Enduring the unendurable

Japan’s earthquake: Japan’s tragic earthquake and tsunami are unlikely to break the back of the world’s third-largest economy. Experience with crises has shaped the Japanese ethos of “gaman” — “enduring the unendurable”. Even after the March 11 disaster, Japanese industry seemed largely spared. Power shortages may crimp production, but government stimulus should enable companies to step into the breach.

Gut-wrenching aftershocks aside, Tokyo was back at work on March 14. Stocks fell heavily — the Nikkei 225 index down 6 per cent — yet analysts predicted corporate profits and economic growth only slightly down for 2011, with the potential to surprise on the upside.

While unease remains about Japan's nuclear facilities, some of which have yet to be stabilised, the quake's effect looks small relative to the economy. The worst-hit areas are home to farming and fishing, not heavy industry. They represent no more than 8 per cent of Japan’s GDP. In January 1995, when an earthquake struck the industrial centre of Kobe, roughly 88 per cent of manufacturing was still based in Japan; today a quarter of it has moved offshore, according to Deutsche Bank estimates.

The disaster is likely to galvanise Japan’s fractious Diet to pass extraordinary spending measures, particularly because the opposition derives much support from rural areas like those hit by the quake. Worries that Japan cannot afford such a package are unfounded. While its debts are double the size of the economy, burgeoning export profits have swelled government tax revenues.

And unlike Europe’s debt-wracked economies, Japan borrows almost exclusively in its own currency, from its own citizens.

The reconstruction such stimulus unleashes can revive the economy and then some: After dropping by 2.6 per cent in January 1995 from December 1994, Japan’s industrial output rebounded the following month by 2.2 per cent and another one per cent in March, according to estimates by Societe Generale. Overall GDP grew 1.9 per cent in 1995. Consumer stocks like Hitachi, Sony and Toshiba fell heavily on March 14, reflecting a belief that with more government spending needed, Japan’s high savers will dutifully save even more.

Further comfort comes from the strong economic backdrop. Before the quake struck, Japan was enjoying a United States-led recovery in exports and investment.

Stock prices may reflect the uncertainty over the scale of the damage. But as long as the global recovery endures, Japan should too.