It has been pointed out repeatedly that Japan is the best prepared country in the world for natural disasters. Not only is this true in terms of infrastructure and preparedness logistics; but it is also true in terms of the society itself. There are, however, a number of considerations that would temper this upbeat picture. The most alarming may not be related to economics, but to demographics.

Short of a nuclear catastrophe, it now appears that Japan will be able to cope with the immediate economic impact of the disaster. The government has stated clearly that it will spend generously on reconstruction and to assist the affected areas, and citing the experience of the Kobe earthquake (1995), the government believes that new spending should add 1 to 2 percent to GDP growth for fiscal 2011. As a current account surplus economy, Japan should also have no difficulty in raising the necessary funds for the reconstruction and relief efforts. In addition, only 5% of the current massive public sector debt is held by foreigners.

But government spending is unlikely to lift economic growth in a sustainable way. Japan has one of the world’s highest capital stock per capita, estimated at US$180,000 in 2009, double that of the US. At this level, the marginal returns on investment are likely to be very low, and more spending simply means more debt. A more intangible aspect of the impact, but arguably far more important, has to do with Japan’s demographics. Japan has one of the oldest populations in the world. The impact of a disaster of this magnitude on such an elderly population is clearly different from the impact on a society with a lot more young people. The impact is likely to be more lasting and psychologically debilitating for the elderly.

To put things in perspective, in 2011 in Japan the ratio between those aged 15 to 34 and those aged 55 and above is only 58.6%. And the ratio between the 35-to 54-year-olds and those 55 and above is 71.8%. In other words, the 55 and above constitute the biggest age cohort in Japan’s society today. And if it is true that the impact of a disaster of this kind tends to affect the elderly more than the young, then the “animal spirit”, the concept coined by John Maynard Keynes to describe the all important psychological driver of risk taking and business growth, will be further impaired in Japan, with all the negative economic and business implications.

Also appears on The Heart of Commerce Blog.

Topics: Economic Outlook