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Toichiro Asada

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Reading books on disaster recovery: Centered on the nuclear power issue and the financial issue of funding reconstruction

Toichiro Asada
Professor of Macro-Economics (Specializing in Macro-Economic Dynamics), Faculty of Economics, Chuo University

The Great East Japan Earthquake occurred on March 11th, 2011, with an epicenter off the Sanriku Coast. The earthquake was accompanied by a giant tsunami, forming a large-scale natural disaster the likes of which only occurs once every 1,000 years. The unprecedented damage wrought by the disaster left more than 25,000 people dead or missing, with another 360,000 living in shelters after their homes were destroyed. Even more, the resulting accident at the TEPCO Fukushima Daiichi Nuclear Power Plant was the worst in history (reaching the maximum nuclear crisis rating of Level 7, the same as the Chernobyl nuclear accident which occurred in the former Soviet Union in 1986) and it is estimated that more than 50 years will be required to bring the incident to conclusion. The spread of severe damage from this accident and the lack of government policies have led to a delay in reconstruction. Accordingly, perception of the disaster changed midway to include elements of a man-made tragedy. From the occurrence of the earthquake until today (August 2011), a succession of publications have been published which offer various proposals for overcoming disaster. Such publications can be referred to as disaster recovery books. When including proposals made via media such as newspapers, magazines and the internet, the number of proposals is already immense. Through hints gained from three books used as reference material, this article will focus on the themes of 1) the nuclear power issue and 2) the financial issue of funding reconstruction. I will also give my opinion regarding solutions to these issues. Before proceeding, I would like to note that the ideas listed below are my personal opinion and do not reflect the opinion of any groups or individuals other than myself.

(1) Nuclear power issue

In the book written by Ito, Okuno et al. (see reference literature 1), Mr. Yoshiki Seki (Takushoku University; specializes in forestry economics) and Ms. Akiko Okabe (Chiba University; specializes in urban policy) state their opinion regarding the nuclear issue. Also, Mr. Iwata states his opinion in reference material 2). Mr. Seki gives the following opinion (Ito, Okuno et al. (1), p. 334): "Nuclear power policy has been advanced by a 'nuclear power hamlet,' a closed society composed of the METI (Ministry of Economy, Trade and Industry), power companies, nuclear power scholars and manufacturer of heavy machinery. This policy has failed. The national government, which should be responsible for fulfilling a checking role, and the mass media have supported this closed society and formed an 'irresponsible cooperative.'" Mr. Okabe's opinion is as follows (Ito, Okuno et al. (1), p. 346): "The question at hand is whether to continuing promoting nuclear energy in the future, or whether to gradually shift away from nuclear power by suppressing energy demand to a level where renewable energy can be used as an alternative, but there is still no prospect of using renewable energy. However, it is no longer possible to construct new nuclear power plants. Therefore, we must focus our knowledge on suppressing energy needs and realizing a balanced level of needs which can be fulfilled without the use of nuclear power." Mr. Iwata relates the following personal experience (Iwata (2), p. 166-169): "Ever since the 1979 nuclear accident at Three Mile Island in America, I have been greatly concerned regarding the safety of nuclear energy. I have also participated in public demonstrations against nuclear power. However, demonstrations against nuclear power were never popular in Japan, and nuclear power has been promoted in our country." He then makes the following proposal: "Establish a third-party organization to supervise nuclear power. This organization should be composed of truly neutral members who are independent from the METI."

