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At the circus, you are sometimes treated to the spinning plate act
where a performer tries to keep an improbable number of plates spinning at once,
racing from one plate to the next as their wobbles indicate the need for
another dose of momentum. Considering the number of spinning and wobbling
plates that our central planners are managing, it's easy to be both amazed
and anxious at the same time.
The difference between the spinning plate analogy and real-world
economic and financial systems is that if a failure occurs out in the real
world, it has a very high chance of spreading across and through the other
elements of the system. Contagion is the fear, as if in finally toppling, one
plate will crash into its neighbor and set off a chain reaction of falling
plates.
To carry this metaphor, Japan is a wobbly plate.
For those who are in a hurry today, the bottom line is that Japan is
in serious trouble right now and is a top candidate to be the next black
swan. Here are the elements of difficulty that concern me the most, each one
serving to reduce Japan's economic and financial stability:
- The total shutdown of all 54 nuclear
plants, leading to an energy insufficiency
- Japan's trade deficit in negative territory for the first time
in decades, driven largely by energy imports
- A budget deficit that is now 56% larger than revenues
(!!)
- Total debt standing at a whopping 235%
of GDP
- A recession shrinking Japan's economy at an annual rate of
2.3%
- Renewed efforts underway to debase the
yen
As I wrote a shortly after the earthquake in March 2011, Japan is
facing an economic meltdown. If it is not careful, it may well face a
currency meltdown, too. These things take time to play out, but now almost
exactly a year after the devastating earthquake of 2011, the difficulties for
Japan are mounting -- as expected.
Exacerbated by the earthquake and tsunami, Japan’s current
predicament has been developing over many years and represents the aftermath
of a burst financial bubble (involving stocks and real estate), an inability
to let failed institutions actually fail, and repeated and stubborn attempts
to preserve what ultimately could not be sustained.
Where many analysts predicted that the tsunami would be GDP positive
because of the re-building that would follow, I predicted economic
difficulties would be the main result due to broken supply chains, reduced
factory output, and increased drag due to rising energy imports.
The Big Story – Energy
Japan is like the world’s largest petri dish, and the experiment
at hand is about what happens to an advanced, industrialized economy when its
electricity production is cut. As always, our view is that energy is the master
resource. Our observation is that complex systems behave in unpredictable
ways when starved for energy, but directionally, they tend to shrink and
‘simplify.’
Electricity is a critical form of energy, and thus the amount of
electricity produced and a country’s GDP are very highly correlated.
Sure, there is always some easy conservation that can be done that would
allow an electricity shortfall to be met without any serious economic
impacts. Street lights can be turned off, air conditioning and heating can be
moderated, and other low-impact conservation efforts can reduce electricity
consumption without doing much more than lowering utility revenues.
However, there is a certain point beyond which conservation can do no
more and electricity restrictions begin to bite into economic activity.
Plants end up running slower or even shutting down, productivity declines,
and work can stagnate.
Before the Fukushima disaster, Japan relied on nuclear power for 30% of
its total electricity production. As of March 26, 2012, that number is going
to be 0%.
Japan's trade deficit balloons to record high as
nuclear crisis pushes up fuel imports
As public worries grew, nearly all the 54 nuclear reactors in Japan were
stopped for inspections. The government wants to restart at
least some of the reactors, after checking for better tsunami and quake
protection.
Resource-poor Japan imports almost all its oil. Until the Fukushima disaster, the country had
trumpeted nuclear technology as a safe and cheap answer to its energy needs.
Now, Japan is importing more natural gas and oil as utilities boost
non-nuclear power generation. Imports of natural gas in January
vaulted 74 percent from a year earlier and imports of petroleum
jumped nearly 13 percent.
(Source)
Japan's KEPCO to shutdown
its last nuclear reactor
TOKYO, Feb. 20 (Xinhua) -- Japan's Kansai Electric Power Company
(KEPCO) is going to shutdown its last
nuclear reactor for a regular check, the No. 3 reactor at Takahama nuclear plant in Fukui, central Japan, late on
Monday afternoon.
KEPCO said that the shutdown operation would be completed by Tuesday
morning. With this shutdown, there are only 2 operating commercial
reactors remained out of 54 all over Japan.
