On the Economic
Consequences of the
Tohoku Pacific Earthquake
Rene Belderbos
Dept. of Managerial Economic, Strategy and
Innovation
Faculty of Business and Economics
Contents
 Main focus: consequences for the
Japanese economy
- Economic growth, energy policy
- Multinational firms, trade&investment
 Consequences for the world economy and
Europe
1. Short term effects (2011)
2. Responses (2011-2014)
3. Long term prospects
Faculty of Business and Economics
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
Faculty of Business and Economics
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
Faculty of Business and Economics
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, GEHitachi and Mitsubishi Electric. Japan Steel dominates world production of
reactor vessels. (vested interests and obby power?)
– 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
Faculty of Business and Economics
Long term: Energy Policy Options
1. Greater dependence again on oil, gas and coal? Not likely
2. 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
3. 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
Faculty of Business and Economics
Long term: Government Debt and Ageing
Weakest points 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)
Faculty of Business and Economics
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?
Faculty of Business and Economics
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
Faculty of Business and Economics
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?
Faculty of Business and Economics