Provisional Analysis of the Tohoku-Kanto Earthquake Impact

◆Provisional analysis of the Tohoku-Kanto earthquake impact: Japan sustained an unprecedented blow from the Tohoku-Kanto Earthquake on 11 March. In this report, we provide an analysis of how Japan’s economy could be affected by this massive disaster. It goes without saying that the results of our analysis are provisional since the extent of damage is still unknown at the present. Given the risk that the adverse impact of the nuclear accident will increase, we do not rule out the possibility of Japan’s economy worsening beyond our assumptions for the time being.

◆Five factors to place downward pressure on real GDP in FY11: The current disaster is likely to place downward pressure on real GDP in five ways in FY11. The effects of (1) sluggish economic activity in the Tohoku region (provisional estimate of impact on FY11 real GDP: drag of 0.2%) and (2) the loss of production from scheduled power outages (drag of 0.2%) can be forecast to some degree. However, (3) the downswing of consumer spending resulting from the worsening of consumer confidence (drag of 0.2) is associated with many uncertainties, raising concern about an even greater downswing. Also, (4) a yen appreciation of Y5 against the dollar would reduce real GDP by nearly 0.1% in FY11 and 0.3% in FY12. Moreover, (5) the impact of further escalation of damage from the nuclear accident is beyond forecasting at the present moment. The combined total of (1) to (4) already suggests Japan’s real GDP could shrink by 0.7% or more in FY11. Depending on the degree of (5), Japan’s economy could worsen even further.

◆Reconstruction demand to support real GDP: In Jul-Sep 2011 and beyond, reconstruction demand is expected to support real GDP. At present, we anticipate reconstruction demand to boost real GDP 0.5% per year from FY11 to FY13. As a result, should the downside factors 1- 5 discussed above intensify no further, the net impact on real GDP may turn out to be relatively small (drag of around 0.2%) for the full year of FY11.

◆The direction of the nuclear accident deserves careful attention: The analysis offered in this report is provisional. We will continue to monitor developments of the nuclear accident as we endeavor to carefully ascertain the economic impact of this disaster.