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Why 95% of Traders Fail

Post Nuclear Japan: Atomic Debt

Economics / Japan Economy Jul 05, 2011 - 10:11 AM GMT

By: Andrew_McKillop

Economics

Best Financial Markets Analysis ArticleElectricity cuts and rationing in Japan as it very carefully thinks about the dangers of getting all 49 of its remaining nuclear reactors back up to full charge, and tests all the way before doing it, can be used by nuclear apologists as a "We told you so !" proof that we need nuclear power. But in fact Japan faces things a lot more difficult and challenging, even, than taking a leaf out of Germany and Switzerland's books and starting a total nuclear exit strategy.


To be sure the power cut effects can seem dramatic. At Nissan's headquarters in Yokohama, the air conditioning is blocked at 26 degrees. When it's hot and sticky outside it would be nice to have things cooler, but that's not an option anymore: saving power is mandatory. Air conditioning is now heavily and widely restricted, office corridors go starved of artificial light, and street lighting is so low that yet another sacrosanct facet of Japan's otherness and difference has slipped: there has been a mild uptick in historically almost unknown street crime.

Underlying this austerity-type forced energy saving we find long-term causes a lot more powerful than atomic energy, despite Japan's 55 reactors that were operating in 2010, supplying an official 28.9 percent of national electricity that year. Also that year, Japan's sovereign or national debt reached 226 percent of GDP, some 70 percent more of its GDP - the fourth largest in the world - than Greece's debt, and nearly 4 times the debt-to-GDP ratio of Spain. Japanese debt is simply the most massive in the world, not even distantly rivalled by following countries in the world debt league, such as a few heavily-indebted small countries and island states like St Kitts Nevis or Jamaica, able to achieve, if that isthe right word, a debt ratio as high as 175 percent of GDP.

SAVING MORE THAN ELECTRICITY
Ironically speaking, even if Japan had completely free electricity - unlike supposedly cheap, clean and safe nuclear power - remediating its debt crisis would probably not be any easier. The nuclear disaster at Fukushima will add about $ 135 billion to $ 175 billion to Japan's national debt, due to site operator Tepco being bankrupt already as cost estimates of the disaster, only for the 2011-2021 period, extend to the $135-$175 billion range.

Put another way, if Tepco remained solvent and in business, it would need to pay 100 percent of its 2010 total operating profits, of around $ 5 billion, for about 25 years - to cover all estimated economic damage expected from the Fukushima disaster in the next 10 years. Interesting mathematics !

Taking the IMF nominal value (not corrected for purchasing power) estimate of Japan's GDP in 2010, at $ 5458 billion, the Fukushima hit adds around 2.7 percent of this to its vast stack of debt, and comes in at very close to what Japan, by a miraculous game of financial charlatanism is able to do: lend money and buy debt abroad. Japan has maintained current-account surplus and has been sending up to 3 percent of its GDP abroad every year, providing about $175 billion of funds in 2010 for other countries and their companies to borrow.

This paradox of the most stunningly indebted nation financing the world is explained by a combination of Japanese companies investing little at home, and domestic investment spending on real estate, housing and general non-residential fixed investment also being low, due to so-called "poor investment opportunities" in Japan. Decoded, this means that Japan tends to de-invest, an unsurprising result from what is called its Lost Decades, or around 20 years of near-permanent near-recession and an explosion of sovereign debt, from nearly nothing 20 years ago, to $ 12 335 billion in December 2010.

Due to the double hit of Fukushima and tsunami damage that money is gone now, after this crisis. Millions of former copybook Japanese savers are now having to spend their savings on essentials, like food and fuel and temporary shelter, whose prices are rising strongly. Their drawdown of savings is  being forced by them losing their jobs and businesses, due to the damage. Some 100 000 Japanese have been thrown out of the Total Exclusion Zone around the Fukushima site, probably forever. When or if the zone is extended as far as 50 kilometres (the same as for the same-disaster-level Chernobyl exclusion zone), as many as 100 000 more Japanese could be thrown out of their homes, farms, businesses and jobs.

Tepco, if it remained an entity still doing business, even with close links to highly placed politicians, would have to quickly find at least $ 100 billion of the $ 135 - $ 175 billion economic damage it will cause in the next 10 years. This explains why this will not happen and its nuclear legacy to the Japanese people will be new sovereign debt. Bravo for "cheap, clean and safe" nuclear power !

ROUND TWO
The Fukushima crisis, due to its staggering economic cost, and linked directly with Japan's long but sharply deteriorating national debt crisis, may have unexpected international financial and monetary sequels, directly affecting and worsening the US and EU27 debt crises.

The risky joke in Tokyo these days is: Tepco melted down in a nuclear fire, but Fuji-san (the Japanese
people) are drowning in debt. The country's attempt to rival France in overdependence on nuclear power, but coming in way behind countries like Belgium, Armenia, Bulgaria or Hungary - or Switzerland - by percentage of its power from nuclear reactors, was an elite technocratic ideal, like in France. The problem was it took no account at all of things like Japan's seismic risk, let alone the real costs of nuclear power. Putting all its eggs in one basket, the fallout was disastrous when its "eggshell nukes" cracked. The economic fallout inside Japan is already heavy, with quarterly GDP data showing another contraction at an annual rate of over 3 percent, but the financial fallout worldwide, may also be heavy, and above all unexpected.

There is zero chance of Japan, this year, exporting or lending $ 175 billion to other countries. Whether or not China continues increasing its purchase of Japanese debt at the record rate of growth it showed in 2009 and 2010 is the first question. China was already starting to trim its US debt purchase, to loud media attention, especially of short-term US debt with a little face saving increase of buying in the area of long-dated American debt. In 2011, China might "invest in Japan", buying more Japanese debt if only to spread risk away from the US dollar to the equally unreal, but smaller Japanese Yen FX trading space. Japan also may sell US debt, simply because it has to finance a totally unexpected "nuclear gift" of the poisoned type - an immediate $ 100 billion hit - and cover the economic damage from its economy being dragged down by electric power cuts, caused by unsafe nuclear power.

By or before end-year we will know more on what sequels flow from Japan's flirt with the dangerous atom, but one trend is clear: Japanese households are buying more gold than previous, like Chinese private citizens - and Americans and Europeans too ! Uranium ? No thanks.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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