1

First take on the Japanese earthquakeFirst take on the Japanese earthquakeMain scenario: Short lived effects on financial markets and econMain scenario: Short lived effects on financial markets and economy but omy but

nuclear problems poses a big risk nuclear problems poses a big risk

2

Main scenario: Normal

hurricane/earthquake dynamics after all

� Kobe, 9-11 and Katrina did not cause permanent effects on production andfinancial 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.

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.

4

Scenarios for Japanese GDP

Index: 2000:1=100

Japan's catastrophe: GDP scenarios

Severe nuclear disasterNormal hurricane recovery

Pre-catastrophe forecast

Source: Cabinet Office, SEB

00 01 02 03 04 05 06 07 08 09 10 11 12

93

95

97

99

101

103

105

107

109

111

113

115

93

95

97

99

101

103

105

107

109

111

113

115

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 increaseimports 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

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

7

Contaminated areas at Chernobyl

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

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

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

Percent

Percent

US: ISM

Manufacturing

jan maj sep jan maj sep jan maj sep

94 95 96

45.0

47.5

50.0

52.5

55.0

57.5

60.0

45.0

47.5

50.0

52.5

55.0

57.5

60.0 Kobe

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

Japan USA Sweden Germany

Jan

94

Mar May Jul Sep Nov Jan

95

Mar May Jul Sep Nov

2

3

4

5

6

7

8

9

10

11

12

13

2

3

4

5

6

7

8

9

10

11

12

13 Kobe quake of 1995Central bank rates

FED ECB Japan

94 95 96 97

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

12

Nuclear risks make all the differenceIndex

Index

13

Japanese stock market declined after

Kobe

� In a long time downward trend

� Small impact on other countries

Stock markets

Nikkei 225 EMU STOXX SWE (AFGX) Dow Jones

January

95

February March April

75

80

85

90

95

100

105

110

Index 1995-01-16 = 100

75

80

85

90

95

100

105

110Kobe quake

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

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

Japan USA Sweden Germany

jan

01

mar maj jul sep nov jan

02

mar maj jul sep nov

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

9-11

Central bank rates

FED ECB Japan

00 01 02 03

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

9-11

16

Stocks remained in bear market for

another 1-1.5 years after 9-11

Stock markets

Nikkei 225 EMU STOXX SWE (AFGX) Dow Jones

jan

01

mar maj jul sep nov jan

02

mar maj jul sep nov

60

70

80

90

100

110

120

130

140

150

160

Index 1995-01-16 = 100

60

70

80

90

100

110

120

130

140

150

1609-11

17

US economy in slowdown phase before

Katrina

� Mixed impact on sentiment

US: ISM

Manufacturing Non-manufacturing

04 05 06 07

49

51

53

55

57

59

61

49

51

53

55

57

59

61Katrina

18

US rate tightening cycle not affected by

Katrina

Percent

19

Stock markets continued to rise after

Katrina

Stock markets

Nikkei 225 EMU STOXX SWE (AFGX) Dow Jones

jan

05

mar maj jul sep nov jan

06

mar maj jul sep nov

80

90

100

110

120

130

140

150

80

90

100

110

120

130

140

150Katrina

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

21

Japan second largest holder of US

Treasury securities

Proportion of total foreign holdings, %

Proportion of total foreign holdings, %

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

Purchases (LHS) Sales (LHS) Japan, Net purchases [ma 3] (RHS)

94 95 96

bill

ions

-5

-2

1

4

7

US

D (

bill

ion

s)

15

25

35

45

55