I can sympathize with all of these assertions and proposals. However, I would like to go one step further and make the following detailed proposal. The nuclear power hamlet has acted concertedly to make the public believe that nuclear power is a safe, clean and low-cost energy source. However, all of these myths have been clearly dispelled since the accident at Fukushima Daiichi Nuclear Power Plant. Therefore, I believe that our only choice is to gradually shift away from nuclear power. There is a dramatic movement for developing revolutionary and low-cost technology capable of generating power through new energy sources such as solar power and wind power. These fields are also rapidly becoming appealing as feasible businesses, so I believe that we should raise the ratio of such new energy in the long-term. Participation from domestic and overseas corporations which are sensitive to business chances will naturally increase the ratio of these new fields. However, I don't think it is necessary to maintain nuclear power until such a high ratio is realized. Although Japan possesses 54 nuclear reactors used for generating nuclear power, only 11 of these reactors were currently in operation as of August 2011. Even if operation was stopped at all 11 of these reactors, it would be possible to cover 100% of current energy demands simply by increasing the degree of utilization of existing power facilities such as gas-fired power plants, oil-fired power plants and hydraulic power plants. Objective data substantiating this fact has been disclosed in a number of areas, including a book written by Mr. Hiroaki Koide (Kyoto University Research Reactor Institute). Such a fact is by no means a national secret. The degree of utilization of power facilities such as thermal power plants and hydraulic power plants is relatively easy to adjust. A surplus of power would exist if the utilization of such plants was too high. Therefore, the degree of utilization of such plants is intentionally kept low in order to maintain nuclear power plants, facilities for which it is difficult to adjust the degree of utilization (lack flexibility). Indeed, past energy consumption in Japan peaked in 2001. During the past 10 years, this peak has not been exceeded even once (although this may be attributable to the effect of deflationary depression). I believe that there is a high probability that the planned blackouts implemented by TEPCO immediately following the earthquake was propaganda intended to show the necessity of nuclear power to Japanese society. In my opinion, the most realistic and practical course of action is to combine the following two strategies: 1) a short-term strategy for complete abolishment of nuclear power in conjunction with raising the degree of utilization of existing power facilities other than nuclear power, and 2) a long-term strategy for increasing the ratio of power generated using geothermal heat and new forms of energy such as solar power and wind power, as well as construction of a smart grid system.

(2) Financial issues of funding reconstruction

Even according to conservative estimates, the government must urgently make about 20 to 30 trillion yen of additional financial expenditures (a net increase which cannot raised simply by restructuring the existing budget through revision of child stipends and other programs) in order to fund reconstruction from the recent disastrous earthquake. These expenditures are composed of items such as processing of rubble, reconstruction of damaged social infrastructure and reparations for victims. However, sources for additional financial expenditures include 1) increased taxes, 2) issuance of government bonds with private underwriting (loan from private sector to government), and 3) issuance of government bonds underwritten by the Bank of Japan. (In the last case, although the bonds are in the form of a loan from the Bank of Japan to the government, expenditures are actually financed through the issuance of additional money by the Bank of Japan. In other words, this case consists of money financing.) This fact is expressed in a formula known as the government budget constraint formula. In the reference literature written by Ito, Okuno et. al (1), option number 3 above is proposed by Mr. Kazumi Asako (Hitotsubashi University, specializes in macro economics) and option number 2 (overseas loan) is proposed by Mr. Yoshitaka Kurosawa (Nihon University, specializes in international financial theory). Furthermore, option number 2 (domestic loan) is proposed in a joint thesis written by Mr. Yosuke Takeda (Sophia University, specializes in macro economics), Mr. Yasuhide Yajima (NLI Research Institute, specializes in financial theory) and Mr. Ichihiro Uchida (Aichi University, specializes in applied econometrics). Mr. Masahiro Okuno (Ryutsu Keizai University, specializes in micro economics) proposed both options 1 and 2. Moreover, fierce opposition to option number 3 is contained in the thesis written by Okuno and the thesis written by Takeda, Yajima and Uchida. On the other hand, the reference material written by Iwata (2) and Tanaka/Jonen (3) proposes that all additional financial expenditures be covered by using option number 3.

I agree with the proposals made by Asako, Iwata, Tanaka and Jonen. In other words, I believe that option number 3 should be selected. I will give a brief explanation of the reason for my thinking. When ordering the options according to the greatest increase of national income and employment due to additional financial expenditures, the result is 3 > 2 > 1. This can be shown through formulas and graphs which use the IS-LM that is introduced in beginner level macroeconomics courses taught in economic undergraduate schools in universities throughout Japan. Put simply, assuming additional financial expenditures of 20 trillion, use of option number 3 will result in the largest increase in national income and employment. This will contribute to a speedy recovery. However, when using option 1, there is almost no increase in income or employment. Use of option 2 creates intermediate results. The most important point is clearly indicated in the reference material by Iwata (2). In the case of option 1 and 2, the government obtains money from the private sector and returns the money through spending. Therefore, even though there is an increase in the flow of public expenditures, there is absolutely no increase in the stock of money which exists in the entire economy. Conversely, in the case of option 3, money is not obtained from the private sector. Instead, expenditures are made using money which was newly created by the Bank of Japan. This results in an increase in both public expenditures and the stock of money, leading to a large increase in national income. For the benefit of readers who are familiar with economics, I will briefly describe this point using IS-LM terminology. In the case of options 1 and 2, only the IS curve shifts to the right (the range of the shift is extremely small for option 1). There is not shift in the LM curve. In contrast, in the case of option 3, both the IS curve and the LM curve shift to the right, showing a major effect on income and employment.