According to the local media, the remaining two reactors, the
No. 6 reactor at Tokyo Electric Power Co.'s Kashiwazaki-Kariwa
plant in Niigata Prefecture will be offline on March 26.
(Source)
If you are thinking that shutting down some 30% of a nation’s
electricity production capacity is an extreme move, you are right.
A Breach of Trust
There’s very good reason to suspect that the Japanese nuclear
plants may not be re-opened anytime soon, as there is now enormous distrust
of government authorities, especially after the release of a report last week
charging that the government had secretly considered evacuating Tokyo even as
it was downplaying both the severity of the Fukushima accident and the risks:
Nuclear Crisis Set Off Fears Over
Tokyo
Feb 27, 2012
TOKYO — In the darkest moments of last year’s nuclear
accident, Japanese leaders did not know the actual extent of damage at the
plant and secretly considered the possibility of evacuating Tokyo, even as
they tried to play down the risks in public, an independent investigation
into the accident disclosed on Monday.
The 400-page report, due to be released later this week, also
described a darkening mood at the prime minister’s residence as a
series of hydrogen explosions rocked the plant on March 14 and 15. It said
Mr. Kan and other officials began discussing a worst-case
outcome of an evacuation of workers at the Fukushima Daiichi
plant. This would allow the plant to spiral out of control,
releasing even larger amounts of radioactive material into the atmosphere
that would in turn force the evacuation of other nearby nuclear plants, causing
further meltdowns.
The report quoted the chief cabinet secretary at the time, Yukio Edano, as having warned that this “demonic chain
reaction” of plant meltdowns could have resulted in the evacuation of
Tokyo, 150 miles to the south.
“We would lose Fukushima Daini, then we would lose Tokai,” Mr. Edano
was quoted as saying, naming two other nuclear plants. “If
that happened, it was only logical to conclude that we would also lose Tokyo
itself.”
The report also described the panic within the Kan
administration at the prospect of large radiation releases from the more than
10,000 spent fuel rods that were stored in relatively unprotected pools near
the damaged reactors. The report said it was not until five days after the earthquake that
a Japanese military helicopter was finally able to confirm that the pool
deemed at highest risk, near the No. 4 reactor, was still safely filled with
water.
“We barely avoided the worst case scenario, though the public
didn’t know it at the time,” Mr. Funabashi, the foundation founder, said.
(Source)
After this damaging assessment, the people of Japan have every right
and reason to be suspicious of official pronouncements about the safety of
the remaining nuclear power plants. The Fukushima disaster is horrible and
still unfolding, despite its near disappearance from the news.
We did an incredible job of covering that disaster, drawing upon
experts, parsing the data, buying satellite images, and coming to our own
conclusions. Very early in the situation, we
advised people in Tokyo to get out, even as the Japanese government harbored those same ideas but spun a
different tale. Our assessment of the disaster, especially after the
entirely-too-energetic explosion of Reactor #3, was far more serious than the
official story and did not jibe with what most people were being fed by
official sources and the mainstream media.
At any rate, Japan has now shut down nearly all of its reactors for
maintenance and safety reviews, and it is our assessment that re-starting
them will take longer than currently planned due to public opposition and
distrust of Japanese officials. Such are the wages of violating the public
trust.
The Economic Impact of Shutting Down the Plants
Japan is facing a summer of extreme electricity shortages, and this
will impact the economy quite significantly. With shortages of as much as 25%
of peak load, imports of oil and gas running into the trillions of yen, and consumers
facing as much as a 20% hike in their electricity bills if the import costs
are entirely passed along, it is clear that a serious challenge looms for
Japan, especially this summer.
Nuclear-Free Summer Looms Over
Japan’s West in Risk to Recovery From Quake
Feb 28, 2012
Japan’s economic rebound from the deepest contraction among
advanced nations after Greece and
Portugal may be stunted this year as power shortages threaten
its western region.
The Kansai area, which accounts for about a fifth of Japan’s
economy and escaped the worst of electricity cutbacks after the March 11
earthquake and tsunami, last week lost its final operating nuclear plant.
