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VOL 6, NO 3 June 3, 2011

The Economic Impacts of the Great Eastern Japan Earthquake:

A Supply-Side Analysis

- On March 11, the biggest earthquake ever recorded in Japan and one of the strongest to hit anywhere in the world struck, with an epicenter off the coast of Sanriku in northeastern Japan. This caused catastrophic destruction throughout eastern Japan, especially on the Pacific Ocean side of the Tohoku Region. The human, social, and economic damage has been huge, with the full picture yet to completely emerge. Japan’s economy, which had been emerging from a standstill and on its way to a self-sustaining recovery led by improving exports and production, was once again put to a severe test because of the natural disaster. This report seeks to assess the impacts to the supply side, qualifying and quantifying the damage to illustrate the level of impact. However, information and data are still limited, and calculations can only be made based on various assumptions. Also, please note that this report does not cover overall projections, including factors not related to the earthquake.

- The March 11 earthquake can be broadly characterized as follows: 1) direct damage was severe, so 2) a vast area was affected indirectly; and 3) the risk of prolonged weakness in economic activity in increasing.

- Direct capital stock losses have far surpassed those from the Hanshin-Awaji Earthquake (or Kobe Earthquake) in 1995, with damages exceeding JPY20 trillion in the 13 most impacted prefectures. Of that, private sector businesses suffered approximately JPY8 trillion in damages.

- In addition to losses to business facilities, the indirect effects from restricted supplies of electric power and supply chain disruptions will weigh heavily on nationwide GDP through the middle of the year. At the same time, there is still room to avert such a consequence through substitute production and adjustments to electric power supply and demand. The current downturn could possibly be minimized. Japan’s economy could even make an early return to positive growth.

- Our risk scenario involves a delayed resolution to the nuclear reactor crisis and restricted electric power supplies continuing to cause production to stall for an extended time. This scenario bears close watching.

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1．The Economic Impact of the Great Eastern Japan Earthquake

（1）Three Characteristics of the March 11 Earthquake From an economic perspective, the impact from the natural disaster can be classified into two categories—direct damage or impact of stock losses including business facilities, social infrastructure, buildings, and residences, and indirect damage or impact of flow losses including subsequent weakened economic activity. (See Cabinet Office Economic and Social Research Institute What are the Economic Losses Caused by Catastrophic Disaster?, ESRI Discussion Paper Series No. 177, 2007.) Compared to large-scale earthquakes of the past, we note three points about the March 11 temblor. Severe direct damage was wrought by an earthquake of unparalleled proportion and the resultant tsunamis, and the indirect adverse impacts in the destruction area have been emerging day by day. Further, compounded with the accident at the Fukushima nuclear reactor triggered by the earthquake and with parts and materials producers concentrated in the devastated area, the scope of indirect damage has been vast and there is an increasing risk of prolonged weak economic activity (Table 1).

Production Demand Scope

① Severe direct damageMajor

earthquake andhuge tsunami

● Widespread stalling of productionactivity due to capital stock losses

● Big plunge in domestic demand, including privateconsumption, residential investment and capital expendituresdue to sudden changes in consumer and business sentiment●Export decline and increase in imports of substitute goodsdue to sudden drop in domestic supply capacity

● Disaster area

② Vast indirectly-affected areasHuge tsunamiand nuclear

reactor accident

● Further stalling of production activitydue to restricted electric power supply●Production bottlenecks and widespreadstalling of production activity due todisruptions in supply chain (supplynetwork) and transportation, distributionnetworks

●Widespread decline in domestic demand due to changes inconsumer, business sentiment outside of disaster-strickenarea● Decline in additional exports and increase in substitutegoods like fuel due to decline in domestic supply capacityoutside of disaster-stricken area

● Tohoku Electric,TEPCO service areasoutside disaster zone

● Nationwide

③ Increasing risk of prolonged weakeconomic activity

Nuclear reactoraccident

● Possibility of extended stalling ofproduction activities due to lingeringconcerns about continued electricityshortages and restricted electric powersupply

●Possible delays in restart of forward-looking consumptionand investment activities, export recovery and emergence ofpotential reconstruction demand as uncertainties about futureare not dispelled●Drafting, implementation of public reconstruction measurescould be delayed as multiple responses needed at same time

● Nationwide

Source: Compiled by BTMU Economic Research Office from various materials.

Table 1: Economic Impacts of March 11 Earthquake

Characteristic Main causeMain economic impact predicted

First, we address the primary characteristic––the severe direct damage. As a reference, the Hanshin-Awaji Earthquake that struck in January 1995 is estimated to have caused approximately JPY10-13 trillion of direct damage (JPY20 trillion including indirect damage, see Table 2), but it is already fairly certain that the costs of the March 11 earthquake will exceed those costs. The real GDP of Hyogo Prefecture, which bore the brunt of the January 1995 earthquake, fell by an annualized -4.0% QoQ in Jan-Mar 1995 (Figure 1). The March 11 earthquake, which has caused more severe damage than the Hanshin-Awaji Earthquake, will very likely result in even greater drops for production activity, demand, and real GDP growth.

