Here's What Goldman Sachs Just Told Its Clients About Japan: No Long-Term Radiation Effects And Japan Is In A Position To Recover

Japan Quake

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Goldman Sachs hosted a conference call this morning on the situation in Japan for its clients.Here’s what happened:

12:14: We’ve run over on time, says the host.

The conclusions are:

Even in a worst case scenario, this will not lead to long term effects.

It’s likely to be contained to a small area.

Japan is in a position to recover in a meaningful way and will not derail the Global recovery.

We’re very comfortable with Japanese equities at this time.

12:12: How can the entire Japanese market be trading below book value?

If we look at the early 90s, it got down to 1x book value.

The population from the macro perspective is ageing and will go into decline.

Additionally, it’s largely controlled by foreign investors who can drive the market up or down. 

12:09: What do you think about Japanese market values?

At .85 times book value, it’s perhaps one of the cheapest markets in the world.

It’s cheaper than Egypt.

its companies have some of the largest cash values on its balance sheets, too.

Many companies in Japan are exposed to global growth and particularly growth in Asia.

SMC Corporation, for example, has about 50% market share in China. And some names like it have rallied already.


The insurance losses could be large and they could result in some earnings decline and some sectors like autos could be affected.

We think that Japanese earnings should remain consistent.

Insurance earnings will go down effectively to zero.

The greatest uncertainty is the electricity uncertainty. 

We could see a shortages in components for autos.

If we look at implications, they’re there and they’re specific, and they might exacerbate inventory problems.

It could be delayed, you won’t see shortages over the short ime because the Japanese have been running with excess supplies.

12:02: Could this crisis derail the global recovery?

Nat disasters effect growth, but –

While Japan is 3rd largest economy, it’s contribution to global growth is small. China, the US, and EM are bigger factors on growth.

So no, it will not derail the recovery.

12:01: What would happen to global supply chains?

There is a lot of spare manufacturing capability elsewhere in the country. They could take up some of the slack in the interim.

While there will be some temporary slows, it will not sustain on a global level.

11:55: Now let’s turn to the implications for the economic and equities market.

Here’s what we (Goldman Sachs) consider the base case situation: 

Wow – THERE IS SOMETHING INSANE GOING ON ON THE CALL RIGHT NOW. APPARENTLY IT’S Richard Lester’s line. it sounds like he’s getting a fax. Now it’s been muted.

Back to the base case.

The implications for industrial production. The slow down in economic was reversed quickly after Kobe. 

One of the key risks in this episode is the electricity shortages. In our base case, we’re assuming that electricity – there will be outages in the summer.

Forecasts have been downgraded from 1% to .5%, but GDP growth could be negatively impacted ~negative 1 to 1.5%.

It is not possible to export form other countries electricity and therefore we continue to update our risks.

11:51: Will the radiation effects be contained to the 10 mile radius that’s been imposed?

DENNING: It’s difficult to say whether it will be kept within a 10 mile radius. Will there be large exposures to people? Will there be people who die because of radiation?

That is EXTREMELY unlikely.

Any effect on the US is absolutely preposterous. The potassium that has been issued – hopefully people have the good sense not to take that.

LESTER SAYS: The likelihood of any immediate effects outside the exclusion zone just seems extremely small indeed. There is of course the likelihood that somewhat elevated levels of radiation, mean that there could be longer term effects on the population but its very difficult to estimate the magnitude of those effects, even in the worst case scenarios that we’ve been discussing.

DENNING: What will happen is , there will be calculations made about additional cancer fatalities within the general pop, but the reality is that you will never be able to measure them.

The only observable effect of Chernobyl was thyroid cancers in children. You won’t be able to detect the elevation.

The psychological effect is another thing, but there won’t be observable cancers in the Japanese population.

11:48: Could they bury the whole structure under sand and concrete?

LESTER: The end game in that sense, I don’t think anyone is focusing on that point. There are much higher priorities at the moment.

End game possibilities won’t be thought of until the immediate dangers have been addressed.

RICH DENNING SAYS: The reason that they said that is that they were aware that had been done at Chernobyl,. The reality is that this had no effect on Chernobyl. The way that they ended Chernobyl was that they introduced nitrogen underneath the reactor and starved it.

Now ultimately, would we have to have a chernobyl like encagement, we’ll know in the next few weeks.

11:42: Why is there not a large potential for sustained radiation?

LESTER SAYS: There were many factors operating at Chernobyl but one of them was that the reactor there relied on large amounts of graphite which remained on fire for long periods of time and the fire was contributing to release of radiation.

The situation is bad in the spent pools, but because of the absence of graphite, we don’t have a sustained source of energy that would lead to such large sustained releases of the type we saw in Chernobyl. The heat we saw in these pools is on the order of being 2-3 megawatts.

And given where spent fuels are, it ought to be possible to re-intro water into these pools to get the fuel covered and get some continuous fuel cooling going on.

Even though there’s been some releases from these pools, the scenario of a large sustained release is much much lower than what we saw at Chernobyl. It’s just very hard to imagine a comparable mechanism.

There are similarities- but that’s an important difference.

At some point, we’re going to be able to get water back in there. And the chances of a massive release on the scale of Chernobyl is unlikely.


Iodine 31, which is why people keep buying potassium iodide, is no longer a risk at all because the spent fuel has been around for so long that they’ve been through many many half lives and are not a risk.

Cesium does have a long half life. It’s why people can’t move back into the town next to Chernobyl right now.

The focus is really on cesium and either you don’t let it get out of the fuel by cooling or you scrub it by having the release underwater.


