Japan：Assessing the impact

l Global Research l Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2011 research.standardchartered.com Gerard Lyons, +44 20 7885 6988 Gerard.Lyons@sc.com Will Oswald, +65 6596 8258 Will.Oswald@sc.com Simon Wong, +852 3983 8559 Simon.Wong@sc.com Priya Narain Balchandani, +65 6596 8254 Priya.Balchandani@sc.com Raymond Chan, +65 6596 8650 Raymond.KY.Chan@sc.com Abah Ofon, +971 4 508 3738 Abah.Ofon@sc.com Ned Rumpeltin, +44 207 885 5558 Ned.Rumpeltin@sc.com Thomas Harr, +65 6596 8247 Thomas.Harr@sc.com Eddie Cheung, +852 3983 8566 Eddie.Cheung@sc.com “Life is the foremost of treasures. It is expounded that even the treasures of the entire major world system cannot equal the value of one’s body and life. Even the treasures that fill the major world system are no substitute for life.” The Gift of Rice Nichiren Daishonin (1222-1282) Special Report | 07:30 GMT 15 March 2011 Japan – Assessing the impact • This disaster is likely to have a V-shaped impact on the Japanese economy; we expect the economy to recover, but the initial cost could be considerable, if hard to quantify • If the damage were similar to the Kobe quake of 1995 it would cost about USD 60bn, but this estimate is likely to be a floor; the cost will be considerably higher given energy and supply-chain disruptions • The authorities have already provided ample liquidity; we expect them now to try and stabilise the JPY • Japan has large stocks of rice, although it is not known if these are affected; corn and soybean stores will be under greater pressure Summary At this stage, it is difficult to assess the economic impact of the 11 March earthquake in north eastern Japan. Assuming the same proportional cost of rebuilding relative to that region’s GDP contribution as in the Great Hanshin earthquake of 1995 (also known as the Kobe earthquake), the cost would be around 1% of Japan’s GDP, or USD 60bn. In terms of energy release, this earthquake was almost 2,000 times stronger than Kobe, but as the Sendai region is significantly different in structure to Kobe, this initial cost is an approximation. The Bank of Japan (BoJ) has already stepped in to provide liquidity support; we believe it will continue to do so. USD-JPY moved lower on Friday in anticipation of repatriation flows, particularly from insurance companies, but we expect the BoJ to be vigilant in preventing a sustained appreciation of the Japanese yen (JPY), especially so close to its all-time low of 79.75. While rebuilding costs will add to Japan’s government debt, at around 200% of GDP, a further 1% burden is unlikely to materially change the country’s debt dynamics, especially as not all costs will be borne by the government. The rise in JGB yields from the end of Q3-2010 to today, if sustained, would have the same impact in a single year than this one-off cost. We expect jet fuel and gasoil to be under increased pressure, and have revised our forecasts higher. Japan is a significant refinery market, and while South Korea can step in to fill the shortfall, its refineries are already running at around 90% capacity. Agriculture prices had already been trending downwards, and we believe this should be broadly sustained. However, Japan is the largest global importer of corn, representing 18% of global trade. Japanese stocks of corn and soybeans were already low, while those of rice were higher; it is not yet known whether agriculture stores were affected. Longer-term, rice production could be affected by the level of salt water, but with the planting season not due until May and salt-resistant varietals an option, the effect on rice is unclear. The regional impact is unlikely to be significant, given both the structure of Asia ex-Japan economies compared with 1995 and Japan’s smaller role. However, Japanese positioning in currencies such as the Australian dollar (AUD) and Brazilian real (BRL) is high via investment trusts. Special Report GR11MA | 15 March 2011 2 Economic impact Given the scale of the devastation, the near-term impact on Japan's economy should not be underestimated. That being said, Japan's economy has the ability to cope, and it will rebound. The boost from reconstruction will be huge. More worrying will be the cost of the reconstruction, as this will shed further doubt on the country's fiscal position. There may also be some impact on energy markets, given Japan's role as a refiner; we provide some initial estimates in this report. While there will be wider questions linked to nuclear energy safety, it would be premature to suggest that this will fundamentally change nuclear plans in Japan or elsewhere, or energy demand.