Economic Policy and condition after the great east Japan earthquake

Economic Policy and condition after the great east Japan earthquake Mr. Itsushi Tachi Senior Fellow, Economic & Social Research Institute Cabinet Office, Government of Japan Sources: National Policy Unit White Paper 2012

Ⅰ. Influence of the Earthquake

Ⅰ. Influence of the Earthquake 1 The Scale of The Great East Japan Earthquake Date: March 11 th, 2011 Devastated Area: From Hokkaido to Kanto region, Mainly Northeast Pacific region Number of Missing and Dead: Around 19,000 persons Damaged Stocks: Around 16~25 trillion yen* Around 16.9 trillion yen** *estimated by Cabinet Office, Economic Research Division **estimated by Cabinet Office, Disaster Management Division Features: Great Damage by Tsunami Supply Chain Disruption Electricity Constraint Close-up to next page Damage to Nuclear Power Plant Cabinet Office 2

Ⅰ. Influence of the Earthquake 2 The Damage of 3 Tohoku Prefectures Number of Missing and Dead in 3 Tohoku prefectures Kuji City Iwaizumi Town Hirono Town Noda Village Fudai Village Tanohata Village Miyako City Ishinomaki City Kesenmuma City Minami Sanriku Town Higashi Matsushijma City Matsushijma Town Rifu Town Shiogama City Fukushima Nuclear Power Plant Shinchi Town Soma City Minami Soma City Namie Town Okuma Town Futaba Town person(s) Yamada Town Otsuchi Town Sendai City Takajo City Natori City Iwanuma City Onagawa Town Tomioka Town Naraha Town Hirono Town Kamaishi City Ofunato City Watari Town Yamamoto Town Iwaki City Km Rikuzen-takata City Km Km Iwate Miyagi Fukushima Cabinet Office

Ⅰ. Influence of the Earthquake 3 Estimated Economic Damage of the Great East Japan Earthquake Damaged Stocks in Disaster Areas *estimated by the Cabinet Office of Japan(June 24,2011) Buildings, etc. (housing, offices, plants, machinery, etc.) approx. 10.4 trillion yen Lifeline utilities (water service, gas, electricity, and communication and broadcasting facilities approx. 1.3 trillion yen Social infrastructure (river, road, harbors, drainage, and airport, etc) approx. 2.2 trillion yen Others (including agriculture, forestry and fisheries) approx. 3.0 trillion yen Total approx. 16.9 trillion yen

Ⅰ. Influence of the Earthquake Foreign assistance and rescue efforts 4 Tremendous support from the international community Assistance offered from 163 countries and regions 43 international organizations (As of October 21 st 2011) US Navy/US Pacific Command (Operation Tomodachi) Rescue teams were dispatched from 29 countries, regions and international organizations (As of October 21 st 2011) Ministry of Defence Source: Ministry of Economy, Trade and Industry

Ⅰ. Influence of the Earthquake 5 Map of sites where rescue teams from foreign countries and regions operated Aomori Prefecture Hachinohe Outline of Operations of Rescue Teams from Foreign Countries and Regions Republic of Korea (12th - 23rd March) Team of 107 rescue members, 2 rescue dogs Singapore (13th - 15th March) Team of 5 rescue members, 5 rescue dogs Germany (14th - 15th March) Team of 41 rescue members, 3 rescue dogs Switzerland (14th - 16th March) Team of 27 rescue members, 9 rescue dogs U.S. (15th - 19th March)Team of 144 rescue members (including 12 rescue dogs) China (14th - 20th March) Team of 15 rescue members U.K. (15th - 17th March)Team of 77 rescue members (including 8 reporters), 2 rescue dogs Mexico (15th - 17th March) Team of 12 rescue members, 6 rescue dogs Fukushima Prefecture Iwate Prefecture Miyagi Prefecture Miyagi Prefecture Iwate Prefecture Kamaishi Ofunato Kesennuma Minami-Sanrikucho Ishinomaki Onagawacho Taiwan Australia (16th - 19th March) Team of 72 rescue members, 2 rescue dogs New Zealand (16th - 18th March) Team of 52 rescue workers France (16th - 23rd March)Team of 134 rescue members (including 11 Monacans) Taiwan (16th - 18th March) Team of 28 rescue members Russia (16th - 18th March) 75 rescue members in Team 1, 80 rescue members in Team 2 Mongolia (17th - 19th March) Team of 12 rescue members Turkey (20th March - 8th April) Team of 32 rescue members Indonesia (19th - 23rd March)Team of 11 rescue members, 4 members (official and medical staff) South Africa (19th - 25th March) Team of 45 rescue members Israel (29th March - 10th April) Team of 53 medical staff Iwanuma Shiogama Shichigahamamachi India (29th March - 6th April) Team of 46 relief members Jordan (25th April - 12th May) Team of 4 medical staff Soma Taiwan Fukushima Prefecture Source: Ministry of Foreign Affairs Sendai Tagajo Natori Taiwan Thailand (8th May 3rd June) Two teams of 2 medical staff Sri Lanka (12th May 1st June) Team of 15 recovery assistance staff (Staff of the Ministry of Disaster Management and Human Rights) Philippines (28th June - 11th July) Team of 3 medical staff

