20,000 Dead in Japan, BoJ Desperate to Avoid Banking Crisis
When the tragedy in Japan still unfolding, today King World News interviewed James Lucier, Managing Director at one of the top botique firms in the world, Capital Alpha Partners. Lucier was quick to point out that the human casualties have been underestimated, “I do want to emphasize the extent of the human tragedy here. The number that one sees in the public press is about 15,000 people dead. The reality according to sources in Japan is going to be higher, more like 20,000 dead. We are talking about whole families, whole trains full of people, whole villages, tremendous human suffering.
James Lucier continues:
“Well obviously we are looking at a great natural disaster, perhaps the most serious earthquake in Japanese history. Perhaps even surpassing the scale of the great Kanto earthquake of 1923. In this case clearly the modern city of Tokyo has escaped the sort of devastating damage that every city in Japan saw during the great quake of ’23.
But we still see tremendous damage up north and Japan has a formidable task before it in terms of reconstruction. However the record shows that modern industrialized nations tend to recover fairly quickly from such disasters, and that if any country is prepared for such an event it is Japan.
After the shock of the Kobe earthquake of 1995 Japan performed a fairly thorough overhaul of the many deficiencies in response. And yet even after the Kobe quake which many saw as having a less than stellar performance by the first responders, we still saw Japan recovering 98% of its industrial capacity in that area within about 18 months.
So here, with regard to the northeastern regions of Japan, where many of Japan’s heavy manufacturing industries are located, we do see a reasonably good prognosis for rapid reconstruction.
The real question of course is with regard to how Japan would finance this recovery. The estimates we are seeing are anywhere from 100, 200, even 300 billion dollars. By comparison the cost of hurricane Katrina in the United States was roughly $80 billion.
The real issue is whether Japan can finance this reconstruction internally. There are commentators who argue that this would mean adding only about 7 percentage points to Japan’s current debt to GDP ratio. But only 7 percentage points I think is a pretty big deal when your debt to GDP is already over 200%.
“Well obviously we are looking at a great natural disaster, perhaps the most serious earthquake in Japanese history. Perhaps even surpassing the scale of the great Kanto earthquake of 1923. In this case clearly the modern city of Tokyo has escaped the sort of devastating damage that every city in Japan saw during the great quake of ’23.
But we still see tremendous damage up north and Japan has a formidable task before it in terms of reconstruction. However the record shows that modern industrialized nations tend to recover fairly quickly from such disasters, and that if any country is prepared for such an event it is Japan.
After the shock of the Kobe earthquake of 1995 Japan performed a fairly thorough overhaul of the many deficiencies in response. And yet even after the Kobe quake which many saw as having a less than stellar performance by the first responders, we still saw Japan recovering 98% of its industrial capacity in that area within about 18 months.
So here, with regard to the northeastern regions of Japan, where many of Japan’s heavy manufacturing industries are located, we do see a reasonably good prognosis for rapid reconstruction.
The real question of course is with regard to how Japan would finance this recovery. The estimates we are seeing are anywhere from 100, 200, even 300 billion dollars. By comparison the cost of hurricane Katrina in the United States was roughly $80 billion.
The real issue is whether Japan can finance this reconstruction internally. There are commentators who argue that this would mean adding only about 7 percentage points to Japan’s current debt to GDP ratio. But only 7 percentage points I think is a pretty big deal when your debt to GDP is already over 200%.
It really depends on whether the patient Japanese bondholders who so far finance about 95% of Japan’s debt internally are able to sustain this. The question is does Japan still have the pools of savings necessary to provide these funds, or does Japan have to go to the global markets the way the United States does?
If Japan does go to the global markets I think it will very likely face a rise in the interest rates it pays. Perhaps even the Japanese public, depending on how the market responds, might also require a rise in Japanese interest rates.
If Japan does go to the global markets I think it will very likely face a rise in the interest rates it pays. Perhaps even the Japanese public, depending on how the market responds, might also require a rise in Japanese interest rates.
This is something that is potentially a significant issue for Japanese regional banks which hold Japanese government bonds. Rising interest rates might require these banks to take a haircut on the value of those bonds and so there is potentially a banking issue here.
You see the Bank of Japan stepping in aggressively with liquidity in order to not only cope with the rising value of the Yen but also to forestall a difficulty of this sort (higher interest rates creating a banking problem). It remains a dangerous situation, I mean how many times can you do the equivalent of quantitative easing if you’ve already been doing it for 20 years? How much financial flexibility does the country really have at this point?”
When asked about the horrendous problems at the Japanese nuclear reactor James Lucier remarked, “This is clearly qualitatively worse than Three Mile Island. You have not one, not two, but three reactors that are in effect dead at this point. Perhaps the entire complex of six reactors in the worst case might be written off. So we are watching this and hoping that the reactor situation remains under control and that any release of radiation is minimal.
I do want to emphasize the extent of the human tragedy here. The number that one sees in the public press is about 15,000 people dead. The reality according to sources in Japan is going to be higher, more like 20,000 dead. We are talking about whole families, whole trains full of people, whole villages, tremendous human suffering.
Let me close on a more positive note by adding that we do not see the possibility of a Chernobyl incident here, but of course we are watching the situation carefully because of the structural failures that we have seen at these reactor buildings and the reactor vessels themselves. Having said that, I think we are beginning to approach the point now where you can take the possibility of a meltdown off of the table.”
You see the Bank of Japan stepping in aggressively with liquidity in order to not only cope with the rising value of the Yen but also to forestall a difficulty of this sort (higher interest rates creating a banking problem). It remains a dangerous situation, I mean how many times can you do the equivalent of quantitative easing if you’ve already been doing it for 20 years? How much financial flexibility does the country really have at this point?”
When asked about the horrendous problems at the Japanese nuclear reactor James Lucier remarked, “This is clearly qualitatively worse than Three Mile Island. You have not one, not two, but three reactors that are in effect dead at this point. Perhaps the entire complex of six reactors in the worst case might be written off. So we are watching this and hoping that the reactor situation remains under control and that any release of radiation is minimal.
I do want to emphasize the extent of the human tragedy here. The number that one sees in the public press is about 15,000 people dead. The reality according to sources in Japan is going to be higher, more like 20,000 dead. We are talking about whole families, whole trains full of people, whole villages, tremendous human suffering.
Let me close on a more positive note by adding that we do not see the possibility of a Chernobyl incident here, but of course we are watching the situation carefully because of the structural failures that we have seen at these reactor buildings and the reactor vessels themselves. Having said that, I think we are beginning to approach the point now where you can take the possibility of a meltdown off of the table.”
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