OCEAN CITY -- The recent 9.

0 magnitude earthquake in Japan — and the tsunami that followed — are,

first and foremost, a huge humanitarian tragedy.

In the wake of such a disaster, it is understandable that questions arise about effects on the world
economy. Assessing the damage this earthquake will have on the US and global economies will
undoubtedly be difficult, especially given the ongoing and alarming crisis at the Fukushima nuclear plant.

So far, one pronounced economic effect of this terrible event has been temporary moves by some
investors out of what they perceive to be riskier assets. Additionally, for a time, markets may lose a
certain amount of liquidity as Japanese investors, as well as government and corporate interests,
redirect more resources toward needs tied to the quake and the nuclear situation.

These events will no doubt have a big impact on many domestic businesses in Japan. But they will also
have effects worldwide. Event risk in the nuclear power business is unique in that problems at any one
plant can have implications for them all, and it will be important to see how this crisis impacts public
perception of nuclear power in the U.S.

Normally, disasters, natural or otherwise, have only a temporary economic impact. "The markets tend to
be fairly efficient in this regard," says Michael Hartnett, Chief Global Equity Strategist and Chairman of
the Research Investment Committee (RIC) for BofA Merrill Lynch Global Research. "If this were to
translate to a major, long-term market event, it would be through two channels: Growth, and interest
rates. That is to say: Does it affect economic activity, and does it require a policy response?" Hartnett
cites the Fed's dramatic rate cuts after the attacks of 9/11 as a classic example of this type of major
policy response. Right now, he says, the earthquake, as devastating as it is, may not have a lasting
impact on policy. However, a major impact on production activity is possible due to power shortages.

One analogy to the current situation in Japan is the Great Hanshin earthquake (also known as the Kobe
earthquake), which struck Japan on Jan. 17, 1995. In that disaster, nearly 6,500 people died and more
than $100 billion was spent on reconstruction. Although the damage this time is more in smaller towns,
the devastation is spread along a large swathe of the Pacific coast. Furthermore, many auto and
electronics firms rely on the affected region for parts. The ongoing nuclear crisis obviously adds further
uncertainty.

In the wake of the 1995 earthquake, the economic consequences were both direct and indirect. The
Nikkei fell 8% in five sessions, slumped 20% from its previous peak to its April 1995 trough and took 10
months to recover its losses. The yen actually rallied 20% versus the US dollar, in response to a big
repatriation of Japanese capital to pay for the recovery efforts. Asian markets fell 6% very quickly but
immediately recovered, while the S&P 500 was largely unaffected.

If the earthquake does end up having a meaningful impact on global investments, it will likely be
because bonds and equities will be hurt by a major withdrawal of capital by Japan, which is the third
largest holder of U.S. Treasuries.

"Without knowing the full impact of the nuclear situation there, the devastation doesn't yet appear to
be on a scale that would warrant wholesale repatriation of Japanese capital from overseas," Hartnett
says. "If that were to happen, you'd see the yen move up very sharply. You'd also see selling of US
Treasuries by financial institutions. We'll know that this is happening if the yen reaches new highs."

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The financial impact of the March 11, 2011 tsunami on Japan has been massive. The world's
third largest economy which already had a national debt of approximately 180 percent of Gross
Domestic Product is likely to have damages in the billions of dollars. The financial impact of the
Japanese tsunami and events related to it were felt throughout the world. 

In response to the tsunami's fallout, the Bank of Japan quickly began to inject $124 billion into
an asset buying program in an attempt to ease disruption to financial markets. This did little to
calm the markets per MarketWatch and as evident in the performance of Japanese stock market
during the days following the tsunami. At one point the NIKKEI 225 Index had experienced a
cumulative decline in value in excess of 15 percent and financial markets across the globe were
negatively affected.

According to Digital Look, Ltd., a financial news service, a Goldman Sachs analyst has
estimated the combined damage of the Japanese tsunami and earthquake to be in the vicinity of
£124 billion. However, the total damage estimates vary between $100-$200 billion depending on
which economic analyst estimates are referenced. What these estimates may not include are the
ripple effects which could end up costing the Japanese economy far more than $100-$200
billion. For example, if stock valuations remain low, this could lower corporate equity values
across the country by additional hundreds of billions of dollars in capital.

