The 2011 earthquake exposed Japan’s strengths in discipline and resilience, but also its weaknesses—rigid BOJ policy, political paralysis, and fiscal obsession. True recovery depends on bold reforms and a willingness to challenge the comfort of the status quo.

Peter Tasker, an analyst at Arcus Research, discusses the strengths and weaknesses of Japan revealed by the Great East Japan Earthquake. He argues that the nation’s 20-year stagnation was a result of political choices to “do nothing,” with the Bank of Japan’s monetary policy and the government’s focus on fiscal discipline causing economic decline. He proposes that for successful reconstruction, Japan must abandon its status quo and embrace bold change.

Proposal: The Strength of Discipline and the Weakness of Resistance to Change Exposed by the Earthquake
Peter Tasker (Analyst, Arcus Research)

No natural disaster highlights national character more than a major catastrophe. Japan’s response to the Great East Japan Earthquake revealed both its strengths and its weaknesses.
The visible strengths were the courage, determination, and discipline of ordinary citizens.
The weaknesses exposed were the excessively close ties between government and finance, a lack of strategic thinking, and a vacuum of political leadership.

The vulnerabilities brought to light by the earthquake also overlap with the reasons why a once-feared and admired economic superpower has come to be seen as a negative model of economic mismanagement.
What matters now is whether, in post-disaster Japan, its strengths or its weaknesses will dominate.

The current suffering of Japan’s economy stems not from economic inevitabilities, but from politics.
It was a man-made disaster.
The first ten years of the “lost two decades” had some inevitability.
The bursting of one of history’s largest bubbles naturally inflicted pain as the financial system absorbed the shock.
But the second decade cannot be blamed on the bubble.
That is already a distant past.
The stagnation of the last ten years is the result of repeated choices made by the Japanese people and government.
Those choices, in essence, were to “do nothing.”
They prioritized the comfort of the status quo, avoiding the risks of engaging with the new and the uncertain.
In reality, the greater risk lies in preserving the status quo, for decline inevitably follows.

Calling Back the “Black Ships”

The single most consequential choice affecting the Japanese economy has been the Bank of Japan’s monetary policy.
Rejecting both quantitative easing and inflation targeting—tools widely adopted around the world—the BOJ triggered the most severe deflation on the planet.
As a result, the yen appreciated rapidly, stripping Japanese exporters of competitiveness against rivals in the United States, China, and South Korea.

Just as Switzerland is unimaginable without the Alps, Japan is still thought inseparable from its world-class automobile industry.
But who could have predicted, twenty years ago, that the world’s hottest consumer electronics would come not from Japanese firms but from Apple, Samsung, and Nokia?
If the BOJ’s missteps persist for another twenty years, no industry will be safe from decline.

In addition to the BOJ’s errors, another critical factor is Japan’s choice of a fiscal policy path obsessed with discipline.
In the 2009 general election, the Democratic Party of Japan (DPJ) won power promising growth-focused and household-support policies.
But beyond implementing the child allowance, few strong measures were taken.
Within a year, the DPJ dramatically reversed course, stressing the fear of fiscal collapse and advocating steep consumption tax hikes.

If there is ever a time to relax fiscal restraint, it is now, in the aftermath of the earthquake.
Massive funding is essential for rebuilding devastated regions and supporting victims’ lives.
Yet the government clings to fiscal discipline, opposing new bond issuance, and appears intent on exploiting the people’s willingness to “sacrifice anything for the victims” to push through tax hikes.
To every question, the government’s only answer is “raise the consumption tax.”

Bold change is needed in other areas as well.
The belief that preserving the status quo ensures stability is a mere illusion.
For example, emerging economies such as China actively use sovereign wealth funds (SWFs) as tools of national policy.
Japan, by contrast, confines its foreign reserves mostly to short-term U.S. Treasuries.
A Japanese SWF plan was killed off with the excuse that it “might lose money.”
Calls to make Tokyo a global financial center have been around for years, yet remain unheeded.
…(to be continued)