On the Economic Consequences of the Tohoku Pacific Earthquake Rene Belderbos Dept. of Managerial Economic, Strategy and

1. On the Economic Consequences of the Tohoku Pacific EarthquakeRene BelderbosDept. of Managerial Economic, Strategy and Innovation

2. Contents • Main focus: consequences for the Japanese economy • Economic growth, energy policy • Multinational firms, trade&investment • Consequences for the world economy and Europe • Short term effects (2011) • Responses (2011-2014) • Long term prospects

3. Short term economic effects: what’s happening • Damage to the economy estimated at 15-20 trillion Yen (120-160 billion Euro) • Factories damaged or destroyed, distribution and transport affected • Electricity shortage: power plants shut down (nuclear): reduces capacity utilization • Export down: Tohoku is hub of electronic component production and exports; fear of radioactive contamination of export goods • But 5 prefectures 7.8% of GDP, compared with 12.4% for the Great Hanshin Earthquake (1995) in Kobe • Stock exchange down (- 10 percent): energy sector hit, steel and construction sector up • Decline in GDP expected: 0.5 percent. Blow to the economy that was just recovering from recession after the financial crisis. • Effects on the world economy: global supply chain • key high tech parts produced in the area (flash memory chips, silicon wafers, lithium batteries (hybrid cars), chips for navigation systems. No second source for some of these parts. Specialized production • GM Chevrolet temporarily stopped production of its Louisiana plant due to lack of parts supply • The Apple Ipad2 will face shortages of key parts (battery, memory) and roll out in Europe may be delayed

4. Effects and Responses • Electricity shortage: common effort by firms and families to reduce electricity use: solidarity in times of hardship • Power plants shut down after the quake restarted. Use of decommissioned plants. Increased imports of oil and gas. Capacity Tepco back to 70% in April • HQ of firms shifted to Osaka temporarily • Insurance companies and families are expected to repatriate foreign assets (30% of firms and families have insurance; companies and government share payout). Sufficient funds available in disaster insurance fund • Yen rises (on the expectation of fund repatriation) G7 Intervention in foreign exchange market to contain rise of the Yen. Avoid that the rise of the Yen further hampers growth • Bank of Japan puts money in the economy; support for banks to maintain finance for restructuring. Recapitalization fund for firms and banks still in place (11 trillion) Rebuilding the area (late 2010 through 2014) • Japan has ample experience (Great Hanshin Earthquake) • Public and private investment up. Public investment expected 10 trillion (2% of GDP) • GDP growth will increase

5. Long Term Effects: Energy Policy • Energy policy: background • Japan is almost completely dependent on energy import (oil, gas, coal), with own energy resources limited to hydropower en geothermal power (5%) • Strategic national importance given to energy diversification policy after oil crisis in the 70s. Focus: coal and nuclear, reduce reliance on Middle East • Coal fired (efficient) plants expansion • Nuclear power about a quarter of electricity production: uranium once imported can be used longer term. ‘Nuclear revival’ was expected to meet Kyoto emissions targets. Nine more reactors planned for this decade • Japan has major nuclear players and technologies: Toshiba-Westinghouse, GE-Hitachi and Mitsubishi Electric. Japan Steel dominates world production of reactor vessels. (vested interests and obbypower?) • Full cost of nuclear technology not taken into account (safety) • Energy policy background: ‘Forgotten’ renewable energy? • Wind, solar, biomass: currently 3 percent of electricity generation (e.g. Germany 8 percent) • Japan used to be number 1 in solar, now number 4. number 13 in wind • For a country relying on energy imports, poor performance is odd

6. Long term: Energy Policy Options • Greater dependence again on oil, gas and coal? Not likely • New nuclear plant development delayed. Restarted with extra safety assurance (tsunami walls, cooling systems). • Nuclear power is too important for Japan and it has too many vested interests, to stop developments • Reignite renewable energy development? • Japanese firms do have important technology expertise (batteries, photovoltaic cells, wind turbine technology). • New government has set more ambitious targets (10 percent) • More costly but will be seen as necessary complement

7. Long term: Government Debt and Ageing Weakestpoints of the Japanese economy get hit • Energy costs will rise • Need to finance reconstruction will further increase government debt Public debt and long term economic growth • Currently about 200 percent of GDP • But little foreign exposure (6.5%): debt held by Japanese private sector • Ageing society will reduce private sector savings and increase consumption (fertility rate 1,3; 25% population above 65 yrs, will further increase) • Reliance on foreign funding will increase Policies. Increase in tax base: Consumption tax (5%) has to increase. Which politician will take this measure? Economy will show limited growth. Japan will drop in the rankings of the largest size economies (China topped Japan just this year)

8. Long term: multinational firms Risk assessment • An earthquake 300km further South would have hit Japans political and business system at their core • Firms will become more sensitive to natural disaster exposure • 2010 investment by Texas Instruments in a semiconductor plant in Fukushima • “ We highly value the plant’s production setup, which allows a stable supply of high quality products” • Japan (Tokyo) loses attractiveness to headquarter coordination centers, financial activities? • Most likely beneficiaries: other regions in Japan; Singapore, Hong Kong • Our research: Japanese firms spread their production facilities to reduce cost and exchange rate risk • May include political and environmental risk, e.g. SARS crisis and anti-Japan sentiments in China. Second plants set up in countries such as Vietnam • Japanese multinational firms may look for risk diversification of their high tech production • Currently: Asia mass production, Japan high tech components. Backup capacity in Asia, EU or the US for high tech components?

9. Consequences for Europe • Trade and investment: limited • Short-term: some global supply chain problems • Longer term: Asia may benefit from relocation of investments, Europe much less? • Currently: Asia 80%, EU 10%, US 10% of new Japanese manufacturing investments • Exports: Japan has not been a motor for growth in the world economy • Energy policy in Europe: indirect • Planned revival for nuclear energy (Co2 reductions) under threat in European countries. • Public sentiment against keeping old plants open and investment in new plants

10. Finally: A Positive Note • Japan has few natural resources • Rise of the Japanese economy based on human resources: efforts and skills of the Japanese people • The Japanese people are at their best under adversity: they will work together to meet this challenge • 災い転じて福となす: bend misfortune into happiness • Perhaps Japan will emerge as a new ‘powerhouse’ in renewable energy?