Following the tsunami in Japan the auto industry in the country was also heavily affected, and
according to Forbes, production of automobiles was halted in many factories. Other affected
industries financial disabled by the tsunami were power suppliers, and logistics services. The
Tokyo Electric Power Company (TEPCO), a large Japanese power supply company faced
exhaustive problems at the Fukushima Daiichi power plant and was unable to supply power to its
customers because of damaged infrastructure from the tsunami. The resulting cost of the
calamity has already cost the company $18 billion in lost equity according to CNBC. 

The insurance industry is also expected to sustain financial outflows according to the Insurance
Journal's report of Fitch Rating Agency statements. Moreover, Fitch reports downgrades of
insurers in Japan are quite possible due to the extent of insured losses incurred from the tsunami.
These losses are estimated to be $35 billion according to Fitch, but is subject to further review as
damages are more accurately assessed.
Standard & Poor's currently believes Japan can handle the damage costs of the tsunami and that
Japan will have a positive annual GDP growth by the end of year per Reuters. However, if
Japanese workers are prevented from returning to work due to complications associated with the
Fukushima power plant, this could represent an ongoing and increased expense. Weakened
confidence in the Japanese economy could in turn limit Foreign Direct Investment, reduce the
workforce and lead to inhibition of international trade.

If the post-tsunami situation in Japan becomes more dire, the entire Japanese economy could
face vast reduction in GDP which totaled over $4 trillion in 2010 according to the CIA World
Fact Book. It remains to be seen if the financial impact of the tsunami will exceed expectations;
if it does the Japanese economy could be thrown into recession.

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Economic Impact of Japan Tsunami 2011

Japan was devastated by a massive earthquake followed
by Tsunami on Friday 11 March 2011. Although it is
tough to estimate the financial and economic impact on
Japan and other countries, but still according to the latest
reports and analysis the consequences can be as follows.

1. If the government issues newer bonds for

rebuilding and reconstruction, the country might
face huge debt crisis, since the country has been
still in the process of recovering from its past
recession and shrinking economy. However for a
country like Japan, which has a great
infrastructure, good wealth conditions, huge
economy, top class building codes, better
emergency readiness and excellent hospitals, it
should be able to recover from this tragedy as
quickly as any nation could. The major challenges
in front of the country is, facing the rebuilding
costs, demographic challenges and existing fiscal
burden.
2. According to the analyst there could be short term
economic effect on other countries as well. Like
U.S. automakers could see short term benefits. US
businessmen who are in manufacturing segment
might feel some boost in the business owning to
the growing demand for reconstruction of houses
and other buildings. The major impact will be on
 the Japanese companies who export their products
like Honda, Toyota, and Sony as closed production
centres and ports might add up to the financial
burden.

3. Since Japan is the third largest importer of oil, shutting down of the Japanese refineries
due to the disaster can lower demand for oil consequently lowering the crude oil
prices.Australia's mining industry can get affected due to closure of Japanese steel
mills.In Japan many factories have been shut down or damaged. It is said that effect on
the technology market will be huge.
4. Japan's Nikkei index dropped 1.7% and the Hang Seng index in Hong Kong declined
1.5% after the tsunami hit. In the U.S., stocks were basically flat. There is a probability
that yen might rise against the dollar due to financial flows into Japan from overseas.
5. In a statement, officials of The Bank of Japan, the country's central bank said that the
bank would ..".continue to pump liquidity in the financial system to ensure the stability in
financial markets and to secure the smooth settlement of funds, in the coming week".
According to the latest report, the bank pumped 15 trillion yen ($183 billion) into money
markets to assure financial stability. According to an estimate by an insurance industry
analyst, the insurance industry's losses in Japan at $10 billion.
6. It is said that Japanese industrial sectors might face a slowdown due to the shortage of
electricity generation capacity. According to IHS Global Insight estimates, real GDP
growth of Japan could decline by 0.2 to 0.5 % point this year. But if the ongoing nuclear
crisis continue to rise further then the impact can be much larger
7. Since Japan’s exports and imports are a relatively small share of GDP, the trade flows
across the globe will not be effected much. However global supply chains (autos,
telecommunications and consumer electronics) can have a significant downturn.
According to the latest analysis, there will be a negligible negative impact on global
growth this year.
8. In the US, there will be slight disruption in the production part. US operations of
Japanese automakers might face a slight setback due to unavailibility of parts arriving
from Japan and disrupted supply chain. However this can be an advantage to the
domestic producers as demand will shift to them
9. There will be a fall in the sentiments of firms and household sector as they will be fearful
in their investment decisions.