Also, the area that was directly damaged by the March earthquake, including areas struck by the tsunami, was extremely vast in scope, stretching from the Tohoku Region down to the northern Kanto Region. (According to police reports, even Hokkaido, Mie, and Kochi prefectures suffered destruction.) The three prefectures in which damage was most concentrated––Iwate, Miyagi, and Fukushima prefectures––together with the next three––Ibaragi, Tochigi, and Chiba prefectures––comprise 11.8% of the nation’s real GDP (FY07 figures). Hyogo and Osaka prefectures, which bore the brunt of the 1995 Kobe Earthquake, comprised 12.1% of Japan’s GDP (FY94 figures). In terms of real GDP, the two

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regions were about the same scale (Figure 2). But together with the prefectures that experienced severe localized damage––Hokkaido, Aomori, Akita, Yamagata, Gunma, Saitama, and Kanagawa prefectures––the areas that suffered damage in the March 11 earthquake comprises 29.3% of Japan’s real GDP. This is 1.7 times the size of Tokyo in GDP terms. Japan’s overall economy grew an annualized +3.4% QoQ in Jan-Mar 1995 when the Kobe Earthquake struck (Figure 1), and the worst effects of the earthquake appear to have been limited to the disaster zone. On the other hand, the direct damage from the March 2011 earthquake has been more severe and the scope of destruction wider. Thus, the drops in production and demand from the recent earthquake (the indirect damage in the disaster zone) are very likely to appear in nationwide macro statistics and figures.

Hyogo PrefectureEstimate

Toyoda-KochiEstimate

Toyoda-KochiEstimate

Hanshin-Awaji GreatEarthquake Survey Report

and Editing CommitteeEstimate

Total approx JPY9.268 trn JPY13.2682 trn JPY7.2271 trn (1 yr) JPY1.8790 trn (2 yrs)

Buildings approx JPY5.8 trn

Railways approx JPY343.9 bn

Highways approx JPY550 bn

Public civil engineering projects approx JPY296.1 bn

Ports approx JPY1.0 trn

Reclaimed land area approx JPY6.4 bn

Educational facilities approx JPY335.2 bn

Agriculture-, forestry-, and fishery-related areas approx JPY118.1 bn

Healthcare, welfare facilities approx JPY173.3 bn

Waste treatment, sewage treatment facilities approx JPY4.4 bn

Waterway facilities approx JPY54.1 bn

Gas, electric approx JPY420.0 bn

Communications, broadcasting facilities approx JPY120.2 bn

Commercial-related approx JPY630.0 bn

Other public facilities, etc. approx JPY75.1 bnNotes 1. Hyogo Prefecture Estimate is from Hanshin-Awaji Great Earthquake Reconstruction Status Report released April 5, 1995.　　　　2. Toyoda-Kochi Estimate is from Estimation of Economic Damages in the Industrial Sector by the Great Hanshin-Awaji Earthquake ( Kokumin Keizai　　　　Zasshi, 1997), written by the two researchers.　　　　3. Hanshin-Awaji Great Earthquake Survey Report and Editing Committee Estimate is from Hanshin-Awaji Great Earthquake Survey Report (1998),　　　　written by committee.Source: Compiled by BTMU Economic Research Office from Hyogo Prefecture, Toyoda-Kochi, and Hanshin-Awaji Great Earthquake Survey Report and Editing Committee materials.

Table 2: Hanshin-Awaji Great Earthquake Damage Costs Direct Damage Costs

―

Indirect Damage Costs

― ―

-20

-10

0

10

20

30

40

94 95 96 （Year）

External demand, etc.Public demandInventory investmentCapital expendituresResidential investmentPrivate consumptionReal GDP

Source: Compiled by BTMU Economic Research Office from Hyogo Prefecture

Nationwidereal GDP

（QoQ annualized change, %）

Figure 1: Hyogo Prefecture Real GDP, Before and After Kobe Earthquake

1994

0

5

10

15

20

25

30

被災3県 被災6県 被災13道県

東日本大震災 東京都 阪神・淡路大震災

Note: Hanshin-Awaji Great Earthquake indicates Hyogo and Osaka prefectures combined (FY94).Source: Compiled by BTMU Economic Research Office from Cabinet Office materials.

（Share of nationwide GDP, %）

Figure 2: Real GDP of Disaster-Struck Area (FY07)

Great Eastern Japan Earthquake

Three most severelydamaged prefectures

Six most damagedprefectures

Thirteen mostdamagedprefectures Hanshin-Awaji

GreatEarthquake

Tokyo

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The second characteristic of the March 11 earthquake is the vast scope of indirect impact due to the massive tsunamis and the nuclear reactor crisis, both triggered by the quake. In fact, power supply capacity by both Tohoku Electric Power Company and Tokyo Electric Power Company (commonly known as TEPCO) plunged immediately after the earthquake, and the suppliers have been forced to seek and implement planned power outages in their service areas. The Tohoku Region, particularly Fukushima Prefecture, has long produced large amounts of electric power, and this has exacerbated the spread of the adverse impacts. (While only 6.2% of nationwide production originated in the Tohoku Region in 2005, the region produced 14.0% of the nation’s electric power. See Figure 3.) Of course, curtailed power supply will weigh on economic activity for the users of electric power—businesses and households––and industries with high electricity input ratios (Coal, petroleum and natural gas, Sewerage/waste treatment facilities, Chemical-based products, Pulp/paper/paper processed goods, etc., industries) are facing a difficult path (Figure 4). Further, as noted above, because the area of devastation is so vast, the range of industries adversely affected has been broader. Obviously, the oil and coal product processing (48.2% nationwide share in FY07), agriculture, forestry, and fisheries (43.9%), and food production (36.8%) industries in the 13 prefectures that suffered damage on March 11 all comprise high shares of those industries nationwide. But the nationwide shares of all industries (except for textile manufacturing) in the 13 prefectures that suffered damage in the recent quake far exceed the shares of those industries in Hyogo and Osaka prefectures at the time of the Hanshin-Awaji Earthquake (Figure 5). It is no surprise that the nationwide supply chain (supply network) has been chaotic and become less functional, and although transportation and logistics networks are being repaired（Note 1）, it is very likely that bottlenecks and stalling will continue to occur in economic activity around the country, even beyond the damaged areas.

