come to?
MORICIWell, it generally comes to 1 percent of GDP after the multiplier effect.
GJELTENYou know an interesting thing? The financial crisis, which didn't involve any physical destruction at all was far more costly to the Japanese economy than this incredible earthquake and tsunami is going to be. Man causes more damage through financial mismanagement than nature does from disasters.
MORICICon men are much more -- I'm sorry. Con men are...
MORICICon men are much more destructive than hurricanes.
SZECHENYIAnd just briefly, if you compare it to the last big earthquake that struck Japan in 1995, in western Japan, that did about $100 billion of damage, the equivalent of 2 1/2 percent of GDP. The stock market dove as much as 25 percent immediately after that accident. It was back at the same level by the end of that year. And in approximately two years time, whatever was lost in terms of GDP had been mostly recovered. So obviously, the circumstances are different in this case, but that's just an interesting basis of comparison.
IPI would add, though, one thing, though. I think that, in this case, one of the things that might set this disaster apart is that there seems to be lasting damage to the infrastructure of the country in terms of the ability of railroads, ports, airports, the electricity grid to support a normal level of economic activity, which was not the case with Kobe in '95. If those problems are not overcome relatively quickly, then that could actually exercise as a -- act as a brake on the ability of the Japanese economy to grow.
REHMWhat about food prices since the commodity markets are also affected by this, Peter?
MORICIWell I think food prices will go up somewhat because some Japanese food supplies will go off stream. They just won't be able to get them to market. Food is perishable. And so they will import more than they would normally. I don't know that this is going to be a huge effect, and it certainly not gonna be one that is permanent. So I don't know that that's one to be as much concerned about as, say, the long-term consequences for the price of oil.
REHMPeter Morici, he's professor of international business at the University of Maryland. And you're listening to "The Diane Rehm Show." Let's open the phones now, 800-433-8850. Let's go first to Gastonia, N.C. Good morning, Tom. You're on the air.
TOMThank you very much, Diane.
TOMMy nephew lives in Tokyo, and I've been contacting -- talking with him. He informed me that the area that was affected by the earthquake was northern Japan, primarily an agricultural region. That area also was most affected by the tsunami. The southern areas where industrialization has occurred, there are strong infrastructure. The buildings, the factories have not been affected, and work proceeds as normal. Japan has not been affected by being wiped out of the map like a Godzilla monster, but a certain section of it has. I find this discussion to be very interesting versus what I have understood from my nephew. I'll hear you off the air. Thank you.
REHMAll right. Tom.
GJELTENWell, I think that is true. And I think we have actually acknowledged that this morning, that the area affected by the earthquake and the tsunami accounts for about 6 or 7 percent of the overall economy, which is actually less. The Kobe earthquake actually affected about twice as much in terms of economic activity than this one.
REHMBut what about landmass, Tom?
GJELTENWell, you know -- and there's something else we haven't mentioned that we've got to talk about, Diane, and that is the prospect of radiation and the fallout from these nuclear plants. That is the big story right now. And we saw, you know -- now the big fear is that there might be a rupture of the containment vessels. If you get radiation spreading over this area which, as the caller says, is an agricultural area -- I mean, Japan is a far more densely populated place than the area around Chernobyl was. I think that's a huge unknown factor here that has to be considered.
IPI also think that the economic impact in Japan especially goes well beyond just those areas that are within close proximity of the disaster. As we were talking about earlier, there are highly integrated supply chains in a lot of these companies. We've seen several -- excuse me, Japanese automakers shut down all production, including in plants that are not anywhere near the affected area, because they depended on parts and supplies that can't get to the plants now, because they're stuck on highways or railroads that are blocked off right now, or because some of the essential components come from factories that are idle.
MORICIA good way to look at this is, you know, a hurricane in the United States, Katrina, Mississippi, Louisiana, relatively small effect on the entire economy of the United States, although very large there because we're so large. If it was the Caribbean Island, it would wipe out the economy. To some extent, Japan is some place in between. You know, it's a third the size of the United States economically, although the landmass is not very large. It's spread out because it's a chain of islands. So, you know, Japan will recover.
MORICIThis radiation issue, though, is very important. So far, we don't have an indication that that has happened or is going to happen. And if it doesn't happen, then Japan will likely be able to recover pretty quickly, like within a year or two. If that does happen, then all those people will have to be resettled, those sources of food supply. And that becomes a much larger problem, whose cost we cannot readily estimate.
REHMNow the radiation levels currently are fairly low, are they not, Greg?
IPCertainly, from the news reports that I've seen...
