More Japanese Nuclear Reactor Problems

Elaine Meinel Supkis

More news is leaking out of Japan concerning the ill-placed nuclear power plant. Pictures now show it straddled the earthquake fault line and bringing it back online will take many months. I remember the Kobe quake and its big effect on the Japanese economy at that time. The Japanese government also boasts that Japan's economy has expanded for 66 months. That is, 5.5 years. This quake will give them yet another excuse to extend their 'poor me' depression. Meanwhile, today, Manhattan blows a gasket near 42nd Street, right by where I once worked many years ago.

The fault that caused Monday's 6.8-magnitude earthquake off the Chuetsu region of Niigata Prefecture runs directly below Kashiwazaki-Kariwa Nuclear Power Plant, experts have found.

From Asahi Shinbum:

Quake damage at the Kashiwazaki-Kariwa Nuclear Power Plant was more extensive than initially thought, with radioactive materials discharged into the air, barrels of waste overturning and transformers leaking oil, officials said.

One look at this photo and we can clearly see, the damage is pretty big and the functioning of this plant is very much in question. At the very least, it has to be stripped down and all components, pipes and delivery systems must be double and triple checked. But the entire concept of this plant is now in question! It is obviously right smack dab on a fault line.

The Japanese government wants to assure everyone that nuclear power is the way to go but this is in conflict with Japan feeling sorry for itself over the nuclear bombing of two cities. One can't be nonchalant about nuclear power plants blowing up while hysterical about bombs blowing up! Despite acting as if they are in this depression that has weakened their nation, the Japanese have actually been very busy building nuclear power plants which are the most expensive form of energy production.

Modern technological systems are very new. We have been using them for less than 200 years. I once lived in South Orange, New Jersey which, along with Glen Ridge, was the last place in America to keep using gas lights from the Victorian era. Occassionally, there is a problem in the gas line and it blows out with a pop, breaking the glass enclosing the mantle and the flame. When gas lines were laid out 200 years ago in London, pipes would burst and the place would blow up.

As we see today in Manhattan, underground explosions are dramatic and dangerous. The British solved this by using discarded musket barrels screwed end to end. This worked because of the high-grade steel used to make them. So to this day, one has to use special pipes for gas lines. Ditto, steam lines. And like Manhattan, the steam lines and other feed systems in nuclear power plants need to be hyper-protected from failure.

Replacing the nuclear plant just like rebuilding the steam line in Manhattan, will cost a lot of money. And the Japanese government was very careless about their finances when their bubble burst back in the early 1990s. Their ability to absorb hefty losses has been compromised by the enforced .5% interest the Bank of Japan has imposed on the nation. Namely, there really are no savings left in Japan except for the FOREX reserves.

And in the event of a major earthquake, this can get hammered. Japan's FOREX reserves have one function: to buy up dollars and hold them so the yen stays cheap. Then Japan sells to the US and gets profits out of this uneven money stream. If either the US or Japan can't do these things, it collapses.

From the Nikkei:

Govt To Keep Nuclear Plant Closed Until Quake Study Done

TOKYO (Nikkei)--The government plans to wait until an earthquake resistance study is completed and safety can be verified before greenlighting the resumption of operations at Tokyo Electric Power Co.'s (9501) nuclear power plant in Niigata Prefecture, which was hit by a powerful temblor earlier this week, The Nikkei learned Wednesday.
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6 Carmakers To Pause Output As Quake Disrupts Supply Chain

TOKYO (Nikkei)--Unable to procure piston rings and other parts from Riken Corp. (6462) in the wake of a Niigata Prefecture earthquake, Toyota Motor Corp. (7203), Nissan Motor Co. (7201) and four other automakers Wednesday decided to temporarily halt production.
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U.S. Fund To Tender TOC Stake In DaVinci Advisors' Hostile Bid

TOKYO (Nikkei)--Prospect Asset Management Inc. plans to tender its holdings in building lessor TOC Co. (8841) to DaVinci Advisors KK (4314), the head of the U.S. fund indicated Wednesday.