(Note 1) According to the Ministry of Land, Infrastructure, Transport, and Tourism’s Transportation Restoration Status

Report, 100% of highways, 99% of national roads, 100% of airports, and 90% of ordinary rail lines (87% including sections partially closed or suspended due to aftershocks), 83% of Shinkansen lines (74% including sections partially closed or suspended due to aftershocks) are now operational (all for general public use, as of 10am April 19). Further, the April 7 Nikkei reported that large-scale retailer distribution systems in the Tohoku Region have been completely restored by using new logistics centers and increasing the frequency of deliveries. However, it will still be some time before logistics systems are completely repaired, and reconstruction activities appear to still be lagging, such as on small roads other than those that are parts of main arteries.

0

5

10

15

20

25

30

35

40

45

北海道 東北 関東 中部 近畿 中国 四国 九州 沖縄

Electric Power Production ValueTotal Production Value

Source: Compiled by BTMU Economic Research Office from METI data.

（Share of nationwide total, %）

Figure 3: Electric Power Production Value and TotalProduction, by Region (2005)

Hokkaido Tohoku OkinawaKyushuShikokuChugokuKinkiChubuKanto

0

1

2

3

4

5

6

7

石炭・原油・

天然ガス

水道・

廃棄物処理

化学基礎製品

パルプ・紙・

紙加工品

電力

鉱業

窯業・土石製品

非鉄金属

鉄鋼

繊維工業製品

（%）

Note: Electric Power Input Ratio divides electric power input volume by domesticproduction, for each industry.Source: Compiled by BTMU Economic Research Office from METI data.

Figure 4: Electric Power Input Ratio, by Industry　　　　(2009, top 10 industries out of 53)

Coal,petroleumand naturalgas

Sewerage/wastetreatmentfacilities

Chemical-basedmanufacturedgoods

Pulp,paper,Paperprocessed

Electricpower

Mining Ceramicsandpotterygoods

Non-steel

Steel Textilegoods

5

0

5

10

15

20

25

30

35

40

45

50

Agriculture, forestry, and fisheries

MiningFood stuffs

TextilesPulp, paper

Chemicals

Oil, coal products

Ceramics, pottery products

Primary metals

Metallic goods

General machinery

Electric machinery

Transport machinery

Precision machinery

Other manufacturers

Construction industry

Electric, gas, water

Wholesale, retail

Financial, insurance

Real estate

Transport, communications

ServicesElectricity, gas, water (govt svcs)

Government services

Public sector

Household non-profits

13 mostdamagedprefectures(excl top 6)

Six mostdamagedprefectures(excl top 3)

Three mostseverely-damagedprefectures

HyogoPrefecture +OsakaPrefecture (end-94)HyogoPrefecture (end-94)

Figure 5: Nominal GDP in Prefectures Damaged by March 11 Earthquake,by Economic Activity (FY07)

（Share of nationwide total, %）

Source: Compiled by BTMU Economic Research Office from Cabinet Office statistics.

The third characteristic of the March 11 earthquake is the increasing risk of weak economic activity over the long term. As noted above, although Tohoku Electric and TEPCO sought and implemented planned power outages in service areas from shortly after the earthquake, on April 8 TEPCO announced that it would no longer implement planned outages in principle. The same day, Tohoku Electric announced that planned outages would probably not be necessary for the time being. TEPCO also said that it hopes to continue to not implement the power outages through the summer months. Thus, the sense of a power supply shortage will inevitably heighten through the summer, when demand for air conditioning increases, and at the very least, concerns about reintroducing planned outages and supply restrictions cannot be written off. Furthermore, avoiding planned outages over the summer is based on the assumption that economic entities can adequately cut their own usage. Either way, the electric power issue will continue to hold economic activity down to low levels. This report examines risk scenarios at the end, and we think that strong caution remains warranted regarding Japan’s economy falling into a state in which there are few opportunities to revive.

（2）Calculating the Costs of Direct Damage

Here, in order to begin to get a quantitative grasp of the economic impact of the March 11 earthquake, we attempt to calculate the cost of direct damage in terms of the cost of capital stock losses in the disaster region. In order to do so, we first need the existing volume of capital stock on both prefectural and regional levels. Unfortunately, no such data is available publicly in Japan. We therefore extracted private business capital expenditures, residential investment, public investment (public sector gross fixed capital formation) from prefectural GDP data, then calculated the share for each prefecture after aggregating the flow investment value for as far back as data has been tracked, since FY55 (Note 2). Using this ratio, we distributed the value of capital stock for the entire nation at the end of every year over all prefectures.

(Note 2) Although each prefecture’s share has fluctuated considerably due to the timing of beginning aggregation, in terms of the data needed for this analysis––from FY94 onward––private business, residential, and public capital stocks have been extremely stable.

The calculation shows that, in the 13 prefectures that experienced damage in the March 11 earthquake, private business facilities stocks comprised 28.4% of the national total, while residential stock comprised 35.1%, and public stock 33.5% (as of end-2009). The capital stock of the 13 prefectures that

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suffered damage comprised 31.6% of the nation’s capital stock (Figure 6). Of this, the most severely affected prefectures, Iwate, Miyagi, and Fukushima, together account for 4.2% of Japan’s business facilities stock, 4.0% of residential stock, and 5.3% of public stock. The three prefectures’ ratio of overall capital stock was 4.6%, with a fairly large relative weighting for public capital stock. The six most damaged prefectures—Iwate, Miyagi, and Fukushima, plus Ibaragi, Tochigi, and Chiba––together accounted for 11.8% of the nation’s business facilities stock, 13.1% of residential stock, and 13.0% of public stock. The six prefectures’ ratio of overall capital stock was 12.5%. These figures are roughly on par with the levels of Hyogo and Osaka prefectures as of the end of 1994. Hyogo and Osaka prefectures comprised 12.3% of the country’s business facilities stock, 10.1% of residential stock, 9.9% of public stock, and 11.0% of capital stock overall.

