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					                                                               ING INVESTMENT MANAGEMENT

 March 2010

Japan Earthquake Impact Update                                 Effect on GDP growth
Short of a nuclear catastrophe, although the                   The most damaged areas of the disaster, mainly the
scars in the Tohoku region will never heal                     Tohoku region, represent around 4% of the economy, but
                                                               the electrical power supply shortage in Tokyo and
completely, we expect Japan to recover
                                                               disruptions to infrastructure and distribution will result in a
economically from the recent earthquake                        bigger loss than experienced during the earthquake in
disaster. However, reconstruction of the                       Kobe, a region that also accounted for around 4% of GDP.
damaged areas is estimated to be in the order of
                                                               Drawing a parallel with the Kobe Quake in 1995, GDP
US$200-300 billion.
                                                               after the initial downgrade quickly recovered as
                                                               production shifted and new plants were built. Given that
                                                               the Japanese output gap is still important (estimated at
The immediate impact of the disaster                           3%) this could well happen again this time.
On Friday, 11 March 2011, Japan suffered its worst post-
                                                               Despite the huge loss in human life, property, industry
war disaster when the biggest earthquake in the country’s
                                                               and the nuclear scare, Japan will recover. We expect the
history, at a magnitude of 9.0, struck near the east coast
                                                               impact on the economy to be highly negative for one to
of Honshu in the north, followed by a 15-metre tsunami
                                                               two quarters. However, during the next two quarters we
that destroyed many towns and villages in Miyagi
                                                               should start to see contributions from rapid rebuilding.
prefecture. More than 20,000 people have died or are still
missing. This tragedy was further compounded by
substantial damage to Tokyo Electric Power’s (TEPCO)           Impact on industry
nuclear reactors, located in Fukushima, one of the worst
                                                               The effects may well be felt outside the region through
hit areas. The earthquake and tsunami damage is
                                                               supply side disruptions. Production will decline due to the
estimated at US$200-300 billion.
                                                               fact that there will be ‘rolling blackouts’, whereby
Whilst the risk of a nuclear disaster has abated somewhat      Japanese regions will cut power supply in turns. There
as electric power has been restored at TEPCO’s nuclear         will also be disruption to gas and water supplies.
plant, the situation remains serious. Whereas the Kobe         Companies in many sectors are likely being forced to
quake did not involve the destruction of plants to generate    temporarily close their factories.
electricity, in this case, the quake has resulted in
                                                               Japan will have to import more conventional resources
substantial power shortages that will last several weeks, if
                                                               such as oil, thermal coal and natural gas to make up for
not months.
                                                               the shortfall in electricity generation. Imports of natural
Japan is a resource-poor country. It imports around 85%        gas and thermal coal for power generation and petroleum
of its energy use and depends on nuclear energy for            imports will therefore rise sharply.
about a 25% of its electricity. Out of Japan's 54 reactors,
                                                               However, while some industries will suffer shortages of
the two nuclear plants in the region represent 20% of total
                                                               parts produced in the Tohoku region, some companies
nuclear power in Japan and 6% of the overall power
                                                               have already started to shift production to other factories,
                                                               whether in the western part of Japan or to their overseas

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Rising Japanese overseas production has been an                                             Conclusion
increasing trend for more than a decade, as companies
take advantage of lower production costs and move                                           Whilst there may be structural problems within the
closer to countries where demand for their products                                         economy in the long term, such as its demographics,
continues to see strong growth. The earthquake is                                           lower domestic employment as more companies expand
expected to accelerate this trend.                                                          their overseas production bases and rising public sector
                                                                                            debt resulting from the rebuilding, the key point to focus
In the short term, there may be shortages such as                                           on is that, short of a nuclear disaster, on a one year view,
custom-made semiconductors for automobile companies,                                        we expect that Japan will have recovered economically
smart phone makers may not have enough LCD panels,                                          from this disaster.
and digital camera makers may run out of SLR lenses. In
addition, petrochemical companies may be affected by
the shortage of electric power, depending on plant
location. We expect sectors with high demand to be
construction and construction materials, followed by
household goods.

Financial support for Japan
It is also very encouraging that the entire world is helping
Japan get back on its feet. Not only are there volunteers
from around the globe, there was an immediate co-
ordinated G7 currency intervention to reverse yen
strength, after it spiked to 76 yen/US dollar on speculation
that Japanese insurance companies will be forced to
repatriate funds. We expect the losses for the insurance
companies to be very manageable, mainly because most
of the policies are reinsured abroad, there is a cap on the
maximum payout obligation per disaster, and the private
insurance companies have ample catastrophe loss

The Bank of Japan has acted immediately to provide
liquidity to the money market, and the government is                                        This information was provided by Miyuki Kashima, Head of Equities in
expected to set aside a separate budget for the                                             ING Investment Management, Japan.
reconstruction. Indeed, Kaoru Yosano, the country’s
minister for economic and fiscal policy, suggests that                                      The situation described in this document is subject to frequent changes
government spending will be more generous when                                              and our views can change accordingly. Certain statements contained in
compared with the Kobe earthquake reconstruction in                                         this document are statements of future expectations and other forward-
1995.                                                                                       looking statements. These expectations are based on INGIM’s current
                                                                                            views, assumptions or opinions and involving known and unknown risks
The Japanese stock market declined 10% over one week                                        and uncertainties. Views, opinions and estimates may change without
after the triple disaster. When nuclear crisis fears were at                                notice and are based on a number of assumptions which may or may
its peak, the market was down 20% intra-day from the 11                                     not eventuate or prove to be accurate. Actual results, performance or
March closing. There has been some stabilisation as                                         events may differ materially from those in such statements due to.
Japan’s nuclear situation has abated, with stock market                                     among other things, general economic, financial or political factors. We
performance improving. In the very short term, share                                        assume no obligation to update any information, including but not limited
                                                                                            to forward-looking information, contained in this document.
price volatility has meant that tactical trades have been
difficult to implement.

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