Europe

The overall impact on the European countries will not be much significant as Japan's export
market share is not much. However, Western Europe has been gradually in the process of
recovering from the 2008/9 recession and debt crisis, even a mild economic downturn would be
shocking for Europe. Japan provides less than 3 per cent of German imports and buys only over
1 per cent of total German exports. However trade might be indirectly impacted as nearly 54% of
Japanese exports go to the Asian countries and nearly 45% of Japanese imports come from Asia.
However the major concerns in front of Europe is rising crude oil prices and high food costs.

Rest of Asia

For Countries Australia and Indonesia, it will be beneficial as they are the energy exporters and
Japan's energy needs will shift its focus from nuclear enery to thermal coal or gas. Also it is said
that factory shutdowns due to continuous shortage of electricity supply might hamper Asia's
manufacturing cycles. Countries like South Korea, Taiwan, Thailand and Hongkong will be
impacted as a major share of their imports come from Japan. Other countries like India and other
South Asian counties are unlikely to be much affected owing to lesser trade exposure to Japan.
Commodities such as cement, steel, etc. might feel some price pressure given to the rise in
demand for construction materials in Japan. It is said that, Vietnam's fish exports actually may
benefit from the badly hit fishing industry in the tsunami-affected area. Since China's export
share to Japan is considerably low, there will not be much direct demand impact on Chinese
economy. However, Japan's disrupted supply chain can affect China, as a substantial share of
China's goods imports come from Japan in electronic segment.

Impact On Various Industries

Sea Food Industry

As Japan's fishing industry has been badly affected, the sea food industry has suffered loss.
Majority of the damage is caused to smaller sized boats . According to reports, the larger vessels
which carry out their extractive activities around the coasts  were moved to the main port in
Chiba Prefecture ,as their earlier station has been destructed badly. The aquaculture industry
specially in Sanriku ( famous for chum salmon and Tuna operations) , Hachinohe city and the
surrounding areas is badly affected. Various sea food processing factories and cold storage areas
is hardly affected and the time of future recovery of these factories is uncertain. Due to lack of
logistics operations and supply, shortage of electricity supply, there will be short term rise in the
prices of sea foods. Additionally the radiation factor and low consumer confidence will affect the
exports.

Camera and Photo Industry

According to the latest reports , renowned company Sony stopped its operations at ten factories
and two research centers due to power outages caused by emergencies at nuclear power plants
and damage caused by quake. One of the factory of Epson was hit by the tsunami and three other
have been temporarily shut down due to rolling blackouts. Nikon's Sendai factory( manufactures
D3S, D3X, D700 and F6) was shut down owing to damage to equipment and buildings .Canon 
has suspended operations at eight factories located in Northern Japan. Other companies Ricoh
,Sigma, Fujifilm, Casio, Tamron and Panasonic are affected but not heavily and are trying to
recover from the crisis. Although it is still two early to estimate and evaluate the damage caused
and the recovering time.
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Five factors suggest that Japan faces a uniquely difficult and uncertain set of challenges.
First, the economic damage from Japan’s three calamities (a horrifying earthquake, a devastating
tsunami, and a nuclear crisis) may well be double that of Kobe. And, unlike Kobe, these
calamities did affect Tokyo — indirectly, fortunately — where some 40% of Japan’s industrial
production is located. Second, Japan’s public finances are weaker than in 1995, and demographic
factors are less favorable… Third, benchmark interest rates are already near zero, and have been
for a while… Fourth, the addition of destabilizing nuclear uncertainty to the terrible impact of
the natural disasters amplifies the reconstruction challenges… Finally, Japan’s external
environment today is more challenging. During the post-Kobe reconstruction period, world
demand was buoyant and global productivity surged, owing to China’s gathering boom,
America’s information-technology and communications revolution, and political and economic
convergence in Europe. –Mohamed El-Erian, Pimco