0

10

20

30

40

50

民間企業設備ストック 住宅ストック 公的資本ストック 資本ストック全体

被災3県 被災6県（除く被災3県）

被災13道県（除く被災6県） 兵庫県（1994年末）

兵庫県＋大阪府（94年末）

Source: Compiled by BTMU Economic Research Office from Cabinet Office statistics.

Figure 6: Capital Stock in March 11 Disaster Region (as of end-2009)

（Nationwide share, %）

Private business facilities stock Residential stock Public capital stock Capital stock overall

13 most damaged prefectures (excl top 6) Hyogo Prefecture (end-94)

Hyogo Prefecture + Osaka Prefecture (end-94)

Six most damaged prefectures (excl top 3)Three most severely-damaged prefectures

We see that the capital losses in the three most severely-damaged prefectures were by far the biggest when using the Cabinet Office’s loss rate (Note 3) to assess the capital stock losses by prefecture and type (Figure 7). According to these figures, business facility and public capital stock losses in the three most severely-damaged prefectures were nearly JPY6 trillion and residential stock losses were JPY2.5 trillion. All together, capital stock losses in those three prefectures totaled more than JPY14 trillion. Furthermore, the 13 prefectures that suffered damage were hit by more than JPY8 trillion of business facilities and public stock losses as well as JPY4 trillion of residential stock losses, totaling more than JPY20 trillion. Compared to the direct loss amounts from the Kobe Earthquake, estimated at approximately JPY10-13 trillion, the March 11 earthquake resulted in losses 1.5 to 2 times greater.

(Note 3) Together with the March Monthly Economic Report, the Cabinet Office released estimates of direct damage amounts. The estimates covered seven prefectures: Hokkaido, Aomori, Iwate, Miyagi, Fukushima, Ibaragi, and Chiba. The report covered private business facilities, residences, electricity/gas/sewerage equipment, social infrastructure (roads, ports, airports, etc.), and other (urban parks, etc.). The total damage estimates were approximately JPY16-25 trillion of capital stock losses (approximately JPY14-23 trillion for Iwate, Miyagi, and Fukushima prefectures alone), and of that, damage to business facilities totaled JPY9-16 trillion. At the same time, estimates of stock total value in the seven prefectures and three most severely damaged prefectures were also shown, so this report used the inverse of the loss rate (loss value divided by stock total value) and took the average of the highest and lowest figures. In the most severely damaged three prefectures, the loss rate was 26% (the same rates for private business facilities, residences, and public capital stock), and 2% in the other ten prefectures. (Incidentally, the loss rate was 23% in Hyogo Prefecture after the 1995 Hanshin-Awaji Earthquake.)

7

0

5

10

15

20

25

民間企業設備ストック 住宅ストック 公的資本ストック 資本ストック全体

（JPY trn）

被災13道県（除く被災6県）

被災6県（除く被災3県）

被災3県

Source: Compiled by BTMU Economic Research Office from Cabinet Office statistics.

Private business facilities stock Residential stock Public capital stock Capital stock overall

Three most severely-damaged prefectures

Six most damaged prefectures (excl top 3)

13 most damaged prefectures (excl top 6)

Figure 7: Capital Stock Losses in March 11 Disaster Region

2． Economic Impact Caused by the Great Eastern Japan Earthquake

（1）The Impact of Capital Stock Damage (Direct Damage) on Production (GDP)

As noted above, the direct losses stemming from the March 11 earthquake––that is, the value of capital stock losses in the 13 prefectures that suffered damage––have been calculated at more than JPY20 trillion. Of that, private business production activity-related facilities or capital stock totaled JPY8.2 trillion. We calculate the impact on GDP compared to prior to the earthquake (the indirect damage in the disaster region) by multiplying this by the capital share divided by the capital coefficient (Note 4) .The result is a JPY1.9 trillion hit to GDP, and if that entire amount is absorbed by June, nationwide GDP will decline -0.4% QoQ in Jan-Mar (23% of the Jan-Mar quarter occurred after March 11), while Apr-Jun nationwide GDP will fall -1.3% QoQ. We calculate that the annualized downward pressure will be -1.5% for Jan-Mar and -4.9% for Apr-Jun (see Figure 8). Meanwhile, from Jul-Sept, private business stock losses will begin to recover and we have calculated the impact assuming that these stocks will take two years to return to previous levels. (Capital stocks are anticipated to accelerate in the first four quarters and thereafter decelerate. See Figure 8.) As a result, we project a positive contribution of about 1% annualized QoQ each quarter.

(Note 4) Assuming the general Cobb-Douglas production function Y= ALαK(1-α) ｛however, Y is GDP, L is labor input, α is labor distribution ratio, and K is private business facilities stock, (1-α) is the capital distribution ratio｝, to seek the partial differential for K

∂Y/∂K＝ALα(1-α)K(1-α)-1

＝(1-α)A LαK(1-α)／K ＝(1-α)Y／K ＝(1-α)／K/Y｛K/Y is the capital coefficient｝

Therefore, ∂Y＝(1-α)／K/Y･∂K. α and K/Y are calculated using FY09 actual figures, including the meaning of utilization rate adjustments, and ∂K＝- JPY8.2 trillion. Note that the calculations in this report do not consider the impact on prices of goods from the earthquake, and the nominal and actual impacts on GDP have not been explicitly separated (same below).