The Ministry of Finance is constantly searching for opportunities to raise taxes and the Bank of Japan has an extreme diversion to money financing. Therefore, interested parties within these organization and other individuals influenced by the organizations are opposed to option 3 for reasons such as a) underwriting of national bonds by the Bank of Japan is prohibited by law, b) the value of national bonds will fall drastically if the Bank of Japan underwrites national bonds, c) hyper inflation will occur if the Bank of Japan underwrites national bonds, and d) underwriting of national bonds by the Bank of Japan is taboo. However, as clearly pointed out by Iwata (2) and Tanaka/Jonen (3), there is no rational basis for any of these arguments. Argument (d) is totally irrational, so I will decline to discuss it. Regarding (a), under current laws, money financing is possible if passed by the Diet. As pointed out by Mr. Yoichi Takahashi (Kaetsu University), former official at the Ministry of Finance, it is a fact that such laws are the basis for annual underwriting of a certain amount of national bonds by the Bank of Japan (it seems that the Ministry of Finance and the Bank of Japan are extremely adverse to this fact being known by the public). Regarding (b), there is no increase in the supply of national bonds to the private sector if the Bank of Japan underwrites national bonds. Therefore, compared to underwriting by the private sector, it actually prevents a decrease in the price of national bonds (it prevents an increase in the interest of national bonds; it should be noted that the price of national bonds and the interest of national bonds moves in inverse proportion). This conclusion is nothing more than a simple problem of applying IS-LM analysis. Regarding (c), Japan has a nominal gross domestic product (nominal GDP) of almost 500 trillion yen (although it is decreasing due to deflationary depression). Even if one-time money financing is made through additional public expenditures of about 20 to 30 trillion yen, there is no possibility of hyper inflation being caused. (The official definition of hyper inflation is an increase in prices at an annual rate of 13,000% or higher. However, individuals who assert the occurrence of hyper inflation almost never disclose actual numerical data. Therefore, the annual rate of inflation being considered by such individuals is unclear.) Most likely, money financing would only cause prices to increase by an annual rate of 2% to 3%. Furthermore, in the case of one-time money financing, the resulting price increase would simply be a temporary phenomenon. However, as pointed out by Iwata (2), maintaining continual inflation of about 2% to 3% would actually be preferable for rescuing the Japanese economy from deflationary depression and putting it on a growth track. However, one-time money financing of this scale would not even generate such results.

Reference Literature
  • 1.Proposals for Reconstruction from the Great East Japan Earthquake: Construction of a Sustainable Economic Society; edited by Shigeru Ito, Masahiro Okuno, Takashi Onishi and Masaharu Hanazaki (University of Tokyo Publishing, June 2011)
  • 2.Economic Reconstruction: Recovering from the Great East Japan Earthquake; Kikuo Iwata (Chikuma-Shobo, May 2011)
  • 3.Economic Panic: Lack of Correct Economic Policy Creates Panic!; Hidetomi Tanaka, Tsukasa Jonen (Takara-Jimasha, June 2011)
Toichiro Asada
Professor of Macro-Economics (Specializing in Macro-Economic Dynamics), Faculty of Economics, Chuo University
Current position: Professor at the Faculty of Economics, Chuo University
Born in Aichi Prefecture in 1954. Graduated from the School of Political Science and Economics, Waseda University in 1977. Completed the Doctoral Program at the Graduate School of Economics, Hitotsubashi University in 1982. Holds a PhD in economics (Chuo University). After serving as Associate Professor at the Faculty of Economics, Komazawa University and the Faculty of Economics, Chuo University, assumed his current position in 1994. Current research themes include economic changes based on methods in macro-economic dynamics, as well as research in macro-economic policy. His major written works include Macro-Dynamics of Growth and Cycles (Nihon Keizai Hyoronsha, 1997, single authorship) and Monetary Macro-Dynamics (Routledge, London, 2010, co-written).