Ⅰ. Influence of the Earthquake Industrial Production& Exports 6 Source : Ministry of Economy, Trade and Industry Source : Ministry of Finance Soon after the earthquake, industrial production and exports declined sharply. Nowadays, industrial production is picking up as the reconstruction of supply chains has progressed. Exports exhibit signs of picking up.

Ⅰ. Influence of the Earthquake Consumer Activities 7 Source : Cabinet Office Monthly Economic Report Source : Cabinet Office Economic Watchers Survey. Due to a mood of self-restraint, a concern for lack of electricity and harmful rumors, the Great East Japan Earthquake and Fukushima nuclear plants accident have dampened consumer activities temporarily. Consumer activities are showing a V-shape recovery.

Ⅰ. Influence of the Earthquake Supply Chain Reconstruction: Production 8 Source : Ministry of Economy, Trade and Industry The Second Emergency Survey on the Actual Status of Industries after the Great East Japan Earthquake Production is steadily recovering toward pre-disaster levels in production bases directly and indirectly affected by the disaster.

Ⅰ. Influence of the Earthquake Supply Chain Reconstruction: Alternative Suppliers 9 Survey for Availability of Alternative suppliers: Secured Alternative Suppliers (Multiple answers) Survey for Availability of Alternative suppliers: No Alternative Suppliers (Multiple answers) As of Apr 2011 As of June 2011 As of Apr 2011 As of June 2011 100% 100% 80% 80% 60% 40% 20% 0% 65% 76% Almost secured alternative suppliers Material Industry(26) Processing Industry(21) 95% 100% Procurement from alternative supplier already started Material Industry(22) Processing Industry(17) 60% 40% 20% 0% 12% 48% No alternative supplier for some raw materials & components Material Industry(26) Processing Industry(21) 0% 18% No alternative supplier for some raw materials & components Material Industry(22) Processing Industry(17) *Reason of multiple answer: some companies use plural kinds of materials, component and parts. Source : Ministry of Economy, Trade and Industry The Second Emergency Survey on the Actual Status of Industries after the Great East Japan Earthquake Almost all manufacturers can secure availability of alternative suppliers. Supply chain reconstruction has been progressing rapidly.

Ⅰ. Influence of the Earthquake Impact to the production and sales by the shredding of Supply chain 10 (%) 100 90 80 70 60 50 40 30 20 10 0 Sales (All Industry) 3 12 3 (Prediction) (month) (year) 2011 12 Increased significantly Increased No Change Decreased Decreased significantly Impact of shredding of supply chain was resolved early in 2012. (Source) ANNUAL REPORT ON JAPANESE ECONOMY AND PUBLIC FINANCE 2012

Ⅰ. Influence of the Earthquake 11 100 90 80 70 60 50 40 30 20 10 0 (%) 100 90 80 70 60 50 40 30 20 10 0 Management Policies about Supplier of products and parts Management policies about regions of the suppliers by scale 57.6 61.7 51.3 43.3 19.9 17.3 24.1 29.0 Total 20 to 100 million yen 100 millon to 1 billion yen 1 billion yen or over Management policies about numbers of the suppliers in domestic (%) 0.1 0.3 0.4 0.2 2.1 0.9 3.1 7.6 84.6 85.6 83.8 79.7 12.2 12.2 12.1 12.3 0.9 1.1 0.6 0.0 Total 20 to 100 million yen 100 millon to 1 billion yen 1 billion yen or over No change of suppliers of products and parts because of present partnership and costs. There is plans to promote the diversity of supplier of products and parts. Decreased significantly Decreased No Change Increased Increased significantly (Source) ANNUAL REPORT ON JAPANESE ECONOMY AND PUBLIC FINANCE 2012