8

-3

-2

-1

0

1

2

11 12 13 (Year)

（JPY trn）

-6

-4

-2

0

2

4

Vs pre-March 11 earthquake, amount of drop (left axis)

Contribution to nationwide GDP (right axis)

Source: Compiled by BTMU Economic Research Office from Cabinet Office statistics.

Figure 8: Impact of Private Business Losses on Production (GDP)（QoQ annualized, %）

2011

Further, in the Bank of Japan’s March Tankan survey Business Conditions Before and After the Tohoku-Pacific Ocean Earthquake reference data released April 4, responses collected after the earthquake (March 12-31) show that the number of companies describing the outlook for business conditions as ‘unfavorable’ exceeded the number of companies describing actual (current) business conditions as ‘unfavorable’ by 4% (enterprises across all industries and all sizes nationwide, excluding financial institutions, Table 3). The municipalities that have been significantly damaged by the earthquake (the cities, towns, and villages labeled by the Prime Minister’s disaster task force as being significantly damaged in a press release dated March 31, ‘Regions Severely Damaged’––16 in Iwate Prefecture, 34 in Miyagi Prefecture, 10 in Fukushima Prefecture, and nine in Ibaragi Prefecture––and where the Disaster Relief Act applies) are estimated to have suffered losses five times greater, meaning a -20.0% hit to GDP. Furthermore, municipalities in six other damaged prefectures will likely see GDP impacted by -4%, and seven other prefectures (Hokkaido, Aomori, Akita, Yamagata, Gunma, Saitama, and Kanagawa) will suffer a hit to GDP of -3.6%, or 0.9 times the above figure. Weighting the municipalities (because GDP data is not available for individual municipalities in most cases, we used ‘number of workers per workplace’) to aggregate GDP loss amounts, the three most severely-damaged prefectures will cause a loss of -0.5% QoQ annualized for the nation’s GDP in Jan-Mar and an annualized -2.1% QoQ in Apr-Jun. The six most damaged prefectures will be responsible for a -0.9% QoQ annualized loss to the nation’s GDP in Jan-Mar and -3.7% QoQ annualized in Apr-Jun, while the 13 most affected prefectures together will have a negative contribution of -1.5%QoQ annualized in Jan-Mar and -6.1% QoQ annualized in Apr-Jun (Figure 9). Also, assuming that the scale of GDP losses in the affected areas will shrink in Jul-Sept (going by the same schedule in the above calculation), we have calculated that the 13 most affected prefectures will make a 1.0% average positive contribution. This yields roughly the same result as the approach described earlier, based on private business facilities stock losses. In closer detail, while the size of the recent drop in GDP in the three most severely-damaged prefectures is striking in comparison to the size of the original economy (Figures 2, 9), the fact that the devastation was so widespread has also made the drop bigger.

9

Largeenterprises

Medium-sized

enterprises

Smallenterprises All Large

enterprises

Medium-sized

enterprises

Smallenterprises All Large

enterprises

Medium-sized

enterprises

Smallenterprises All

Favorable 70 48 87 205 64 73 77 213 133 120 165 418

Not so favorable 250 182 236 667 213 273 470 957 463 455 706 1,624

Unfavorable 48 69 114 230 41 81 224 346 89 150 337 576

Total 367 298 437 1,102 318 427 771 1,516 685 725 1,208 2,618

Largeenterprises

Medium-sized

enterprises

Smallenterprises All Large

enterprises

Medium-sized

enterprises

Smallenterprises All Large

enterprises

Medium-sized

enterprises

Smallenterprises All

Favorable 48 33 52 133 35 43 46 124 83 75 99 257

Not so favorable 264 191 253 708 235 282 455 972 500 473 708 1,680

Unfavorable 55 75 131 261 48 102 270 420 103 177 401 681

Total 367 298 437 1,102 318 427 771 1,516 685 725 1,208 2,618

Largeenterprises

Medium-sized

enterprises

Smallenterprises All Large

enterprises

Medium-sized

enterprises

Smallenterprises All Large

enterprises

Medium-sized

enterprises

Smallenterprises All

Favorable -6.0 -5.0 -8.0 -6.5 -9.0 -7.0 -4.0 -5.9 -7.4 -6.2 -5.4 -6.2

Not so favorable 4.0 3.0 4.0 3.7 7.0 2.0 -2.0 1.0 5.4 2.4 0.2 2.2

Unfavorable 2.0 2.0 4.0 2.8 2.0 5.0 6.0 4.9 2.0 3.8 5.3 4.0Note: % Change is subtracting 'Actual' responses from 'Future' responses for each response and dividing by total number of responses.

Source: Compiled by BTMU Economic Research Office from Cabinet Office statistics. Source: Compiled by BTMU Economic Research Office from BoJ data.

All industries

Forecast assessment

Actual assessment

% Change

Table 3: Business Conditions Assessments in BoJ March Tankan Reference Data:Business Conditions Before and After the Tohoku-Pacific Ocean Earthquake

Manufacturers Non-manufacturers

Manufacturers Non-manufacturers

Manufacturers Non-manufacturers

(No. of enterprises responding)All industries

All industries

-8

-6

-4

-2

0

2

4

11 12 13 （Year）

13 most damaged prefectures (excl top 6)

Six most damaged prefectures (excl top 3)

Three most severely-damaged prefectures

Total of top 13 damaged prefectures

Source: Compiled by BTMU Economic Research Office from MIC, Cabinet Office statistics.

