Japanese Manufacturing Facing the Power Crisis after Fukushima: A Dynamic Computable General Equilibrium Analysis with Foreign Direct Investment

The Great East Japan Earthquake and the subsequent tsunami hit and destroyed the Fukushima Daiichi Nuclear Power Station. People lost trust in the safety of nuclear power plants, and the regulatory authority became reluctant to permit power companies to restart their nuclear power plants. To make up for the lost nuclear power supply, thermal power plants started operating more. They consume more fossil fuels, which raises power charges. This power crisis is anticipated to raise energy input costs and to force the domestic manufacturing industries to move out to, for example, China through foreign direct investment (FDI). Using a world trade computable general equilibrium model, with recursive dynamics installed to describe both domestic investment and FDI from Japan to China, we simulate the power crisis by assuming lost capital stock and intensified fossil fuel use by the power sector to investigate its impact on the Japanese manufacturing sectors. We found that the power crisis would adversely affect several sectors that use power intensively but would benefit the transportation equipment, electric equipment, and machinery sectors, despite the common expectation that these sectors would undergo a so-called “hollowing-out.”