I included the last headline in this group of Nikkei stories because it illustrates how Japan is increasingly troubled by take over bids coming out of the US and Europe. The halt in auto production, this being the top value-added export item in Japan, will cause difficulties for the carry trade which is based entirely on Japan running as big a surplus as possible with the US. Despite making cars here, Toyota, for example, still imports 60% of their cars to America that are made entirely in Japan. Each day there is a pause, workers in Japan see their income begin to shrink and the trade imbalance moves towards balance, something the Japanese totally fear.

And these nuclear power plants are for street lights, they are for running these mega-robot factories. Taking the world's biggest plant offline for the foreseeable future is a huge, huge hit for Japan. The mess this will cause will reverberate over the next two years. The worse that could happen is, frightened Japanese officials muscle the staff running the plant to open it up again and rush it back online! This could then cause a really bad event, one the Russians can appreciate.

From Japan Times:

The government maintained a bullish view in its monthly report released Tuesday, with the assessment confirming that the economy has continued to expand for 66 months — the longest postwar phase of uninterrupted expansion.

"The economy is recovering, despite weakness in industrial production in some sectors," the Cabinet Office said in the report, leaving its overall economic assessment unchanged for the fourth straight month.

The July report, presented to a meeting of Cabinet ministers related to economic policy, says corporate profits are "improving," business investment is "increasing," private consumption is "picking up," and exports and industrial production are "flat."

5 and 1/2 years of continuous expansion and they are in a depression? How utterly peculiar. But it just might be a moot point if the bad news from this latest earthquake gets any worse! Already, exports were beginning to hurt due to the increasing problems in the US with the credit markets beginning to collapse starting with subprime housing and working its way up the economic ladder. This report echoes the Bernanke report. All is well except if one looks under the covers.

From the Japan Times:

Regarding weakening consumer sentiment at home, she said such a downward trend may be temporary and that actual spending conditions are "not bad." Government data have showed consumer confidence deteriorating due partly to increased tax burdens and rising gasoline prices.

Note how the government has increased taxes. And then, there is inflation! Oops. And along comes an earthquake. The US, after Katrina and other hurricanes, dealt with the economic distress at that time by keeping interest rates artificially low. This didn't fix our economy but it made everyone feel really good for a year. But the price for this is being paid now! And with Japan, the earthquake has opened an unwelcome rift. The Japanese government and the industrialists do not want to spend government money in Japan. This is bad. They want to ship the money outwards so the dollar is stronger than the yen!

They don't want the higher interest rates they need to offer to attract money to Japan so they can rebuild. This will kill the stupid carry trade!

Last time Japan had a major earthquake, this caused many things to cascade out of control. Let's review what happened before the Kobe earthquake:

From TFX, Japan:

May 1992 Japanese Yen-US Dollar currency futures delisted.

Japan was riding high at home with a huge real estate bubble. This was a very serious asset bubble. Supposedly, a few square feet of Tokyo was worth more than lower Manhattan. Japan was on a buying binge in Manhattan itself, too. This all came crashing down pretty rapidly as the Bank of Japan, like the Federal Reserve at the end of 2005, began rapidly raising interest rates. I went looking around for charts illustrating this and found some very nice ones here: From Rutledge blog:

High TPI real rates caused by land deflation are a huge drag on real growth. I know of no example in history where an economy grows while land prices deflate. Deflation is especially hard on manufacturing companies, whose balance sheets are typically made up of tangible assets and financial liabilities. A company must offset its TPI real rate—the carrying cost of its balance sheets—with operating profits from its P&L in order to remain solvent. High TPI real rates make this almost impossible.

We can see from this chart, land values began to collapse at the end of 1991, before Clinton took the White House. This does coincide with the American recession that started with the invasion of Kuwait and world oil prices going up and up! The US saw a stiff decling in housing values as well as a fall in high-value-added stuff from Japan. I remember that mess well, I was hammered by it all, financially. The US pulled out of the bear market thanks to Clinton's efforts. But part of this effort was to curb imports from Japan so their economy continued to falter. At one point, I remember discussing online the possiblity that the Japanese stock market, in 1996, would fall below 9,000! If it hit 8,500, it would be pretty much dead.