Figure 9: Impact of GDP Decline in Disaster-Stricken Region on Nationwide GDP（QoQ annualized, %）

2011

（2）Impact of Electricity Supply Restrictions on Production (GDP)

Next, we calculated the degree of indirect adverse impacts from restrictions to electric power supply (outside the areas that suffered direct damage from the earthquake).

According to TEPCO, as of March 24, although supply capacity had recovered from the approximately 31 million kW level immediately following the earthquake, it still stood at only 36.5 million kW, -2.1% below demand of 37.29 kW that day (Table 4). (This excludes hydroelectric power. Supply capacity prior to the earthquake was 52 million kW.) Extrapolating this over the entire quarter (23% of Jan-Mar days fell after March 11), there was a -0.5% supply shortfall in Jan-Mar. For Apr-Jun, supply capacity averaged 38.81 million kW through April 8 (TEPCO figures), when TEPCO announced that it would no longer implement planned outages. METI has calculated that demand will peak at 41 million kW (March 25 METI press release Forecast and Measures for Future Electricity Supply and Demand in

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TEPCO Areas). We think this calculation should consider that electric power supply capacity will not be a problem in March or June, when demand falls, and with the -5.3% shortfall over the first eight days of April, on average the Apr-Jun quarter will have a shortfall -0.5%. This is included in the assumption terms. Furthermore, based on the projection that maximum electric power supply volume will hit 55 million kW between the second half of July and the first half of September (according to an April 15 TEPCO press release) when demand is highest, even if TEPCO boosts supply to its projected supply capacity of 52 million kW through the end of July (an increase of +5.5 million kW from 46.5 million kW as of March 25), this would still be a shortfall of -5.5%. Also, because supply capacity will once again decline to 50.7 million kW at the end of August, the Jul-Sept shortfall will be -4.4% on average. The circumstances are largely the same in the Tohoku Electric service area. According to a Tohoku Electric press release dated March 15, supply-demand projections (March 16-18) showed that supply capacity was 9.7 million kW. On April 15, the company announced that August supply capacity was projected at 12.1 million kW, and the maximum demand projection was 13 million kW to 13.8 million kW (Figure 4). Based on this, we have added the following assumptions to our calculation––that from March 11 to the end of April, supply would be restricted by -7.6% (by quarterly average, -1.8% for Jan-Mar and -2.5% for Apr-Jun) and by -9.7% from the second half of July to the first half of September (a quarterly average of -6.5%).

March (after earthquake) April May June July August September

3,729 4,100 5,500 5,500 5,500

Mar 24 actual

METI projection based onMar 2010 actual figuresand factoring in Mar 11earthquake

3,650 3,881 5,200 5,135 5,070

Mar 24 actual (exclhydroelectric plants)

Apr 1-8 (date ofannouncement thatplanned outages would nolonger be implemented)avg daily forecast byTEPCO

End-July projection byTEPCO

Average of TEPCO end-July and end-Augustprojections

End-August projection byTEPCO

versus demand（％） -2.1 -5.3 -5.5 -6.6 -7.8

0.23 0.27 0.50 1.00 0.50

-0.5

1,050 1,050 1,340 1,340 1,340

Mar 16-18 Tohoku Electricprojection

Assumption same asMarch

970 970 1,210 1,210 1,210

Mar 16-18 Tohoku Electricprojection

Assumption same asMarch

versus demand（％） -7.6 -7.6 -9.7 -9.7 -9.7

0.23 1.00 0.5 1.0 0.5

-1.8Source: Compiled by BTMU Economic Research Office from METI, TEPCO, and Tohoku Electric materials.

Quarterly average -2.5 -6.5

Supply amount (mn kW)Summer projection by Tohoku Electric

Weighted by number ofdays in month

Demand (mn kW)

― ―

Avereage summer maximum projection by Tohoku Electric (13 mn - 13.8 mnkW)

-0.5 -4.4Quarterly average

Tohoku Electric Service Area

Table 4: Electric Power Demand Projections in TEPCO, Tohoku Electric Service Areas

TEPCO Service Area

Summer maximum projection by Tepco

― ―

Demand (generatorterminal dailymaximum,mn kW)

Supply amount (mn kW)

Weighted by number ofdays in month

The service areas of TEPCO (Ibaragi, Tochigi, Gunma, Saitama, Chiba, Tokyo, Kanagawa, and Yamanashi prefectures as well as Shizuoka prefecture east of Fuji River) and Tohoku Electric (Aomori, Iwate, Akita, Miyagi, Yamagata, Fukushima, and Niigata prefectures) account for 39% and 8%, respectively, of the nation’s real GDP (using FY07 figures). Extrapolating this, the contribution to nationwide GDP from the TEPCO service area will be -0.8% QoQ annualized in Jan-Mar, 0.0% QoQ annualized in Apr-Jun, and -6.0% QoQ annualized in Jul-Sept (Figure 10). We have calculated the total for both regions, including Tohoku Electric service areas (-0.6% QoQ annualized contribution in Jan-Mar, -0.3% in Apr-Jun, and -1.3% in Jul-Sep), to be negative contributions of -1.4% in Jan-Mar, -0.2% in Apr-Jun, and -7.3% in Jul-Sept (all GDP contribution figures quarter-on-quarter annualized).

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0

2

4

6

8

2011/1-3 4-6 7-9 10-12 (Yr/Mo)

Contribution to nationwide GDP from TEPCO service area

Contribution to nationwide GDP from Tohoku Electric serviceareaTotal

Source: Compiled by BTMU Economic Research Office from METI, TEPCO, Tohoku Electric materials, and CabinetOffice data.

