SEB’s experts believe effects on financial markets and the economy will be short lived while nuclear problems pose a big risk. The economists have assembled a chart package on possible economic effects from the Japanese earth quake. Among others they have included charts on growth and financial markets after Kobe quake, hurricane Katrina 2005 and the 9-11 terror attacks 2001. There are also some charts on the Japanese energy sector, implications for oil prices and Japanese holdings of US bonds. Their main scenario remains that the impact on growth will be limited and that central banks will hike according to plans. They also discuss a risk scenario for growth and central banks if the nuclear damage should deteriorate.

1. First take on the Japanese earthquake
Main scenario: Short lived effects on financial markets and economy but
nuclear problems poses a big risk
1

2. Main scenario: Normal
hurricane/earthquake dynamics after all
Kobe, 9-11 and Katrina did not cause permanent effects on production and
financial markets.
GDP decline in q1 and possibly q2 due to humanitarian disaster shortage of
electricity and other disturbances. GDP will decline by 0.5-1%-points in 2011
compare to earlier forecast, but thereafter increase by 1-1.5%-points more in 2012
Compared to Kobe, GDP affected for a somewhat longer period to due to problems
with energy supply
Upward pressure on oil prices in a medium time perspective. Lower supply of
nuclear electricity in Japan and delayed nuclear investments in other countries.
Equities. Short term: Further downside potential Japan 10%, US and Europe 5%.
3-6 months back to pre crisis levels
Fixed Income: Bond yields further down in the short run, but return to pre crisis
level in line with equities. ECB and Riksbank to hike in line with previous plan.
Currencies. Temporary flight to safe havens JPY, CHF, USD. BOJ to prevent
USD/JPY to move below 80. SEK recovers within 1-3 months.
2

3. Risk scenario: Severe nuclear damage
Zone with radiation contamination becomes significantly larger causing
evacuation of population and incapacitating more production plants
Financial market turbulence continues, large repatriation to Japan,
coordinated central bank action to support confidence and liquidity
GDP in Japan declines by 2-3% in 2011 some direct impact on growth
and demand in emerging markets and the west. Japan important part of
global supply chains. OECD growth 0.5-1%-points lower in 2011
Shift from nuclear power in other countries and continued political
turbulence in the Middle East leads to another large upward shift in the oil
price
Equities. Continues to decline another ~20% in Japan, ~10% in other
countries
Fixed Income: Bond yields further down, rate hikes postponed in the
Euro-zone, Riksbank hikes only at two more meetings in 2011
Currencies. Repatriation flows strengthen JPY, flight to safe havens CHF,
USD. Krona continues to weaken.
3

4. Scenarios for Japanese GDP
Japan's catastrophe: GDP scenarios
Index: 2000:1=100
115 115
113 113
111 111
109 109
107 107
105 105
103 103
101 101
99 99
97 97
95 95
93 93
00 01 02 03 04 05 06 07 08 09 10 11 12
Severe nuclear disaster Pre-catastrophe forecast
Normal hurricane recovery
Source: Cabinet Office, SEB
4

5. Possible impact on oil prices: lower GDP
vs increased demand for electricity
production
After Kobe oil consumption was reduced for 2 months, this time
it will probably be longer 2-4 months?
Failure in nuclear plants means that Japan is likely to increase
imports of oil for electricity production
Japan is likely to increase imports of liquefied gas (LNG)
(possibly by as much as 5 times). The effects on prices from
this is, however, likely to be limited as supply is plentiful
Destroyed refining capacity in Japan will raise crack spreads,
especially in Asia
Increased uncertainty regarding nuclear power will effect
alternative fuels. Higher prices on coal, natural gas and
emission rights. Electricity futures have increased by 6% in
Germany, Sweden by 5%
We expect downward effects to dominate in the short-term,
but upward pressure in the medium term
5

6. The Chernobyl power plant exclusion
zone has a radius of 30km
Affected area much larger
Radiation levels varied locally due to wind and rain
Increased radiation in an area with a radius of ~200-300km
Evacuated zone in Japan, 20km, (stay indoor zone 30km)
Distance to Tokyo 200-250km
6

7. Contaminated areas at Chernobyl
7

8. Growth and financial markets after
natural disasters etc.
In order to assess the impact on the business cycle and
financial markets from the Japanese earthquake we have
assembled how data reacted after the Kobe earth quake in
1995, the 9-11 WTC terror attacks in 2001, and the cyclone
Katrina’ devastation of New Orleans in 2005.
Main conclusion are:
– After an initial reaction it is in most cases difficult to discern
the effect on growth from the underlying trend.
– Impact on financial markets most often short-lived
– Natural disasters seem to have affected timing for central
bank’s actions, but not underlying trend
8