–Natural disasters tend to result in a strong contemporaneous reduction in average GDP

growth followed by a quick rebound in the following quarter. Even in the case of very large
disasters (in a ‘global’ rather than ‘local’ sense), the impact on economic growth fades quickly
from the data, in part because in most (but not all) cases the boost from government spending
offsets the fall in activity in other parts of the economy. The impact in asset markets has
generally been more muted than the economic impact. That said, the impact of the East-Japan
earthquake and tsunami may be greater. This is likely to be one of the most costly disasters in
global GDP terms; the ongoing nuclear risk has the potential to magnify the impact in other
ways; power disruptions could last longer than normal; and supply chain disruptions may be an
issue. –Kamakshya Trivedi, Dominic Wilson and Stacy Carlson, Goldman Sachs

–The government has estimated that the cost of repairing earthquake damage to homes,
commercial buildings and infrastructure could be as much as 25 trillion yen (around $300
billion). However, it would be quite wrong to interpret this as an estimate of the blow to GDP,
which measures economic activity rather than changes in the stock of capital. Indeed,
reconstruction spending will actually boost GDP. This would not of course mean that the country
is any better off, even in narrow economic terms: lost assets have simply been replaced and
productive potential is no higher than before. But it does mean that this 25 trillion yen should be
seen as a potential positive for the official GDP data rather than a negative. This spending would
be equivalent to around 5% of one year’s GDP, although it would be spread over several years
and the boost to overall economic activity would be partly offset by reductions elsewhere…
[From a separate note] We suspect that the consensus is giving far too little weight to the blow to
confidence and activity from the nuclear crisis. Admittedly, the steeper the initial fall in GDP,
the sharper the rebound is mechanically likely to be. Nonetheless, the next few months may still
see some shockingly weak economic data. –Julian Jessop, Capital Economics
–The level of GDP this year, next year and the following year will be lower than it otherwise
would have been by five percentage points in total. This is a dead-weight loss… it is gone
forever. Resources are working to rebuild the economy quickly, but these same resources would
have been working to expand the economy’s productive capacity had there been no disaster. –
Carl Weinberg, High Frequency Economics

–Japanese export volume resumed growing in February, increasing 4.5% from a month earlier.
The data are another reminder that the economy was bouncing back nicely from the [fourth-
quarter] decline on the eve of the earthquake and tsunami. Our positive interpretation of Japan’s
pre-crisis momentum is critical to our belief that the economy will bounce back into midyear…
What is clear is that the longer the disruption lasts, the larger the impact on economic growth. If
the damage and duration of the disruption all occur within a short time period, economic growth
could register a quick pickup. This rests on the ability of an economy to substitute away from
near-term disruptions and marshal resources to quickly begin reconstruction efforts. –David
Hensley, Joseph Lupton and Michael Mulhall, J.P. Morgan Chase

–I’m not trying to downplay the unfathomable losses that have already transpired in Japan. Nor
am I trying to sugarcoat some the deep structural problems (high levels of government debt,
chronic oversaving, import dependency) that have persisted in Japan for years. Rather, I want to
let you know that Japan’s two-decade refusal to effectively acknowledge shareholder rights led
to a methodical, slow-draining of capital out of its equity markets. And now, after 20 long years,
the tide is about to turn for the better. Ironically, a long-time investor in Japanese equities might
conclude that the earthquake, tsunami and threat of a nuclear meltdown are collectively the straw
that has broken the back of Japan. I beg to differ. These tragic circumstances are actually the
seminal event that will trigger the steps leading to a rekindling of Japanese spirit, productivity
and profits for those willing to bet on the Land of the Rising Sun. –Alan Zafran, Luminous
Capital

–Crises in the Middle East and Japan threaten to thrust the U.S. and global economies into a
second recession. Since the economic recovery began in July 2009, GDP growth has averaged
only 2.8 percent, a pace insufficient to bring unemployment down to acceptable levels. And that
rate of growth leaves the economy too vulnerable to the slightest hiccup and a deceleration into
recession… A surge in the price of oil to $140 a barrel and an enduring crisis in Japan would do
it. Growth would slow to 2%, businesses would start laying off workers, and voila it’s
Armageddon. –Peter Morici, University of Maryland

