Japan: Relevant Again

There was a time when it was easy to discount Japan’s importance to the world economy. The country was supposedly mired in two-decades of stagnation, it had surrendered its second-place as a global economic power to China where all of the action seemed to be taking place. Japan was sliding into irrelevance.

No longer. The impact of the Great East Japan Earthquake last month and the continuing crisis at the Fukushima nuclear power plant complex has, if nothing else, exposed the important position that Japan still holds in the world economy, especially in making key components for cars, telephones and electronic products of all kinds.

"Japan is more global than we thought," said Eisuke Sakakibara, a former vice minister for international affairs at the Finance Ministry and a well-known commentator on finances, which earned him the nickname "Mr. Yen."

Most people in the US, for example, have probably learned that foreign-owned and domestic automakers have had to curtail production until the supply chain of critical parts could resume normal operations. But there are many crucial industries in which Japan has monopolies or near monopolies which will disrupt global production for months. Take Xirallic.

Never heard of Xirallic? It is a paint pigment that gives automobiles, especially expensive upmarket brands, their shiny, metallic look. This product is made by the German chemical company Merck in one factory, which happens to be in the town of Onahama, about 40 km from the damaged Fukushima plants.

The company estimates that it will be out of commission for at least six to eight weeks, and that assumes that the government doesn’t have to extend the radiation evacuation zone, now set at 30 km (18.6 miles), another 10 kilometers. Unusually high radiation levels have been observed (though later declining) in at least one other town 40 km away from the stricken plants.

Well, maybe the automobile industry can manage with cars with a duller finish, but can the high tech industries do without semiconductor-grade silicon wafers? Most are made by two Japan-based companies, the Shin-Etsu Chemical Co and Sumco Phoenix Company.

Shin-Etsu has two factories, one of which is located in Nishio village, Fukushima prefecture. The other is in Ibaraki prefecture north of Tokyo. The latter was not badly damaged by the earthquake and tsunami, but is in the Tokyo Electric Power Co. Service area and thus subject to rolling power blackouts. It is uncertain when either will restart.

The Sumco company is better off as most of its plants are in the undamaged Kansai region west and south of the capital. It also has a plant in Taiwan, which after the quake issued a message saying it would make an "all out effort" to meet worldwide demand for the wafers without raising prices. Even so prices for silicon wafers were double that of 2008.

Mitsubishi Gas Chemical Co. manufactures roughly half of world’s supply of hydrogen peroxide, used in making of many paper products. Its Kashima plant was knocked out by the earthquake. It has another in the Tokyo metropolitan area, but its operation is severely impacted by the blackouts.

In a way, the situation is similar last summer’s big blowup with China over the disputed Senkaku islands, when Beijing allegedly threatened to embargo rare earths. The world woke up to the fact that China controlled more than 90 percent of these minerals that most people never heard of but are crucial to making of modern electronic products and televisions.

Something similar is happening now. During Japan’s so-called stagnant years, its manufacturing companies moved much of their routine assembly to Southeast Asia and the US, but during those years it kept an iron grip on its monopolies of dozens of critical but little-known (except to affected industries) components.

The northeast coast of Japan, known locally as the Tohoku region, is not usually considered a major manufacturing center. The quake and tsunami-impacted prefectures account for only about 6-7 percent of the country’s gross domestic product.

That is not the case with Tokyo, which alone has a GDP roughly equal to Canada or Italy. There was little serious damage from the March 11 earthquake and tsunami in the capital itself, but the impact of rolling blackouts caused by dire electricity shortages is an increasing factor in pessimism over the economic recovery.

"The planned blackout is as bad as the earthquake itself," says Kyohei Morita, chief economist for Barclays Capital Japan Ltd. He estimated that the blackouts alone will shave as much as one percent off of Japan’s projected GDP growth.

The quake/tsunami is estimated to have cut about 12 percent off Japan’s electric power production. More importantly, it has cut nearly a quarter off the power for the Tokyo Electric Power Co. (Tepco), which has a monopoly of power production and distribution in the capital and its environs, serving about 45 million people in total.

Faced with a 10 million kilowatt shortfall, Tepco announced planned rolling blackouts within days of the earthquake. The utility owns 17 nuclear reactors, including the four badly damaged Fukushima reactors with 13 out of service. That doesn’t count the several coal and gas-fired plants that were also damaged in the quake.

Chairman Tsunehisa Katsumata last week announced that Tepco planned to scrap Units 1-4. No big surprise here. That has been foreordained from the first day of the crisis. Surprisingly, he made no mention of Units 5-6. Maybe some at Tepco think they will reopen. But Chief Cabinet Secretary Yukio Edano flatly stated they will be closed. Tepco will be lucky to keep the four other Fukushima Daini Plants currently in cold shutdown.

Tepco’s more immediate financial situation was eased temporarily at the end of March with a ¥1.86 trillion working capital loan secured through Japan’s seven largest banks. Combined with the approximately ¥400 billion cash on hand, it will see the company through the immediate crisis. But it faces huge problems.

Even as Tepco’s workers struggle to keep stricken reactor cores cool, the company is working feverishly to get more thermal power plants in operation to meet summer air conditioning demand. Last summer was the hottest in Japan on record; officials are hoping that things cool down this summer, in more ways than one.