How will Japan finance its reconstruction?
Trying to make an assessment of the economic and financial costs of a disaster such as the Japanese earthquake and tsunami always seems tawdry.
But failure to do so is also to succumb to mawkishness or despair. Life goes on, markets continue to trade, investors put a price on the damage done.
Overnight, investors have wiped 6.2% off the value of Japanese shares on average, as measured by the Nikkei 225 index. And the value of some of the best known and most powerful Japanese multinationals fell more: Sony fell 9.1%, Nissan dropped 9.5%, Toyota was 7% lower, the banking group Mizuho was 10.5% down.
Goodness only knows whether that is a rational response, whether that represents an efficient calculation of the long term damage or a manifestation of blind investors licking a finger and holding it to the wind.
Breweries are shut. Pretty much all automotive manufacturing has been suspended. Sony has closed six component plants. Power across the country is being rationed. There is enormous short and long term uncertainty about the impact of the nuclear debacle on health, the environment and the security of power supply.
Already Nomura - the largest Japanese investment bank - is forecasting that the disaster will delay a recovery in the Japanese economy by about six months (Japan's economy contracted in the last quarter of 2010, having grown strongly earlier in 2010; Nomura had been predicting the country would emerge from this dip in the second quarter of 2011, but now says a return to better conditions probably won't happen till nearer the end of the year).
Even so, Nomura does not anticipate a major slump in share prices. Here is its logic:
"Although we expect this earthquake to provide further impetus to the correction in Japanese equities that has been occurring since mid-February, we do not envision a serious correction for the following reasons.
"First, industrial production only fell in the immediate month following the Kobe earthquake (in 1995). Second, the government is likely to provide fiscal support to the regions affected. Third, we see little risk that the earthquake will trigger a sharp rise in the value of the yen."
As for another important bit of the economic infrastructure, the banking system, the Bank of Japan has done what it can to maintain its integrity and keep the cost of finance as low as possible, by making £165bn of credit available to financial institutions, almost five times the liquidity it provided after Lehman's collapse in 2008.
So the potential for a seizure of the banking system has been minimised.
The greater financial risk for Japan is probably in its bond market, because Japan famously has the largest national debt relative to its economic output of any of the major developed economies together with a large and unsustainable fiscal deficit.
According to IMF figures, the ratio of general government gross debt to GDP was set to reach 228% this year, and 233% in 2012, even before taking any account of the costs of reconstructing the area devastated by the quake and tsunami. The gap between government revenues and expenditure for 2011 is forecast at more than 9%.
Which is why the credit rating agency Moody's warned this morning that the natural disaster could bring forward the moment of a potential financial calamity, which would be the moment when investors lose confidence in Japan's ability to repay its debts.
The sum that Japan needs to borrow this year is the kind of number that boggles the brain: if you add together both the maturing debt that needs to be repaid and new borrowing to finance the deficit, Japan needs to borrow around a third of its $5.5 trillion GDP, excluding very short term debt, or more than half its GDP including short term debt.
These are the sort of numbers that make the British public-sector balance sheet look like a model of strength and prudence.
But although the Japanese government's credit rating has recently been downgraded, historically this is a country that has proved able to raise these sums - largely because the vast bulk of government borrowing has been financed by Japanese savers and domestic institutions who simply have a habit of lending to the state.
Japan is far less dependent on the vagaries of the sentiment of overseas investors than most big borrowers, such as the US.
In the current circumstances where Japanese people and institutions face a huge test of their resolve, they may be more determined than ever to lend to the government - as an act of solidarity, as a tangible sign of the collective will to reconstruct their country.
But even so, the Japanese government is in a hideous position, under pressure from markets to cut borrowing at just the time when the imperative of rebuilding the country will require a massive deployment of government money.
Update 09:45: In respect of the financing of Japan's big deficit and the refinancing of its massive existing debt, the Bank of Japan is doing all it can to avoid damaging disruption.
As well as pumping liquidity into the banking system, it has doubled its quantitative easing programme to purchase financial assets - including Japanese government bonds - from Y5 trillion to Y10 trillion ($121bn, £76bn)
Interestingly Nomura believes Japanese bond prices could actually rise in the short term, because of these bond purchases by the central bank and because of a switch out of assets perceived to be riskier by investors.
Nomura thinks this strength in bond prices is unlikely to last more than three months
Also, Nomura's chief economist Takahide Kiuchi said - in a conference call with investors this morning - that he expects the quake and disaster will contribute to a contraction in the Japanese economy of between 1% and 1.5% in the three months to the end of June.
He forecasts that the Japanese economy will recover from its "lull" in the fourth quarter of this year.
Update 12:57:I have just spoken to Peter Westaway of Nomura. He made three points.
- Nomura believes the negative impact of the natural disaster - estimated at between 1% to 1.5% of GDP in the second quarter - will mean that the GDP will be flat in the coming few months, but should not contract.
- There is a massive amount of uncertainty around that forecast - because the scale of government stimulus is uncertain, the impact of the nuclear accidents can't be assessed yet and consumer spending may fall by more than expected.
- He expects the rating agencies - Moody's, Fitch and S&P - to "cut Japan some slack" for "humanitarian reasons". Or to put it another way, as and when the Japanese government deficit grows because of the costs of reconstruction, they will not downgrade Japan's credit rating - unless (I suppose) it became clear that the Japanese government had abandoned all hope and intention of restoring the health of the public finances. Or to put it another way again, the credit rating agencies would not wish to be seen to be triggering a fiscal crisis, as the aftershock of a national tragedy.