9. Material damage after catastrophes
Crude estimates – difficult to decide what costs should be
included
Kobe: Yen 10trn = 2.5% of GDP
9-11: USD 10-20bnbn = 0.1-0.2% of GDP
Katrina: USD 81bn = 0.6% of GDP
Earth quake 2011 (very wide range of estimates exists) Yen 10-
15trn? = 2-3% of GDP
9

10. Minor impact on growth in Japan after
Kobe
US growth and confidence turned lower, but Tequila crises
(currency crises in Mexico) most likely driving factor
US: ISM
60.0 Kobe 60.0
57.5 57.5
55.0 55.0
Percent
Percent
52.5 52.5
50.0 50.0
47.5 47.5
45.0 45.0
jan maj sep jan maj sep jan maj sep
94 95 96
Manufacturing
10

11. Interest rates after Kobe Quake
Yields turning lower, but other reasons important for lower rates
May possibly have affected rate cuts in Japan
Government 10 Year yield
13 Kobe quake of 1995 13 Central bank rates
12 12 7 7
11 11 6 6
10 10
5 5
9 9
8 8 4 4
7 7 3 3
6 6
2 2
5 5
1 1
4 4
3 3 0 0
2 2 -1 -1
Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 94 95 96 97
94 95
Japan USA Sweden Germany
FED ECB Japan
11

12. Nuclear risks make all the difference
Index
Index
12

13. Japanese stock market declined after
Kobe
In a long time downward trend
Small impact on other countries
Stock markets
110 110
Kobe quake
105 105
Index 1995-01-16 = 100
100 100
95 95
90 90
85 85
80 80
75 75
January February March April
95
Nikkei 225 EMU STOXX SWE (AFGX) Dow Jones
13

14. Short lived impact on growth and
sentiment after 9-11
Economy was already in a recession
Sentiment at a trough shortly after 9-11
14

15. Coordinated central bank cuts after 9-11
Economies where in a downturn already in the beginning of
2001
9-11 affected timing and size of rate cuts
Government 10 Year yield Central bank rates
6.0 6.0 7 7
5.5 5.5 9-11
6 6
5.0 5.0
4.5 4.5 5 5
4.0 4.0 4 4
3.5 9-11 3.5
3 3
3.0 3.0
2.5 2.5 2 2
2.0 2.0 1 1
1.5 1.5
0 0
1.0 1.0
0.5 0.5 -1 -1
jan mar maj jul sep nov jan mar maj jul sep nov 00 01 02 03
01 02
Japan USA Sweden Germany FED ECB Japan
15

16. Stocks remained in bear market for
another 1-1.5 years after 9-11
Stock markets
160 160
9-11
150 150
140 140
Index 1995-01-16 = 100
130 130
120 120
110 110
100 100
90 90
80 80
70 70
60 60
jan mar maj jul sep nov jan mar maj jul sep nov
01 02
Nikkei 225 EMU STOXX SWE (AFGX) Dow Jones
16

17. US economy in slowdown phase before
Katrina
Mixed impact on sentiment
US: ISM
Katrina
61 61
59 59
57 57
55 55
53 53
51 51
49 49
04 05 06 07
Manufacturing Non-manufacturing
17

18. US rate tightening cycle not affected by
Katrina
Percent
18

19. Stock markets continued to rise after
Katrina
Stock markets
150 150
Katrina
140 140
130 130
120 120
110 110
100 100
90 90
80 80
jan mar maj jul sep nov jan mar maj jul sep nov
05 06
Nikkei 225 EMU STOXX SWE (AFGX) Dow Jones
19

20. Japanese nuclear problems uncertain
factor
Situation probably has to be resolved for financial markets
turbulence to subside
10 out of ~50 reactors down, nuclear power 30% of electricity
production => ~6% of total capacity knocked out. Risk for
shortage in some regions, which could last longer periods
20

21. Proportion of total foreign holdings, %
Treasury securities
Japan second largest holder of US
Proportion of total foreign holdings, %
21

22. Japanese Net purchases of Treasury bonds
and notes dropped to negative numbers in
H2 1995.
US TIC: Purchase and sales of treasury
bonds and notes by Japan
55 7
USD (billions)
45 4
billions
35 1
25 -2
15 -5
94 95 96
Purchases (LHS)
Sales (LHS)
Japan, Net purchases [ma 3] (RHS)
22