Be Optimistic About a Quick Recovery in Japan

(MoneyWatch)  The morning after the devastating 1989 earthquake in the San Francisco Bay Area, I ventured out to write the lead story for Investor's Business Daily, where I was a staff writer.

As I drove toward Silicon Valley I passed a street corner where an enterprising young businessman had set up shop. His product: T-shirts proclaiming "I survived the great San Francisco earthquake of 1989!"

That spirit of resilience and "let's make the best of things" is ingrained deeply in Japan, a country with a long history of bravely overcoming disaster. And it's reason to believe that the third largest economy in the world could recover relatively quickly from this still unfolding tragedy.

This belief is shared by three Harvard Business School professors with extensive experience studying Japan and other parts of Asia.

Rohit Deshpandé, a professor of marketing, recalled the Kobe earthquake in 1995. "The remarkable resilience of the Japanese was clearly in evidence during those times, along with countless acts of heroism by ordinary citizens -- people not empowered or trained to do great things. We are seeing this in the horrible aftermath of the current earthquake and tsunami."

Historian Tom Nicholas went back further, to 1923, when the "Grand Kanto Earthquake" destroyed Tokyo and Yokohama -- 100,000 dead. New patents, a clear indicator of a country's innovative health, dropped by a third for a year afterwards. "But by 1925 (even though the Japanese Patent Office in Tokyo was destroyed) patents registered were 69 percent higher than they had been in 1922, and the country continued its push towards technological modernization... If history is any guide, Japan should make a full recovery from the devastating effects of the recent earthquake and tsunami on the east coast of Honshu."

Sounding a more cautious note was W. Carl Kester, George Fisher Baker Jr. Professor of Business Administration. Analysts have already reduced forecasted GDP growth rates for Japan by 0.5% for the first quarter of this year, and by more than 1.5% for the second quarter, according to Kester. And the recent large drop in the Nikkei 225 Stock Average represents a significant loss of wealth which could lead to more deflationary pressure.

But the biggest economic challenge facing Prime Minister Naoko Kan's government, according to Kester, is how to finance a bold fiscal response. "With government deficits equaling 10% of GDP, and national debt at 200% of GDP, funding the recovery plan with still more government debt would be imprudent. Should Japan lose its AA- sovereign debt rating, confidence in the country's economy and government could be sent into a debilitating tailspin. A safer, even if less popular, course of action would be to reprioritize spending within the existing budget to cover most of the cost of the recovery plan."

Kester noted that Japan often shows itself at its best in periods of crisis, but this time, when it comes to rebuilding the economy, "there is little margin for error."

Read their full comments on prospects for economic recovery in Japan.

For readers who have had business experience in Japan, how do you see a recovery unfolding?

Related Reading

• Japanese Earthquake's Ripple Effect in the Travel Industry
• Don't Panic About "Japan Syndrome" Just Yet
• Lean Production: Another Casualty of the Japanese Quake?

(Photo by Flickr user fishines, CC 2.0)