Figure 10: Impact of Restricted Electric Power Supply on Production (GDP)（QoQ change annualized, %）

（3）Impact of Disrupted Supply Chain on Production (GDP)

Similarly, damage to the very complex nationwide supply chain has been a cause of the indirect adverse effects outside the disaster-stricken area. The Cabinet Office has compiled materials submitted from various ministries and agencies and released The Economic Effects of the Great Eastern Japan Earthquake on April 13. The report noted that automobile parts supplies remain unstable, and that if production recoveries lag at parts suppliers with strong market shares, production throughout the country could be affected (as of April 11). Also, the report addresses concerns about electronic machinery, noting that there are still numerous reports of stalled supplies of semiconductors and electronic parts from the disaster region (as of April 11).

In macro terms, the Tohoku Region produces as much as a total of JPY25 trillion in intermediate input goods and services like parts and materials (as of 2005). Then, of course besides the Tohoku Region, JPY5.5 trillion is input into Kanto production, and nearly JPY1.0 trillion in both Chubu and Kinki production (Figure 11). Kanto has a 2.8% degree of dependence on Tohoku intermediate goods, while Chubu has 1.4%, and Kinki 1.3%; these can also be described as the ratio of Tohoku-manufactured goods in intermediate input value.

If production of intermediate goods falls by the same degree as GDP decline in the disaster-stricken region and six prefectures of Tohoku, as calculated in section 2 (1), and supply is interrupted, then input nationwide would fall by –JPY1.0 trillion in Jan-Mar and –JPY3.3 trillion in Apr-Jun. A production bottleneck would arise（Note 5）. In terms of GDP scale, this would have a negative impact of -0.7% QoQ annualized and -2.4% QoQ annualized (Figure 12). Also, assuming that production in Tohoku and production of intermediate goods and services recovers from Jul-Sept, a slight boost to the nation’s GDP could be expected.

(Note 5) Because intermediate input goods and services production-input data needed for this calculation is not available for the 13 disaster-afflicted prefectures, we limited the coverage to those related to the six prefectures in the Tohoku Region. We also recalculated the production (GDP) rate of decline to reflect this. However, although the damage to private business facilities and the fall in GDP in Iwate, Miyagi, and Fukushima prefectures—where the earthquake damage was concentrated––have been great (see Figures 7 and 9), the Tohoku Region figures clearly include this. Also, the aforementioned Cabinet Office report The Economic Effects of the Great Eastern Japan Earthquake notes that production is expected to adjust in line with parts supply conditions (Automobiles, as of April 11), and calculates the production rate of decline at the input destination to be equal to the rate of decline of intermediate goods production and supply in the Tohoku Region. Note that by including the decline in production of inputs related to intra-Tohoku Region inputs, there may be some overlap in the 2 (1) calculation,

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but we have avoided over-adjusting. Meanwhile, we have not at all addressed the impact of bottlenecks arising from production declines due to curtailed electric supply as seen in 2 (2).

0

5

10

15

20

北海道 東北 関東 中部 近畿 中国 四国 九州 沖縄除く東北

（JPY trn）

0

25

50

75

100（%）

Input value (left axis)

Input ratio (right axis)

Source: Compiled by BTMU Economic Research Office from METI statistics.

Figure 11: Intermediate Goods and Services fromTohoku Region Input into Production, by Region (2005)

Hokkaido Tohoku Kanto Chubu KinkiChugoku Shikoku Kyushu Okinawa Excl.Tohoku

-3

-2

-1

0

1

11 12 13 （Year）

Source: Compiled by BTMU Economic Research Office from METI,Cabinet Office statistics.

（QoQ annualized, %）

Figure 12: Impact of Supply Chain Disruptions onNationwide Production (GDP)

2011

3．The Economic Impacts of the Great Eastern Japan Earthquake Summarized

（1）Economic Outlook from the Production Side

In Section 2 of this report, Economic Impact Caused by the Great Eastern Japan Earthquake, we calculated the impacts on production (GDP) by (1) private business facility losses; (2) restricted electric energy supply; and (3) disruptions to the supply chain. Then, extrapolating those impacts, we calculated that Jan-Mar nationwide GDP would be suppressed by an annualized -3.6% QoQ, and the negative contribution to GDP would increase in Apr-Jun to -7.6% QoQ annualized (Figure 13). A negative contribution of -6.9% QoQ annualized will persist in Jul-Sept, but thereafter we calculate there will be a string of positive contributions: +8.2% in Oct-Dec; +1.5% in Jan-Mar 2012; +2.0% in Apr-Jun 2012; +2.0% in Jul-Sept 2012; +1.5% in Oct-Dec 2012; +1.0% in Jan-Mar 2013, and +0.5% in Apr-Jun 2013 (all contribution figures quarter-on-quarter annualized). Also, applying those calculations to real GDP figures starting with Oct-Dec 2010, already released, in fiscal year terms the contribution to FY10 real GDP will be +2.7% YoY, -2.8% YoY in FY11, and +1.9% YoY in FY12. Overall, the economic outlook will likely be very severe, especially in the disaster area.

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-6

-4

-2

0

2

4

6

8

10

11 12 13 （Year）

（1）Impact from private sector business facilities losses

（2）Impact from restricted electricity supply

（3）Impact from supply chain disruptions

（1）～（3）Total

Note: Calculations of impact on nationwide GDP using various assumptions based on various data,materials.