Ⅰ. Influence of the Earthquake Management Policies about Supply chain from overseas after the east Japan earthquake 12 (%) There is no need to raise the 100 percentage of supply chain from overseas. 90 80 70 60 50 40 30 20 10 0 62.0 13.6 4.8 1.3 7.6 Total 70.0 10.6 5.3 1.4 3.8 46.4 20.2 3.8 0.9 12.9 20 to 100 million yen 100 millon to 1 billion yen 41.4 20.1 3.3 1.3 20.5 1 billion yen or over There is no plan to change the percentage of supply chain from overseas. No change of suppliers of products and parts because of present partnership and costs. There is plans to begin supply chain from overseas. There is plans to increase the share of supply chain from overseas. Large companies plan to increase the share of supply chain from overseas. (Source) ANNUAL REPORT ON JAPANESE ECONOMY AND PUBLIC FINANCE 2012

Ⅰ. Influence of the Earthquake Management Policies about Supply chain from overseas after the east Japan earthquake 100 90 80 70 60 50 40 30 20 (%) By type of industry 82.1 39.3 23.8 4.3 2.5 62.8 14.5 13 There is no need to raise the percentage of supply chain from overseas. There is no plan to change the percentage of supply chain from overseas. No change of suppliers of products and parts because of present partnership and costs. There is plans to begin supply chain from overseas. 10 0 2.6 17.5 4.6 5.8 0.9 0.9 5.6 1.5 Construction Manufacturing Services There is plans to increase the share of supply chain from overseas. Manufacturing companies plan to increase the share of supply chain from overseas. (Source) ANNUAL REPORT ON JAPANESE ECONOMY AND PUBLIC FINANCE 2012

Ⅰ. Influence of the Earthquake 14 BASIC CONCEPT Basic Guidelines for Reconstruction in response to the Great East Japan Earthquake 'decided on July 29,2011( Basic Guidelines for Reconstruction in response to the Great East Japan Earthquake was decided by the Reconstruction Headquarters in response to the Great East Japan Earthquake on July 29,2011. The Guidelines constitute a blueprint for the Government and other actors to tackle numerous challenges in the reconstruction process. Main administrative actors are municipalities. The central government will present guidelines for reconstruction and provide support on finance, human resources, know-how and other aspects. Reinforce bonds (kizuna) with the international community; reconstruction open to the world TIMEFRAME 10 years for the reconstruction period (the first 5 years for the concentrated reconstruction period ) RESPONSE ACTIONS TO BE IMPLEMENTED Measures for the recovery and reconstruction of the disaster-afflicted areas and for the restoration of lives of affected people Measures to be taken in areas closely connected with disaster-afflicted areas; Measures for nationwide disaster prevention and reduction. BUDGET SCALE (estimation, national and local governments) 23 trillion in the next 10 years ( 19 trillion in the first 5 years) SUPPORT FOR RECONSTRUCTION Create system of Special Zone for Reconstruction Establish easy-to-use grant for implementation of reconstruction plans formulated by local governments Work towards reconstruction with the vitality of private sector Source: Secretariat of the Headquarters for Reconstruction in response to the Great East Japan Earthquake POLICIES AND MEASURES Building Disaster Resilient Regions Build regions which respond to challenges of aging society and population decline and mobilize measures on the concept of disaster reduction Realize swift reorganization of land use Revival of Local Economic Activities Mobilize public and private funds for affected business enterprises, reduce corporate effective tax rate Assure quick recovery of logistic infrastructure, promote the use of renewable energy and improve energy efficiency Promote foreign investment to Japan and acceptance of foreign nationals with skill and knowledge. Nation-building incorporating lessons from the Earthquake Promote international cooperation to share lessons learnt as global knowledge asset Verify measures to be taken in case of future earthquakes and strengthen response capacity to disasters Conduct in-depth study on the Great Earthquake including international joint study to contribute to disaster prevention Reconstruction from Nuclear Accident Implement emergency, recovery and reconstruction measures and solve the nuclear accident as soon as possible. Monitor and provide information on radiation dose and develop system to assist inspection to assure food safety.

Ⅰ. Influence of the Earthquake 15 Policies and measures on track FY2011 Third Supplementary Budget (1) First Supplementary Budget: Total of 4.15 trillion yen (approved on 2 May 2011) Disaster relief and other measures 482.9 billion yen Removal of debris caused by the disaster 351.9 billion yen Public infrastructure projects 1.2 trillion yen Loans in response to the disaster 640.7 billion yen Grants to local governments and other expenditures 120 billion yen Second Supplementary Budget: Total of 1.99 trillion yen (approved on 25 July 2011) Compensation for damage caused by the nuclear accident 275.4 billion yen Support for people affected by the disaster 377.4 billion yen Reserve fund for recovery and reconstruction 800 billion yen Grants to local governments 545.5 billion yen Mainly for emergent relief and recovery Third Supplementary Budget: Total of 12.1 trillion yen (11.73 trillion yen allocated for reconstruction ) (approved on 21 November 2011) Mainly for reconstruction Source: Secretariat of the Headquarters for Reconstruction in response to the Great East Japan Earthquake

