Increased exports and more private sector investments can help Japan minimize the effects of the earthquake and tsunami

The March 11 earthquake was the worst ever recorded in Japan. Along with the tsunami it caused, it has already claimed an estimated 28,000 lives and caused economic loss of 16-25 trillion yen (136.1-212.6 billion euros).

Though the human and economic loss cannot be fully assessed even more than two weeks after the disaster, let us briefly discuss four issues: the effect of the quake and tsunami on industrial production, the Japanese economy as a whole, the yen's future and the country's fiscal deficit.

How will the quake and tsunami affect industrial production? The answer in short is "substantially". The direct result is the closure (even if temporarily) of factories because of the damage caused by the quake and tsunami. The indirect effect is that despite being operational, many factories cannot produce to capacity because the crippling of Fukushima nuclear power plant has disrupted normal electricity supply. So in effect, Japan is reeling under the effects of a triple disaster.

The triple disaster has affected automobile, oil, gas and refinery, and high-tech industries, which include such big names as Toyota, Daihatsu, Hitachi, Cosmo Oil, Sony and Murata Manufacturing

What will be the impact of the triple disaster on Japan's economy as a whole? Since the loss is astronomical, Japan's economy will suffer from negative growth for the next few years. To recover from recession, the Japanese government has to come up with a concrete recovery plan as soon as possible, and disburse huge amounts among the suffering people and industries. The government is preparing a fiscal stimulus package of 10 trillion yen, but it is too small an amount to help all the victims.

Japan recovered from the devastation of World War II, thanks to its people's indomitable spirit and industriousness. Hopefully, it will recover this time, too - possibly in a decade.

The dramatic recovery of Asian economies, especially China, from the global financial crisis will help Japan emerge from the disaster faster. Japan can minimize the effect of the three disasters by increasing exports and private sector investment. This is why the establishment of an "East Asian Community" is so important for Japan and other Asian countries, including China.

What does the future hold for the yen? Though the dollar-yen exchange rate is 1:82 now, it had risen to 1:76 recently partly because of the triple disaster. The direct reason behind the yen's rise, however, seems to be speculation - heavy buying of yen because Japanese life- and non-life insurance companies were expected to transfer huge foreign currency assets to compensate the losses suffered by their clients in the triple disaster. But until now no such transfer has taken place.

In the medium to long run, the yen should fall against the dollar and the euro, because it is still abnormally strong against the United States and European Union currencies. The dollar has weakened because the US Federal Reserve has pumped excess liquidity into the market and the euro is suffering the consequences of large fiscal and private sector deficits in the eurozone.

The yen is expected to weaken once US economic recovery becomes more apparent. Besides, the yen cannot sustain its current level because the long-term growth prospects for Japan are not high.

And what will be the triple disaster's effect on Japan's fiscal deficit? The Japanese Ministry of Finance has announced that the ratio of long-term fiscal debt to GDP for the 2010 fiscal year would be 181 percent. As mentioned above, the government is preparing a fiscal stimulus package of more than 10 trillion yen, but one should not be surprised if this ratio worsens the fiscal debt problem.

In Japan, however, private sector savings support public sector debt and total household assets total about 1,442 trillion yen (end of September 2010). As long as Japan's household and private sectors have a savings surplus and continue to hold the country's public sector deficit, the country can avoid an eminent fiscal debt problem.

But that does not mean Japan can disregard the fiscal debt problem.

Moreover, if it wants to avoid leaving this problem for future generations to deal with, it should at least reduce long-term deficits. To do that, the Japanese government should try to promote more viable growth, and build a more solid financial foundation.

In summary, Japan should make every effort to increase its trade to recover from the triple disaster. But it is also important that Asian countries, where natural disasters often occur, especially Japan and China, should join hands to minimize their impact.

The author is a Japanese economist, Japan's former ambassador to the UN and former president of Iwate Prefectural University.