Will the Sun Still Rise?

TOKYO – The scale of the earthquake and tsunami that struck Japan in March was far greater than even the authorities’ worst scenarios foresaw. Nearly six months later, the total damage remains difficult to estimate. Social unrest and confusion, as well as radiation leaks from the Fukushima nuclear power plant, continue.

And now the country has absorbed another huge blow: another downgrade of its bond ratings. Both Moody’s and Standard & Poor’s now rate Japanese bonds at only their fourth-highest level.

So what policies should be implemented in response to these economic blows?

Last year, Japan’s economy grew at a relatively healthy 3% annual rate, higher than in the United States or the European Union, owing mainly to the fiscal expansion undertaken after the collapse of Lehman Brothers in 2008. But growth in 2011 had been predicted to slow even before the earthquake. Indeed, the economy shrank by 3.5% year on year in the first quarter.