How will Japan's economy fare after the disaster?

AS SOME of the panic associated with the nuclear crisis in Japan ebbs, markets around the world have regained ground. But the end of panic also reminds us all that quite apart from the nuclear situation, Japan has suffered an unprecedented calamity—perhaps the costliest disaster in fifty years. Thousands of lives have been lost and power issues continue to plague the country. What will this disaster mean for Japan's economy?We put that question to the experts at Economics by invitation, and the responses have been fascinating...and sobering. Here, for example, is Richard Koo:Although it has been frequently overlooked, Japan has been running ever larger trade surpluses against Taiwan, Korea and China (including Hong Kong). The fact that this has been the case even with a strong yen means that manufacturers in those countries have little choice but to obtain materials and components made by Japanese producers. This means that supply disruptions from these Japanese producers will affect production in plants all over Asia..Although there have been no meaningful macroeconomic statistics since the quake, it is known that nearly 30% of Tokyo Electric’s ability to supply electricity has been damaged by the quake, tsunami and subsequent problems at its nuclear power plants. Tokyo Electric accounts for 32% of total electric supply in Japan. If Tohoku Electric serving northern Japan, which supplies about 10% of electricity for the country, suffered similar damage, the country as a whole might have suffered about a 12% decline in its capacity to supply electricity. Since the elasticity of electricy usage to GDP is about 2, this means that Japan’s GDP might have shrunk by as much as 6% in the wake of this disaster. Although efforts to improve electricity supply are on the way, even a momentary GDP decline of 6% is a huge shock to the economy.But Jesper Koll suggests that, policy environment permitting, Japan could recover quickly and adopt overdue reforms:I expect the fundamental trends to improve relatively quickly for commerce and corporate Japan—the end of deflation has probably been brought forward. Moreover, the risk of Japan becoming a net drain on global savings is very small indeed. At the same time, I am more cautious on policy and social trends and worry that the disaster will accelerate the trend towards big government, tougher regulation and higher taxes, at least in the immediate future.Click here to see all the responses in full. Given the seriousness of the disaster and the backdrop of existing challenges in Japan, my sense is that swift recovery depends upon the government getting a few important policy actions right and not getting a lot of other policy actions wrong.