Ⅰ. Influence of the Earthquake Policies and measures on track 16 FY2011 Third Supplementary Budget (2) Outline of the FY2011 Third Supplementary Budget 11.73 trillion yen allocated for reconstruction Disaster relief 94.1 billion yen Removal of debris caused by the disaster 386 billion yen Additional public infrastructure projects 1.4 trillion yen Loans in response to the disaster 671.6 billion yen Grants to local governments 1.6 trillion yen Grants in response to the disaster 1.5 trillion yen Reconstruction from nuclear accident 355.8 billion yen Nation-wide disaster prevention 575.2 billion yen Other expenditures related to the disaster 2.4 trillion yen Subsidy to locate enterprises/industries in Japan Employment measures Restoration and reconstruction of fishery, agriculture and forestry Project of creating eco-towns Measures to support small and medium sized enterprises Reconstruction open to the world (youth exchange, international cooperation, etc.) Development of disaster resilient information network See the detail: www.mof.go.jp/english/budget/budget/fy2011/11sb03.pdf Source: Secretariat of the Headquarters for Reconstruction in response to the Great East Japan Earthquake

Ⅱ. Japanese Economy

Ⅱ. Japanese Economy 17 Quarterly Estimates of GDP Figures in brackets show contributions to changes in real GDP. '%,YoY) (%, QoQ, S.A.) CY2010 CY2011 11Q1 11Q2 11Q3 11Q4 12Q1 GDP 4.4-0.7-2.0-0.3 1.9 0.0 1.2 Domestic Demand (2.7) (0.1) (-1.8) (0.7) (1.1) (0.7) '1.0( Private Demand (2.3) (-0.1) (-1.7) (0.2) (1.1) (0.7) '0.7( Private Consumption 2.6 0.1-1.5 0.6 1.1 0.7 1.2 Private Housing -4.2 5.4 1.6-3.1 4.8 0.1-1.5 Non-residential Investment 0.5 1.1 0.2-0.4-0.2 5.2-2.1 Private Inventory (0.8) (-0.5) (-0.9) (0.0) (0.3) (-0.4) (0.3) Public Demand (0.4) (0.2) (-0.1) (0.5) (0.0) (0.1) '0.3( Government Consumption 2.1 2.0 0.4 0.7 0.3 0.4 0.7 Public Investment 0.4-3.6-4.6 7.3-0.6-0.5 3.8 Net Exports of Goods and Services (1.7) (-0.8) (-0.2) (-1.0) (0.8) (-0.7) '0.1( Exports of Goods and Services 24.2-0.1-0.4-6.3 8.7-3.7 3.0 Imports of Goods and Services 11.1 5.9 1.2 0.2 3.5 0.9 1.9 (Source) Quarterly Estimates of GDP:January-March 2012 (The Second Preliminary), Cabinet Office

Ⅱ. Japanese Economy 18 Summary of Economic Outlook for FY2012 (January 24, 2012) In FY2012, the Japanese economy will grow, driven by domestic demand as intensive implementation of full-fledged reconstruction measures is expected to create steady demand and employment. As for the world economy, major economies are expected to pick up on the assumption that concerted policy efforts by governments in Europe and others will stabilize the international financial and capital markets under the European sovereign debt crisis. This will create an environment favorable to Japan s exports and production. With regard to prices, the rate of increase in consumer prices is forecast to be approximately 0.1%, owing to such factors as the narrowing GDP gap. Downside risks include a further downturn in the overseas economy amid the deepening European sovereign debt crisis, the appreciation of the yen and the subsequent acceleration of hollowing out of industry, constraints on the electricity supply, and crude oil price increase. Main Economic Indicators for FY2012 GDP growth rates and contributions to the real GDP growth rate Real GDP Private consumption expenditure Private residential investment Private non-residential investment Contribution of private demand Contribution of public demand Contribution of external demand Note: All figures above except for contributions and unemployment rate are year-on-year growth rate as percentage. FY2010 FY2011 FY2012 Actual (%) Actual (%) Note: The figures for consumer price index is headline CPI. Forecast (Approx%) 3.2-0.0 2.2 1.5 1.1 1.1 2.4 3.6 6.3 3.5 0.2 5.1 2.3 0.4 1.6 0.1 0.6 0.2 0.8-1.0 0.4 Nominal GDP 1.1-1.9 2.0 Consumer price index -0.4-0.1 0.1 Unemployment rate 5.0 4.5 4.3 Note: The figures for unemployment rate in FY2010 and FY 2011 are estimated by Cabinet Office. 4.0 3.0 2.0 1.0 0.0-1.0-2.0 4.0 Contribution of external 3.0 3.2 Contribution of external demand Contribution - 3.7 of public 1.1 3.1 2.0 Contribution of public 1.0-4.6 2.2-2.1 0.0 2.0-1.0 1.1-2.0-3.0-3.2-4.0-0.0-5.0Contribution of private demand FY2010 FY2011-1.9 FY20112 Forecast FY2010 FY2011 FY2012 Forecast

