Posted by: Dr Churchill | April 10, 2012

Japan’s Golden Moment is the Opportunity to fully develop it’s Renewable Energy and Denuclearize

Optimism that Japan’s economy will bounce back from a post-quake slump and pessimism about its long-term prospects is the prevailing message of economists and bureaucrats alike.

The reasons for the near-term optimism are well known: strides made by Japanese manufacturers in restoring production and supply networks ripped apart by the March 11 earthquake and tsunami and expectations that sooner or later hundreds of billions of dollars spent on rebuilding the ravaged northeast coast will grease the wheels of the stuttering economy.

There is also little doubt about what has been holding back Japan, which has been in and out of deflation and recessions over the past decade.

Its society is aging faster than any other nation, the productive and consuming population is shrinking, its manufacturers keep shifting operations abroad where wages are lower and markets grow and its debt burden makes it impossible for Tokyo to engage in any grand-scale pump-priming.

Now, one can also add concerns that a shift away from nuclear power will bring higher costs and doubts about reliability of electricity supply and possibly accelerate the hollowing out of the manufacturing sector.

Yet the bright star of renewable Energy is the one sector where all Japan’s might come to play and win. Take for example the photovoltaic manufacturing sector: Sharp, Kyocera, Panasonic and Mitsubishi Electric are the leaders in the fast-growing Japanese solar market. And there is huge growth forecast ahead for all of these and their competitors too.

The catalyst? The expected adoption of a special tariff, now being discussed by lawmakers, on power from solar panels to lure investors to bigger projects.

Japan’s ambitious plan, if implemented, to get solar panels on the roofs of every new building would of course also give the market a hefty boost.

And this is a great thing now that Japan is looking forward to a dose of inflation after years of sliding prices.

By engineering a rise in rates by printing money, Japan can make a big chunk of its burgeoning national debt disappear, which along with tax hikes is likely to pave the way for Japan escaping a potential crisis, as debt soars to more than twice its gross domestic product.

While having the nasty side affect of making assets worth less tomorrow than today, you borrow money to buy renewable energy infrastructure assets like solar panels and other PV panels, the plus side is your debt, relative to your cash flow will also get smaller as long as you have low rates locked in.  Japan defaulting on its debt is highly unlikely.

If push comes to shove and Japan runs into difficulties finding buyers for its low-yielding government bonds, a little debt monetisation — a dirty word for central banks — would not be a bad thing.

Tomoya Masanao, managing director and head of Japan portfolio management at PIMCO, said that, if private investors are not willing to buy JGBs, then the central bank should fill the breach.

If the Japanese private sector does not have enough ability to fund the government, it’s natural that the central bank should step in.

Such a move would weaken the currency, and that would be a positive for an economy that is now grappling with a strong yen on top of the many other economic challenges it is facing.

For now, Japan faces no such threat of private investors being unable to lend the government a hand. As Masanao noted, Japanese corporations and households tend to save even more money when the fiscal deficit rises — as is almost certain as government reconstruction spending kicks in after the massive March 11 earthquake, tsnuami and nuclear scare. Indeed, a chart below shows the remarkably strong relationship between government borrowing and household savings over the years.

Benchmark Japanese government bond yields are hovering near 1 percent and have only breached the 2 percent threshold twice since falling below that level in 1997. As the population ages, household savings rates have fallen. But with household financial assets at $18.5 trillion — and a little more than half of that kept in cash and low-yielding bank deposits — the supply of funds heading into JGBs remains ample, even with debt set to surpass 200 percent of Japan’s $6 trillion GDP this year.

With the euro zone debt crisis raging more than a year later, the question of whether Japan faces its own debt crisis has been hotly debated. Still, the trigger for any Japan debt crisis remains far off and will be of a much different nature than Europe’s troubles. Beyond its savings, Japan enjoys steady trade surpluses (despite the record deficit coming out of the disaster), and for that reason does not rely on foreign investors . Of course, the Bank of Japan already buys a hefty chunk of government bonds, even while arguing this does not equate to monetisation and fighting against any pressure to monetise.  Because only when Japan’s current account balance flips into deficit will warning signs start to flash. If Japan has to lean more on the kindness of foreign investors, then sustaining such a heavy debt becomes a dicier prospect.

What debt monetisation won’t do is improve Japan’s potential growth rate. And that’s why Masanao thinks public debate is urgent,  not just on how the debt will be dealt with over the longer term, but whether Japan is willing to take steps to boost growth and end the steady deflation that has gripped the economy for years. As Masanao says, the special factors that have allowed Japan to support such a mountain of debt are fading.

Yet the mechanism that has worked so well to date may be gradually crumbling.

That is why the only great economic, industrial and financial opportunity for Japan is to pursue the technology of renewable Energy now with the same ferocity it pursued the automotive industry in the years after the war… and the same way it financed the nuclear industry form 1950’s onwards. Fashions change, climate changes, people’s needs change too, same as the times and the seasons. Now is the time for renewables. And here is the time to make them a National policy priority.

And here comes Taro Kono who believes this and who doesn’t look like quite the lonely maverick in Japan’s Liberal Democratic Party.

Kono, a member of the lower house of parliament, has been an unrelenting critic of Japan’s pursuit of nuclear power since he was first elected in 1996. That made him an odd fit with the LDP, which ruled Japan almost continuously from the mid-1950s to 2009 and put nuclear power at the center of Japan’s energy policy.

“For the past 15 years, it has felt like Taro Kono against the LDP, but since the Fukushima Daiichi accident triggered by the March 11 earthquake and tsunami, Kono’s call to scrap nuclear in favour of renewable energy and conservation has moved from the fringe to something closer to the mainstream of political opinion.

About 50 lawmakers attended a recent study group he sponsored on energy policy, out of 722, and Kono sees a prospect for a kind of “green alliance” between sympathetic LDP lawmakers and some in the Democratic Party of Japan.

Kono sees that stopping short of a full-scale political realignment, but hopes it shows momentum for his tough-love approach to restructuring Tokyo Electric, the embattled utility that owns the crippled Fukushima Daiichi plant.

Kono wants to see Japan commit to phasing out nuclear power by shutting down reactors when they reach 40 years of service. He would allow existing nuclear plants to restart by next summer provided they pass tough “stress tests” on safety and shift to natural gas as a bridge to renewables like solar thermal technology.

He also wants to see Tokyo Electric put through a government-run bankruptcy process to cover the costs of cleaning up the Fukushima accident and paying compensation to the more than 80,000 residents forced to evacuate and the businesses, including farms and fisheries that have been shut down. He would also have Tokyo Electric scrap its Fukushima Daichi nuclear complex.

Tokyo Electric is Japan’s largest corporate bond issuer, and many analysts have suggested that a default would have a disruptive ripple effect for other borrowers.

The majority of the LDP is not ready to back that approach, he said. But Kono said he sees a bigger risk with the current government plan for Tokyo Electric, which would provide government support but leave the utility on the hook for years of compensation payments.

“If we push ahead with that kind of an odd plan, that will have future effects on the markets as well,” he said.




This s the golden moment.

A giant opportunity not to be missed.

Let’s see who will harvest this.


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