It is interesting to me to see it climb out of the cellar but then hover deftly at a 12,000-16,000 range even when the most obscure stock markets around the world were getting all giddy on the free-trade-super-free money ride.

From the New York Times:

Yen Soars and Stocks Fall on Collapse of Trade Talks

February 14, 1994, Monday

In the first sign of business's deep disappointment over the collapse of trade talks between Japan and the United States, the yen soared and share prices on the Tokyo Stock Exchange fell sharply today. The dollar settled at 105.90 yen in late trading here, down from 107.20 yen in ...

Note that over a decade ago, if the yen got strong, their Nikkei had the vapors. The Clinton administration was pushing Japan very hard in negotiations. Japan had it easy with both Bush and Reagan---both men took bribes. They were and Bush Sr still is, traitors. Note that Clinton didn't fly off to Tokyo two weeks after leaving office, to collect $2.5 million. Japan was desperately seeking some excuse to not protect the yen.

From the NYT:

Japan Spares No Expense in Effort to Control Yen

Japanese officials have contended for months that they cannot accept the Clinton Administration's demands for guaranteed increases in imports because the measures would amount to interference with the free play of the markets. Yet, in another realm, the Japanese Government has engaged in one of the heaviest waves of ...

Japan controlled the yen by buying the Federal Reserve's bonds just as they do today. Clinton knew he couldn't get this situation under control unless he balanced the budget which he finally did (unlike either Bush!). Japan was under increasing pressure to stop the arcane and confusing rules that prevented anyone from importing anything except the least value-added goods and even these were blocked if it was anything grown by Japanese farmers, for example. Then the gods interceded with an earthquake bigger than this week's event:

The Great Hanshin Earthquake destroys Kobe:

The Great Hanshin Earthquake (阪神・淡路大震災 Hanshin-Awaji Daishinsai?), or Kobe earthquake as it is more commonly known overseas, was an earthquake in Japan that measured 6.9[1] on the Richter magnitude scale and 7.2[2] on the Japanese seismic intensity scale[3]. It occurred on January 17, 1995 at 5:46:46 a.m. in the southern part of Hyogo Prefecture and lasted for approximately 20 seconds. The focus of the earthquake was located 16km beneath its epicenter, on the northern end of Awaji Island, 20 km away from the city of Kobe with a population of 1.5 million. This area is in the middle of the fault zone of the Pacific, the Eurasian and the Philippine tectonic plates.

This was similar to us losing New Orleans and all those oil wells. When the US was hit by both 9/11 and then a series of hurricanes, the money spigots opened wide and money was spent like crazy as well as interest rates dropped to the lowest level in 100 years. The Japanese government reacted just like our own in both cases: they snoozed. They let people die. The prime minister didn't read 'The Pet Goat' but he was just as oblivious as Bush.

In the aftermath, both citizens and specialists lost faith in the technology of their early warning systems and earthquake construction techniques. The national government of Japan was criticised for not acting quickly enough to save many people, for poorly managing Japanese volunteers, and for initially refusing help from foreign nations, including the United States, South Korea, and the United Kingdom. The language barriers and the obvious lack of Japanese medical licensing by foreign volunteers were cited as justification, but some critics suggested that racism and national pride were stronger factors.

If they let in foreigners this would mean letting in imports so the gates were firmly shut and Japan let us all know, they wanted to deal with this by themselves. The US is now so used to begging for help, we go about hat in hand all the time. But even with Katrina, Bush said no to all offers of help from say, Mexico and Canada until the uproar at home forced him to let in some help. This should trouble people. Why would both Japan and America's rulers be so indifferent if we die? I would suggest, this is because they want us to die.

The yen still became stronger verus the dollar despite the destruction of a city and the interruption of trade with the US via Kobe's port facilities:

In April 1995, the yen hit a peak of under 80 yen per dollar, temporarily making Japan's economy nearly the size of the US.