Ⅱ. Japanese Economy 19 Average Forecasts by Private Research Institutes Main Economic Indicators from 2011 through 2013 FY2011 FY2012 FY2013 Actual (%) Forecast (%) Forecast (%) Real GDP -0.0 2.2 1.5 Normal GDP -1.9 1.5 1.3 CPI(excluding fresh food) (2010=100) -0.1 0.1 0.2 Unemployment Rate 4.5 4.3 4.1 (Source) Japan Center for Economic Research "ESP Forecast" (Average of the economic forecasts collected from 40 economists between April 26 and May 8, 2012)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Ⅱ. Japanese Economy 20 Production ( CY2005=100, S.A.) 105 100 Index of Industrial Production Feb. 98.5 Apr. 95.8 95 90 85 80 75 Mar. 82.5 70 2009 2010 2011 2012

Ⅱ. Japanese Economy 22 Exports and Imports (CY2005=100, SA) Imports Quantum Index (CY2005=100,S.A.) Exports Quantum Index 150 140 140 130 130 120 110 Asia 120 100 110 LNG 90 Total 100 80 EU 70 90 60 US 80 Total 50 70 40 2009 2010 2011 2012 Note: The dotted lines show 3MA figures. 2009 2010 2011 2012

Ⅱ. Japanese Economy 23 The Outlook of the Supply-Demand Gap in This Summer and Target of Electric Saving Hokkaido Tohoku Tokyo Chubu Kansai Supply - Demand Target of Electric Saving -1.9% 2.9% 4.5% 5.2% -14.9% -7% - - -5% -15% Hokuriku Chugoku Shikoku Kyushu Total Supply - Demand Target of Electric Saving 3.6% 4.5% 0.3% -2.2% 0.1% -5% -5% -7% -10% (Note) The table above shows the supply-demand gap in the case that the temperature in this summer is the same as the temperature in 2010, without nuclear power plants. (Source) The package for electric power supply and demand, decided on 18th May 2012, The Energy and Environment Council and Electricity Supply-Demand Review Meeting.

Ⅱ. Japanese Economy 24 Reconstruction-Related Demand Budgets and Estimated Impacts Contracts of Public Works (YoY) Budgets Expenditures (trillion yen) Estimated impacts '% of GDP in FY 2010) '%( 20 15 May 2, 2011 supp. Budget 4.0 0.7 10 5 Jul. 25, 2011 supp. Budget 2.0 0.3 0-5 Nov. 21, 2011 supp. Budget 12.1 1.7-10 -15 Apr. 6, 2012 budget FY2012 2.5 0.3-20 1 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 2010 2011 2012

Ⅱ. Japanese Economy 25 Prices (%, yoy) Consumer Price Indice (CY2010=100) and Output gap 4 2 0-2 -4-6 -8-10 Output gap Headline CPI CPI excluding food and energy Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ 00 01 02 03 04 05 06 07 08 09 10 11 12

Ⅱ. Japanese Economy 26 Balance of Payments Current Account Balance (as % of GDP) Trade Balance (as % of GDP) 6 20 3 5 15 2 4 10 3 5 1 2 0 0 1-5 -1 0-10 -1-15 -2-2 2003 2004 2005 2006 2007 2008 2009 2010 2011-20 2003 2004 2005 2006 2007 2008 2009 2010 2011-3 Trade Balance The others Income Current Account Exports Imports Trade Balance (Right scale)

Ⅱ. Japanese Economy 27 Trends of the Overseas Production (Actual and Projection) 30 Overseas Production Ratio (Actual) % % 30 Comparison between Projection (5 years later) and Actual 25 25 20 Processing 20 Projection of Overseas Production Ratio in Manufacturing in 5 years later 15 Manufacturing 15 10 10 5 Basic Material 5 Actual 0 1990 95 2000 05 10 0 1990 95 2000 05 10 15 (Source) Annual Survey of Corporate Behavior, Cabinet Office