JCER: Reconstruction Demand And Exports Will Maintain 1% Growth

Kazumasa Iwata, President
Hiroshi Tsubouchi, Senior Economist
Japan Center for Economic Research

1.Consumption tax rate hike will not resolve financial risks

2.Both operating and decommissioning costs of nuclear power plants will amount to 4 trillion yen annually

The 38th Middle-term Economic Forecast, conducted by the Japan Center for Economic Research (JCER), takes into account various measures such as the reconstruction from the Great East Japan Earthquake and the effects of a potential consumption tax rate hike being considered by the government. The growth rate for fiscal 2011-2020 will stand at an average of 1.1%; reconstruction demand and exports will lead a 1.4% growth until fiscal 2015, and for the latter five years, growth will slow down to 0.8%. The enforcement of a consumption tax rate hike will not be enough to resolve financial risks. If the yen appreciation continues at levels higher than projected in our forecast, it may cause domestic fixed investment to become stagnant.

In terms of energy supply, if all nuclear power plants can be put back into operation, there will not be any immediate restraints for the meantime. However, under the assumption that all nuclear power plants that have been in operation for 40 years are decommissioned and thermal power and new energy sources replace nuclear power, with soaring import prices, by fiscal 2020, increased fossil fuel imports will lead to a current-account deficit.

If nuclear power generation is maintained at levels prior to the earthquake, the costs needed to prepare for and prevent future accidents and cover increases in nuclear subsidies will amount to 4 trillion yen annually. This may further entail risks of increasing the burden on consumer spending and fixed investment. Consequently, the costs of substituting nuclear power by thermal power and new energy sources as assumed in our projections, and the costs of maintaining nuclear power are evaluated to be approximately equal.

Main Points

(1) A shutdown of all nuclear power stations would cut supply-side capacity (potential GDP) over the long term (1.2% per year on average between FY2012-2020, with a 7.2 trillion yen loss in wealth per year).

(2) A 5% consumption tax hike will not be enough to alleviate the primary balance deficit.

(3) Continued yen appreciation may cause fixed investment to flow overseas.

(4) Considering the costs needed to prepare for and prevent future accidents and cover increases in nuclear subsidies, maintaining nuclear power is not necessarily more affordable than alternative energy sources.

(5) The U.S. growth path will not return to trends prior to the global economic crisis.