–The shock to the Japanese economy will affect the rest of world through four broad channels
of transmission: (1) trade in goods and services, (2) capital flows, (3) financial market contagion,
and (4) commodity prices. But the overall impact will also depend on the policy responses in the
affected economies and on initial global economic conditions before the shock hit. Our overall
assessment is that the Japan shock will not derail the global recovery because: The global
economy was in a relatively robust condition when the Japan disaster hit; Transmission through
the four channels above is likely to be relatively limited; Monetary and fiscal policy-makers
around the world are likely to provide more support for their economies if the spillover from
Japan turns out to be more severe. –Joachim Fels and Spyros Andreopoulos, Morgan Stanley
–The issues with the Japanese auto industry are quite serious, and the situation is unlikely to
return to normalcy any time soon. Many automakers in Japan are facing serious supply
disruptions, not just to parts plants being damaged, but to rolling blackouts, infrastructure
damage, port and shipping issues, and more. With the nuclear catastrophe compounding the
problems, a significant percentage of Japan’s electrical generating capacity has been taken
offline, and is unlikely to be restored soon. To make matters more complicated still, power
cannot be shunted from one region of the country to another, owing to differing grids within the
country operating at different power frequencies. Disruptions at Japanese suppliers have already
shuttered one U.S. plant, a GM facility that makes compact pick-ups in Louisiana, and Japanese
automakers have cancelled overtime production around the world. –Aaron Bragman, IHS Global
Insight

–Judging the risks to global supply chains is almost as difficult as assessing the nuclear risks.
Most analysis looks at broad industry trade flows. However, this is not really a macro story.
Japan has plenty of spare capacity in its manufacturing and energy industries that can be brought
on line in the next couple months. Competitors outside Japan could step up production even
more quickly. The real issue is micro: has production shut down for key components for which
there is no easy substitute? For example, if there are only two factories producing a chip that is
essential for a cell phone, then shutting down one of the two chip factories could severely impact
cell phone production even if all the other components remain well supplied. At this stage, the
anecdotal evidence suggests only minor disruptions: a few plants outside of Japan have slowed
production and a few chips have gone up in price. It is early days, but so far, so good. –Ethan
Harris and Gustavo Reis, Bank of America Merrill Lynch

–For Japan, where we do not expect a drastic political system change (although the ruling
government might change), we would expect little, or even a very small positive, effect on long-
run Japanese growth. Whether the long-run impact is positive or not depends on what kind of
institutional changes this earthquake eventually brings to Japan. Especially important is what
will happen to the major impediments to growth that we identified in our own past work. In a
research report prepared for the National Institute for Research Advancement, we identify two
structural impediments for growth in Japan: the zombie problem and bad government regulation.
Following the earthquake, there will be a call for protecting those firms that have suffered from
the disaster. Such protections must be targeted only at those that are affected by the earthquake
and otherwise would be profitable. It would be unwise to assist firms that have been consistently
unprofitable. Likewise, any assistance should be phased out in a timely manner. Too much and
too long-lasting protection after the earthquake can make new zombies. –Takeo Hosh, University
of California-San Diego, and Anil Kashyap, University of Chicago

–The only thing we know for certain is there is a beginning to the situation and an end to it. In
between, it is guess work. But an end will come and one can only hope that Japan is better off as
a result. The current lack of visibility is a nightmare for the individuals impacted. The fragile
Democratic Party of Japan government of Naoto Kan has found new life. He is unlikely to be
opposed in the Diet now despite not holding a majority in the upper house. Now would be the
time to also push through reforms that help Japan grow at a greater rate in the decades to come.
If Prime Minister Kan rises to the situation, Japan could face a future where the next decade is
brighter because of rebuilding and restructuring efforts taken in the wake of a tragic crisis.
Perhaps he should recall the Japanese proverb: Vision without action is a daydream. Action
without vision is a nightmare. –Scott B. MacDonald, Constance L. Hunter and Alexander Avtsin,
Aladdin Capital

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Economists and others weigh in on the economic effects of the Japanese earthquake and
tsunami.