The Bank of Japan has its own agenda just like the Federal Reserve. It is not very responsive to what is actually going on and its job isn't to protect the Japanese workers but to promote Japanese industries. Clinton's successful work at preventing the flooding of US markets with Japanese goods was working and obviously, he was not taking any hints of bribes.

This was the low point for Japan. Here is an amusing graph from a 2002 Zeal LLC Report:

The Nikkei shot up, doubling in value. The Bank of Japan discount rate was 2.5%. The stock peak was right when the US declared war on Saddam as he invaded Kuwait and world oil prices shot up suddenly. In one year, interest rates shot up to 6.0%--350 points higher! By any measure, this is severe. It only had to hover there for a few months before the Bank of Japan dropped rates very rapidly, falling in three years from 6.0% to below 1%, namely, to 0.25%. Where it has pretty much sat ever since except for February's rise to a still astonishing 0.5%!

So in 1995, when the yen was at its strongest against the dollar and the Kobe earthquake happened, this is when the Bank of Japan had the lowest interest rates in the world. Eh? This makes mush of most of what I read about interest rates and money value. Why is everything so utterly backwards or at odds, in Japan? What is going on here?

Posted by John Rutledge at March 8, 2006 8:22 PM:

After a decade of public works projects, Japan is nearly covered in asphalt and government debt has reached crisis levels at more than 18 months GDP. Recent downgrades by rating agencies have made it clear the government cannot continue to borrow and spend money forever. Declining credit quality has produced a declining yen.

On top of these market forces, there has been a shift of attitude within the Japanese government in favor of pushing the yen lower to counteract deflation. The Bank of Japan has been actively buying dollars (with newly printed yen) in recent months to push the yen lower. This has been their first un-sterilized intervention since WWII. These purchases have flowed straight into an increase in the Japanese monetary base.

It is too early to tell yet whether the switch to stimulus is real, but it is worth keeping a close eye on in the coming weeks. If it is, this will be a huge opportunity to buy Japanese assets. I am inclined to make a small bet today and increase the size of the bet as we see more proof. The Japanese government has cried wolf many times before. This time, I think they mean it.

I include this article to show how befuddled everyone has become, concerning Japan. The natural desire is for everyone to hate depressions and to want them to end. My basic thesis is, far from wanting depressions to end, powerful people love these things! They don't have to lift a finger to stay rich! It is the lazy man's wealth machine. It should be obvious to everyone, the lower the yen goes, the deeper this deflation goes. This is because the yen is detached from all world currencies. Ever since the Kobe earthquake, Japan has played rope-the-dope with the US, pleading poverty and loss of GNP due to that terrible event!

This is why things go backwards. Today, the government of Japan boasts of 66 months of good times flowing in their economy, the GNP growing! This takes us back to half a decade after the Kobe earthquake. So, five years after the quake and 10 years after the Bank of Japan hyper-hiked up the interest rates for several months, the GNP began to grow and has grown steadily since. Profits for Japanese industrialists have climbed to the point, 80% of Japan's trade surplus with the world comes from their industrialists playing off the weak yen to increase their valuation of their profits?

Just as the world begins to demand they stop playing this new game, along comes an earthquake. So I expect this game to redouble.

Here is a graph showing how the value of the yen rose against the dollar. Before the Plaza Accord, the yen was super-cheap. Then is was valued at a much higher rate very suddenly. Nearly instantly, its value doubled. This satisfied American negotiators but it was very foolish. Evidently, sudden lurches like this cause ripple effects that destabilize all other systems. Just like the US suddenly dropping rates after Bush stole the election, for example.

Note how Japan struggled to buy US bonds. Suddenly, in 2002, the Japanese purchase of US bonds shoots upwards dramatically. Was this because we offered a good deal? Arf.

Not. This is exactly when our own rates fell to Japanese levels! Of course, at this point, Japan was able to weaken and weaken the yen even as the US economy took several significant hits.

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