Power supply may be up to 25 percent less than peak summer demand if
plants are not restarted, according to Kansai Electric Power Co.
Shortages drive up costs and
force manufacturers to shift work schedules to lower-use periods, disrupting
supply chains and adding to reasons to go abroad.
(Source)
One other factor to consider here is that the fossil fuel plants --
natural gas (NG) and coal -- are currently running flat out to make up the
shortfall. Many of these plants, especially the NG plants, were not designed
for sustained max-load power generation. Their design parameters were for
them to be peak load plants, operating flat out for brief bursts, not
sustained periods. It remains to be seen if these plants can cover operate at
capacity for very long.
In 2011, these assessments of the impact of shutting down
Japan’s nuclear power were made:
The following are some estimates of an economic impact if all of
Japan's reactors went offline.
THE MINISTRY OF ECONOMY, TRADE AND INDUSTRY
Power generation costs would rise by over 3 trillion yen ($38 billion)
per year if Japan replaced
nuclear energy with thermal power generation. Higher electricity costs would
lift production costs by 7.6 trillion yen per year. The ministry did not
provide estimates of how such an increase in costs would affect economic
output.
DAIWA INSTITUTE OF RESEARCH
Shutting down nuclear power permanently would reduce economic
output by 2.5 percent per year -- equivalent of over 14 trillion yen --
over the next decade.
"Higher electricity costs would increase costs for corporations
and individuals and weigh on both capital spending and consumption,"
said Daiwa's Mikio Mizobata,
senior researcher.
NOMURA SECURITIES
- Fossil fuel imports would increase by about 3.3 trillion yen
in the first year after all the nuclear power reactors are shut down, which
would shave 0.4-0.5 percent of Japan's gross domestic product.
(Source)
Because imports subtract from GDP (while exports add), any additional
spending on fossil fuels to replace the shut-in nuclear power will subtract
from Japan’s GDP. Remember, Japan has virtually no domestic fossil fuel
production, so they have to import 100%.
And Import They Have…
Japan’s trade deficit
Trade Deficit in Japan Hits Record
Feb 19, 2012
Japan posted a record trade deficit in January as the yen’s strength and weaker global
demand eroded profits at manufacturers and slowed the nation’s recovery
from the earthquake and tsunami last year.
The trade gap widened to 1.48 trillion yen ($19 billion) and shipments
dropped 9.3 percent compared with a year earlier, as energy imports
surged, the Ministry of Finance reported on Monday in Tokyo.
Shipments to China, Japan’s largest market, fell 20 percent from a year earlier, the biggest decline since
August 2009. Exports to Europe slid 7.7 percent and shipments to the
United States advanced 0.6 percent.
The earthquake and tsunami led to the idling of nuclear plants and a
surge in energy imports. Japan’s liquefied natural gas imports rose
12.2 percent to a record in 2011 as power utilities increased thermal
power generation.
Energy needs accounted for most of the gain in imports in January.
(Source)
Conclusion
It is a very big deal that Japan is slipping into negative trade
territory for the first time in three decades. Last spring I was writing
about how the global flow of funds -- the massive tide of liquidity sloshing
back and forth -- involved Japan to a large degree. Japan was the hub of a massive
carry trade, was buying huge amounts of US Treasurys
and, in general, was a vast emitter of liquidity flows to the world.
With its reconstruction costs and now with its trade deficit, Japan
becomes a net consumer of funds. In other words, the flow of funds reverses.
This represents, at the very least, a change to the global liquidity tide
charts.
In Part II: Implications of a Collapsing Japan, we lay out the case for how close to the brink of
economic crisis Japan truly is, and why the country is likely to stumble
faster and further in 2012 than the shaky situation in Europe that is
currently grabbing the world's attention.
Make no mistake. A material retrenchment of the Japanese economy will
have profound impact across the globe. One notable example: If Japan has to
stop buying US Treasuries to direct capital to its domestic needs or -- even
worse -- begins selling Treasuries for the same reason, the Federal Reserve
will have to put its printing presses into overdrive to make up the gap.
Got gold?
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report (free executive summary; enrollment required for full access).
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