–At this stage, it’s too early to come up with meaningful estimates of the overall impact of the
terrible events in Japan. And, in economic and financial terms, the effects may be dominated by
other challenges facing the global economy, including still elevated oil prices and rising interest
rates. And much still hinges on the radioactive threat to Japan’s more urbanised areas: if that
threat fails to transpire, the [1995] Kobe quake provides a useful framework but if the worst
happens, all bets are off. –Stephen King, HSBC

–The government is focused on controlling the mounting nuclear catastrophe. It is obvious to

everyone that the national infrastructure has been impaired in a very important way: Ports are
wrecked. The damage extends for hundreds of kilometers up and down the coast, according to
satellite pictures. The capacity to produce electricity has been reduced by as much as 40% for
now, and probably will be limited to less than 80% of pre-quake/tsunami potential for a very
long time. Major companies are shut down because their plants are wrecked, or they cannot get
electricity to operate, or they cannot ship their products, or their suppliers are impaired. We have
yet to experience all the financial dislocations from this disaster. –Carl Weinberg, High
Frequency Economics

–A lot of physical capital in Japan has been destroyed by the tsunami tragedy alone. And more
importantly we will never be able to put a value on the loss of human life or the physiological
trauma that has been brought upon the Japanese people from these events. But adding the
potential for a serious nuclear accident to the equation is nearly incomprehensible… Policy
makers should recognize that meaningful stabilizing actions can add enormous value to an
incomprehensible situation where risk premiums have skyrocketed. I hope the BoJ understands
that it is the one institution in the world that can act swiftly in financial markets to instill some
sense of order. I do not believe that there are many Japanese policy makers (or market
participants) who believe the “long term” prospects for Japan are so dim that we should be at
equity valuations which are only a few percentage points from the levels reached in mid 2003 or
early 2009. But we need believers with strong hands at the moment and that is what central
banks are for! –David Zervos, Jefferies & Co.

–The near-term impact on Japanese growth is likely to be negative and potentially quite large.
However, by the end of this year the reconstruction effort is likely to get underway and provide a
substantial boost to growth. The big uncertainty about this disaster (and what sets it apart from
other such disasters) is that roughly 10% of electricity generation capacity (both nuclear and
coal) may be off line for a few months, until oil- and gas-fired plants can ramp up.. In the near-
term, this could have major negative ramifications for the Japanese industrial sectors; some steel
and automotive factories have already been closed. –Nariman Behravesh, IHS Global Insight
–Of the four broad commodity sectors, we believe energy markets are likely to be most
affected since the country imports approximately 85% of its energy use, with nuclear power
representing just over 10% of energy consumed in the country. In July 2007, when the Niigita-
Chuestsu-Oku earthquake led to the shutdown of the Kashiwasaki-Kariwa nuclear plant, lost
nuclear production capacity had to be replaced by other fuel sources such as thermal coal, natural
gas, petroleum products (and direct crude burning). –Torsten Slok, Deutsche Bank Securities

–Though initially, the interruptions in Japan’s economy seem to have depressed oil prices,
any turn to rebuilding there could have the opposite effect. Longer-term, any departure from
nuclear plans could redouble any upward pressure on oil. (Here, of course, it is important to
remember that oil prices were already above fundamentals as a result of the North African and
Middle Eastern turmoil, which has not disappeared even as the headlines remain dominated by
Japan.) –Milton Ezrati, Lord, Abbett & Co.

–The four prefectures most heavily affected by the Tohoku earthquake are Iwate, Miyagi,
Fukushima and Ibaraki. This region accounts for about 6-7% of the overall Japanese economy…
The latest earthquake is expected to inflict more human and physical damage than the Great
Hanshin-Awaji Earthquake of 1995. Given the region’s character as a “trading” economy, there
is also a need to consider impacts on other regions. Based on currently available information, we
estimate that damages could exceed 15 trillion yen (3% of GDP). –Kyohei Morita and Yuichiro
Nagai, Barclays Capital

–Economic output from the affected region plus its connections to the rest of the economy
have darkened the outlook. The cost of rebuilding collides with low levels of insurance coverage,
and may require tax increases or much higher government deficit spending. In addition, power
supplies will be limited, affecting the broader economy, with transportation services disrupted to
the north of Tokyo, and tourism likely to be drastically affected for months. –Ron Napier, SBC
Global

–We’ve been asked by some customers whether Japan was a major seller of Treasury securities
specifically in response to the Kobe earthquake in 1995. We don’t know definitively, but the TIC
data does suggest some selling — presumably by insurers — in response to that earthquake, but
not for several months after the event, which occurred in January of 1995. –Nancy Vanden
Houten, Stone & McCarthy Research