Figure 13: Calculations of Economic Impact from March 11 Earthquake

（QoQ annualized, %）

2011

13

Meanwhile, because the scale of the direct damage following the recent earthquake has been so severe, the reconstruction process anticipated to start from the second half of this year is projected to at least produce considerable potential demand. Three separate supplementary budgets were passed in the ten months following the Kobe Earthquake in 1995, allocating more than JPY3 trillion for disaster rebuilding-related spending. According to Hyogo Prefecture GDP data, public demand increased for four straight quarters starting from Apr-Jun 1995, and resulted in a positive contribution of nearly +8% QoQ annualized to prefectural GDP, particularly in Apr-Jun and Jul-Sep (Figure 1). Furthermore, at the same time, reconstruction demand jumped in the private sector, with capital expenditures surging +71.1% QoQ in Apr-Jun and residential investment increasing for five straight quarters from that point onward (Note 6). Naturally, on the supply side as well, private business facilities also recovered steadily with the same timing. Further, by adding the effect from normalizing electric power supply and the supply chain, a recovery in the production process is more likely to put even more upward pressure on GDP.

(Note 6) However, according to nationwide GDP data, nationwide residential investment and capital expenditures did not rise on-quarter until Oct-Dec 1995 and Apr-Jun 1996, respectively. Residential investment declined everywhere except the Kinki Region and capital expenditures were weak overall in FY95 in particular. Just as the post-earthquake drops were limited to the disaster-stricken region as noted above, the boost in reconstruction demand in the private sector also appeared to be held to under a certain level.

Reviewing Figure 13 from a different angle, if many negative impacts actually occur, these will inevitably be because of damage to private business facilities in Apr-Jun, and electric power supply restrictions in Jul-Sept. Conversely, we think the possibility of avoiding significant negative growth could be lurking here––for example, should substitute production or external outsourcing structures be implemented quickly and compensate for a decline in production capacity caused by damage to facilities. If this could stanch the decline in production to half in the disaster-stricken regions, the disruption to the supply chain will be only mild and nationwide GDP will decline by less in Apr-Jun, by -3.9% QoQ annualized (Figure 14). Also, if measures are taken––like shifting hours of operation, introducing technological innovations, and implementing other effective measures to counter the electric power supply restrictions––and electric power supply and demand are balanced without hurting economic activity, then the -7.3% QoQ annualized downward push on GDP in Jul-Sept could disappear, and nationwide GDP could suddenly shift into positive territory, rising +1.8% QoQ. Both private and public sectors are working creatively and assiduously to find a desirable outcome.

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-4

-2

0

2

4

6

8

10

11 12 13 （Year）

（1）Impact from private business facilities losses

（2）Impact from electric power supply restrictions

（3） Impacts from disruptions to supply chain

（1）～（3）Total

Note: Calculations of impact on nationwide production (GDP) using various data and materials and based on various assumptions.Source: Compiled by BTMU Economic Research Office from various data and materials.

Figure 14: Economic Impacts from March 11 Earthquake(Assumptions: Production decline in disaster region halved through substitute production

and no electric power supply restrictions this summer)（QoQ annualized, %）

2011

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（2）Considering Risk Scenarios

On the other hand, we would like to consider and calculate the risk scenarios. We naturally think that resolving the nuclear reactor crisis and electric power supply issues hold the key here.

In section 2 (2) Impact of Electricity Supply Restrictions on Production (GDP) above, we calculated an assumption that TEPCO would be able to supply 50.7 million kW to 52 million kW of electricity against projected peak summertime demand of 55 million kW. This would be a shortfall of -4.4% against projected demand (Jul-Sept average). However, if summertime peak demand matches last year’s peak of 59.99 million kW (Note 7) and supply capacity is just 46.5 million kW (the estimate as of March 25), supply would fall short by -9.6% and -15.0% against demand respectively. In those cases, we conclude that nationwide GDP for Jul-Sept would fall -14.8% QoQ annualized and -22.2% QoQ annualized (see Figure 15). Further, if other nuclear reactors that were undamaged in the quake are tapped, then concerns about supplying power to other regions around the country could spread. Although there would be a sharp rebound of that degree in Oct-Dec, if supply capacity does not expand fast enough, then the winter months––when demand once again rises with heating use––would loom. Producers would be faced with power restrictions for a third time. This would give rise to concerns about excessive fluctuations and changes in economic activity. Either way, this continues to warrant watching as the biggest risk on the supply side.

(Note 7) Both the summertime demand projection (55 million kW) and last summer’s demand (59.9 million kW) are peak levels, and those levels would not be sustained all summer. However, we feel it is adequate to use past summertime production activity levels as the basis for planning scenarios.

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0

10

20

30

2011/1-3 4-6 7-9 10-12 （Yr/Mo）

Maximum summer demand: 55 mn kW －Supply: 50.7 mn - 52 mn kW

Maximum summer demand: 59.99 mn kW - Supply: 50.7 mn kW- 52 mn kW

Maximum summer demand: 59.99 mn kW - Supply: 46.5 mn kW

Source: Compiled by BTMU Economic Research Office from METI, TEPCO, Tohoku Electric materials, andCabinet Office data.

Figure 15: Impact of Restricted Electric Power Supply in TEPCO ServiceAreas on Nationwide Production (GDP), Under Various Assumptions

（QoQ annualized, %）

Yasuhiro Ishimaru (yasuhiro_ishimaru@mufg.jp)

June 3, 2011

This report is intended only for information purposes and shall not be construed as solicitation to take any action such as purchasing/selling/investing financial market products. In taking any action, each reader is requested to act on the basis of his or her own judgment. This report is based on information believed to be reliable, but we do not guarantee its accuracy. The contents of the report may be revised without advance notice. Also, this report is a literary work protected by the copyright act. No part of this report may be reproduced in any form without express statement of its source.

The Bank of Tokyo-Mitsubishi UFJ, Ltd.Economic Research Office

2-7-1, Marunouchi, Chiyoda-ku, Tokyo 100-8388, Japan