IP...they tend to spike up as there's another sort of spill or explosion, and then they come down a little bit. But these things seem to bounce around a lot. And I gather that there's a fair bit of fogginess, even in Japan, about just how serious some of these releases are.
REHMWell -- and some of the people believe they're not being told the whole story.
SZECHENYIIndeed. There is a lot of frustration with regard to how much is being communicated with respect to the nuclear emergency. The government has formed a joint tax -- task force with Tokyo Electric Power, the utility that runs the facility in an effort to improve that process. You know, the government has ordered evacuations in the vicinity of the plant. It's also ordering people to stay inside. But in the event that this radiation issue continues, as Tom mentioned, how are you gonna orchestrate a mass-scale evacuation when infrastructure is down? It's a huge question.
REHMNicholas Szechenyi of the Center for Strategic and International Studies. Short break now. And when we come back, more of your calls, your e-mail. I look forward to hearing from you.
REHMAnd we'll go right back to the phones to Miami, Fla., to Stephanie. Good morning.
STEPHANIEGood morning. Diane, my comment has to do with the human factor. Apparently, you've been getting some comments that people are wondering why you aren't discussing the human factor today. And I think that this discussion of the economic, the global economic effects is extremely humane. And that's precisely the factor that makes Tom Gjelten's comparison of the quantitative easing in Japan and that in the United States not really material because the money that's being spent in Japan, the purpose of that rebuilding, is basically is going to be tied to survival of the culture, of the rebuilding of national pride, of people basically making meaning of their lives after this disaster.
REHMDo I hear birds in the background?
STEPHANIEYes, I'm in Miami.
REHMI thought so. Tom, do you wanna comment?
GJELTENNo, I don't dispute that at all. I -- there was a vigorous debate about the wisdom of the fiscal stimulus in this country and whether a lot of spending in the short run is really good for the economy in the long run. And, you know, my only point was that the experience that Japan has in this regard may be informative of that debate. I'm certainly not sort of making light of what...
GJELTEN...or the importance of that. But obviously, Japan has to rebuild and that's an urgent human necessity. So that is -- clearly, it is a whole separate issue.
REHMThanks for your call. Let's go to Cazenovia, N.Y. Good morning, Kaye.
KAYEGood morning. Everybody's heart is breaking for the people in Japan...
KAYEWe all wish them the best. My background is marketing and my gut instinct is, not that I agree with this, but I think the government of Japan needs to be very careful and forthright about the radiation because I think beyond the road, there are consumers all over the world who will have true hesitations about buying something that has Japanese components if they think there is any amount of radiation that could be damaging. There are just too many options out there. There are lots of competitions that's gonna pour in. And it's sounds like a goofy, little point right now, but I'm thinking like just the average consumer and I'm going, well, do I want a car or a smart phone or a television that might have been exposed to radiation.
SZECHENYIIt's a very good point. I think it's important to keep in mind the challenges that the government is facing simultaneously, in this case, earthquake, tsunami and nuclear emergency. I think in terms of communicating information with respect to the nuclear situation, you have a challenge. You don't want to underplay the significance of the potential for leaks of radiation. You also can't exaggerate it. So in the short run, I think it's very difficult to find the right balance. I have seen reports that other countries in Asia may inspect exports from Japan with respect to radiation. That's a reality that Japan is gonna have to face.
SZECHENYIBut overall, the important thing is to share accurate information with the public, and that's a challenge in these circumstances given that there are only 50 workers left at this plant. No one really knows what's happening there, I suspect.
REHMAnd just to remind, tomorrow, we will be talking further about the nuclear aspects not only in Japan, but around the world. Here's another e-mail along those lines from Roger. He says, "Will products manufactured in Japanese areas affected by high levels of radioactive fallout have some residual contamination infused in the product?" Peter?
MORICII doubt it. I mean, even close to the plants, their levels of radiation are not particularly high. It's not in the industrial areas. And also, frankly, you can just test the products. If you got (unintelligible) -- they have meters. You put them next to them and it's gonna be the same. I don't think this is going to be the mega issue that people think that I think the Japanese government is responsible enough not to ship stuff out that has a problem.
REHMAll right. To Alexandria, Va. Seyfu, (sp?) you're on the air.
REHMYes. You're on the air, sir.
SEYFUWell, my name is Seyfu. I didn't hear when you pronounced it. My question to the panel is when -- in this close economics for your panel to answer me not to use Japanese monetary policy as a model there. And when I see -- I don't see the difference, their monetary policy from the U.S. What is the idea behind that?
IPWell, people have criticized that bank of Japan, for years now, for allowing deflation to take hold and not being sufficiently vigorous about stimulating the economy through such creative mechanisms as the Federal Reserve is using as quantitative easing, which simply means buying government bonds with newly printed money. That's why I say this actually could strangely enough present an opportunity for the Japanese authorities to be a little bit more aggressive, be a little bit more creative.
IPOne of the things that the United States and Japan had in common, you know, our financial crisis, their current crisis, is that they created a lot of unused capacity, a lot of unemployed people, a lot of empty factories and so forth. And if a way could be found to stimulate consumption and production, you wouldn't actually create an inflation problem because all you're doing is putting back to work resources that are lying idle right now.
MORICII agree with the point about the resources. The Japanese monetary authorities have been overly criticized. They have gone much further in terms of quantitative easing that any Western government ever conceived. You know, it was a big deal for the Fed to go from buying short term securities, to buying long term securities to try to pull down the long end of the yield curve or mortgage rates. In Japan, not only do they buy government bonds, they buy electronically traded funds. They buy corporate bonds. They buy all kinds of assets that Rand Paul would have his arms up about in the United States.
MORICIIt's hard to imagine what else they could buy already. So my feeling is that the deflation problem has been as adequately addressed by the bank of Japan as possible, and I don't they've been irresponsible in what they've done. But they don't know that they could do a lot more, Greg?
IPI agree with Peter that they certainly have bought various, you know, astonishing variety of things. The only thing I would add is they could buy more.
GJELTENYou can always buy more.
REHMHere is an e-mail from Vandy in Cary, N.C., who says, "The panel is talking about Japan savings rate and their debt is also at a very high level in terms of GDP. Can they comment on this? How is this situation different from the U.S. economy, which is struggling to reduce its national debt?" Peter.
MORICIWell, the U.S. government owes about 100 percent, actually 93 percent of the GDP in debt. And about four or 5 trillion of the 14-plus trillion is held by foreigners. In Japan, virtually, all the debt is held domestically and you have to understand what's going on in Japan. Japanese save a great deal so it means they don't spend enough. So what the government does is borrow that money from them and spend it for them. It's a very different dynamic...
MORICI...so the real issue here though is the Japanese government -- the Japanese people are gonna need resources to rebuild, and to some extent, they're gonna cash in what they hold abroad, which means that there is going to be higher capital costs abroad, namely the United States, for its debt unless the Fed does something. And if there's an inflation problem in all this, it's gonna be in the United States...
MORICI...but I don't think it will happen.
REHMLet me understand. You're saying that Japan is likely to call back some of the money it has lent to the United States in order to do the rebuilding it needs to do.
MORICIImplicitly, yes. There won't be a formal government edict to do that. But in reality as the government spends more money, it will have that ripple effect through the chain of events that happened in markets.
GJELTENThere's one other policy option that the Japanese government has, which is that it could increase taxes. Now, the fact of the matter is that actually level of taxation in Japan is very low. And as Peter said, the government borrows money from its citizens and then spends it on their behalf. It does this, essentially, as an alternative to taxing the people and then spending that tax revenue. But there's still -- the government still has a underutilized revenue mechanism that it can activate here.
MORICIYeah. Also, an issue of debate prior to the earthquake -- Prime Minister Kan came under a lot of fire in the context of a parliamentary election last year for simply mentioning notionally that there might be a need to increase taxes in the future. In discussions with the opposition party in -- since the disaster, there has been some talk of a special tax to fund reconstruction, that the government has -- may need concrete progress on that as it is.
REHMAll right. To Cincinnati, Ohio. Coleman, I think has a correction for Peter. Good morning to you.
COLEMANGood morning, Diane. Yeah. I was listening to the discussion session of the show in the beginning. And I believe the cost of the rebuilding it was like -- something like $200 billion, if I'm not mistaken? Is that correct?
MORICIThat wasn't my figure. I interpreted off that. Someone else mentioned it to me.
MORICIThat was Greg, wasn't it?
IPYeah. I mentioned that, Peter.
IPThat's what I seen cited as a total temporary ensured losses.
REHMYes. Exactly. $200 billion. Quite...
MORICIDo you have another figure?
COLEMANYes -- no, I don't have another figure. But that's actually 5 percent of the GDP. And you had mentioned that it was...
MORICIWell, I see. Okay. Well, I was doing the math in my head and that's quite a bit larger and that means...
MORICI...it's gonna be quite a bit larger rebuilding program. Thank you for the correction.
COLEMANAnd that's a -- yeah. And that makes it, you know, quite significant, similar to the, you know, the deficits that we see in many of our states' budget and, you know, cutting here in the States. So thank you very much.
REHMAll right, sir. Thanks for calling. Let's go to Glen Carbon, Ill. Good morning, Chris. You're on the air.
CHRISGood morning, Diane. My question is pertaining to statements made by a Dr. Royal -- Duval Royal at Washington University, who indicates that primary fallouts with Chernobyl impacted agriculture, in particular the thyroid cancer risk that -- for children that came about, you know, with exposure to the grass. And, of course, there was a big problem with milk. And I'm interested to know -- to hear here kind of speak about the agricultural impact if this, essentially a holocaust of radioactivity takes place, if there's this meltdown that could happen. Thank you. I'll take your comments off the air.
REHMAll right. Greg.
IPI'm not an expert in terms of, you know, what the long term impacts are of radioactivity on agriculture and so forth. I wanted to, sort of, add something to it, especially we had earlier, which is the tendency of people to overreact to the risk of, you know, safety issues in products. You know, we've been -- you know, the Japanese themselves, actually -- Peter, I'm sure, from his experience knows more about this than I -- our experts at -- you know, dreaming up, you know, exaggerated health worries as reasons to keep foreign products out of their market.
IPWe've been trying to persuade the Koreans, for years now, to admit in -- our beef exports because of -- to persuade them that the mad cow disease problem is not what they think it is. And so there is a potential here for the fallout, in terms of sales and marketing, to be bigger than the science would require.
MORICIFinding health risks are indoor sport for trade lawyers. That's what they do instead of football on Sundays.
REHMPeter Morici of the University of Maryland. And you're listening to "The Diane Rehm Show." Let's go back to the phones, to Orlando, Fla. Good morning, Eric.
ERICHi. I'm concerned about the control of media in this. My colleague owns Japan.org, and all they've been doing is recording stories, and they were just shut down by Homeland Security.
REHMHomeland Security in this country?
ERICYes, in this country. They basically they had a nuclear response agency was concerned about some of the data coming off the website, and he's simply flowing the stories off of the Internet. He's not creating any stories. He's not fabricating anything. And there -- they simply shut him down. He had to move his website Japan.org to Hong Kong.
REHMAnd how was he verifying the information he was putting out there?
ERICHe was simply grabbing reports through a tool created on the Internet, just picked up major stories like "Drudge Report" and other folks.
REHMAnybody have a comment here? No one here seems to know anything about that? Tom, do you wanna comment?
GJELTENNo. I don't know anything about that. I mean, obviously, the Department of Homeland Security is very concerned about nuclear terrorism. And, you know, traditionally they're concerned about what terrorist groups -- what information terrorist groups may glean from the Internet. But I have no idea if that's what's behind this, if in fact this has happened.
REHMAll right. Let's go to Trentran (sp?) in Gainesville, Fla. Good morning, you're on the air.
TRENTRANGood morning, Diane. I just have a question. I know that after the 1995 great Kobe earthquake, the Japanese yen appreciated by as much as 20 percent. So I'm just wondering if we would see the same thing happen again during this earthquake?
IPI doubt that all of that 20 percent appreciation, if that's the correct figure, was because of the earthquake. There were quite a few other things going on at the same time.
IPYou know, global boom in Asia, perhaps, other parts of Asia, weakness, other part of -- I don't specifically remember. We have seen some improvement in the yen in the last few days precisely because of the theory that the Japanese will be repatriating some capital, and that that will push up the yen as that money comes back into Japan. But offsetting that again, as we were talking about earlier were the very aggressive efforts by the Japanese central bank to re-liquefy the economy, in that sense, you know, printing more yen, which, all else equal, would tend to push its value down.
REHMOh, sorry. Go ahead, Peter.
MORICIAnd when they print those yen, it discourages Japanese investors from participating in what we call the carry trade. And that is borrowing yen to buy dollars and play this sort of game, because the risk of the dollar becoming weaker overwhelms the potential gain on the interest side. You know, there -- I doubt that we're gonna see a 20 percent movement in the currency as a consequence of this event.
GJELTENAnd the Japanese government does not want to see that happen because the more the yen appreciates, the more expensive Japanese products will be in the world market, and this is the last time in the world they wanna see their products become less competitive.
REHMAll right. We'll leave it there. Tom Gjelten, correspondent for NPR, Peter Morici of the University of Maryland, Greg Ip of The Economist magazine, author of "The Little Book Economics." And Nicholas Szecheyni, he's at the Center for Strategic and International Studies. Thank you all so much. And thanks for listening, all. I'm Diane Rehm.
ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Susan Nabors, Denise Couture, Monique Nazareth and Sarah Ashworth. The engineer is Tobey Schreiner. Dorie Anisman answers the phones. Visit drshow.org for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information. Our e-mail address is drshow.org. And we're on Facebook and Twitter. This program comes to you from American University in Washington. This is NPR.
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