Restarting the residual heat removal system. 

What you’d like to do is have as many options as possible, which having power does

The current way we’re cooling, using sea water, cannot continue forever, because it requires boiling to occur and the salts are going to built up to a point to which where you could clog up and channels that are being used to cool the core.

So if you can re-establish the heat removal system, you can effectively stop any release from the fuel and remove the risk of salt clogging.

The Japanese are very closed mouth about whether or not they’re taking actions to make that happen.

If you indeed can get cold water into the spent fuel pools, then you could be in a situation where, in a short period of time, you would no longer be in a situation where you’d have to worry about the worst case.

But if we can’t continue to cool it, it looks like we could end up in a situation where you will wind up melting more fuel, and then the outcome depends on whether there’s water and if there’s containment. 

The last resort is you add as much water as you can, and if additional melting occurs, the release will be scrubbed by that.

Best: continued evolution of what we currently have

Bad: greater releases, water isn’t going through, explosions that cause more damage.

11:36: What are the key differences with this event and Chernobyl?


The scale that’s rating it a 5 –

It’s not accurate to say that 3 Mile is on the same scale. 

In TMI, the releases were not very much.

In this case,the releases have already substantially exceeded TMI. But the health effects, as in the case of TMI, would have to be estimated to be extremely small.

11:27: Host asks Lester, what’s your assessment on the range of outcomes?


Let me add a footnote about the spent fuel pool – 

I think there’s a broad divergence of opinion.

The spent fuel pool is out of water, or it isn’t. We’ll have to wait to find out.

Concerning where things might go from here – we have to decide to continue directing water from water cannons and fire hoses at unit 3 and unit 4 to try to get more cooling or water into the fuel pools. 

And getting power restored to these plants. To get power into them, a lot of work will have to be done. To connect the power supplies to the pumps and also to reactivate systems in the control room.

You can’t do both.

They’re going to have to make a decision about which one to do. They may be opting for the power restoration and holding back on the water jets, but this indicates the difficult conditions under which they’re operating at the moment.


This is a situation that’s going to be posing the significant release of radiation for some time.

We’re got multiple problems going on simultaneously in different reactors and different spent pools. It makes for an extremely difficult situation. It has been happening for the past few days and you think you’ve got one thing under control and then something else comes up.

Radiation will be released for quite some extended period, possibly measured in months.

The best case and worst case scenarios depend on how much radiation is released.

Best case: releases will continue at present level. Or may in fact decline. The health consequences of the releases are likely to be extremely small indeed to the public.

The people inside the plant are another story — it doesn’t look good for them.

The worst case scenario: Substantially larger releases, episodic releases stimulated by chemical reactions, explosions, each of which could lead to larger releases which would have the property of being one time bursts. It’s difficult to imagine a Chernobyl situation because it had large and sustained releases.

The scenarios that we’re looking at here would involve potentially large releases of radioactive activity but associated with sudden events that would result in large releases, but wouldn’t be sustained over long periods.

11:19: Host asks Denning, what’s your assessment of the spent fuel pools:

DENNING SAYS: Unit 4 has no fuel – it was offloaded into the spent fool sometime in early November. So it’s generating quite a bit more heat than other fuel that’s in that pool.

There was a hydrogen explosion that occurred in the building. This is speculative, but here’s what the current assessment going around is about why the explosion occurred: 

The Japanese have denied that the core has been uncovered, but clearly some uncovering has oc cured.

What happened what, the pool got to the point where it was effectively at its boiling point and there’s a circulation point at the bottom there that circulates and had been keeping the pool cool. arse soon as there was some boiling, we believe that the pressurization occured in that pool so that it became very hot even though there was water above it.

The fuel reaction then created a hydrogen reaction that caused the explosion. 



If the doses get extremely high in some areas, the people can be relocated. The other issue with the cesium that could be released is the deposition.

If the wind blows the other way. you could definitely have land contamination. (Right now it’s blowing out to see) In my own opinion, that could be the biggest expense, in my opinion.

The damage clean up will cost billions but the land contamination is another thing that we have to be concerned about.

11:14: Dr. Richard Lester, Head of the Department of Nuclear Science and Engineering, Massachusetts Institute of Technology, spoke first.

LESTER SAYS: There’s a lot of uncertainty of course. We’ve had partial melting of the fuel at 3 reactors. It’s not going to be clear how much melting has taken place for quite some time.

At 3 mile, it took years before the amount of fuel

We don’t know what fraction of the cores has melted.

The fuel is not being well cooled, and the water is no longer providing shielding of the radiation.

In one of the units there has been a breach of the primary containment. There are indications that, although this has not been confirmed, somewhere in the primary containment area, there was a breach in unit 2 that led to some significant release of radioactive activity.

11:00: THE CALL BEGINS Before the guests spoke, a host gave a brief overview of the crisis going on in Japan. Here it is:

The initial earthquake was a 9.0, and since then, aftershocks of 7.4 have hit 4 times, and aftershocks over 6.0 have occured 48 times.

There’s agency estimates that aftershocks as high as 5.0 until March 19th.

There are some similarities with Kobe, but some differences that should be noted.


3-4% of GDP. This is roughly 1/2 the size of Kobe. A number of people have asked whether the bank of Japan having to intervene is a risk to Japan’s fiscal sustainability. Will it tip the scale? No, compared to the overall debt burden, the cost of the earthquake

Fiscal sustainability is a risk 5-10 years down the road, but not now.

Affects on currencies: The dollar has depreciated marginally. The yen has appreciated marginally.

Questions they’ll be answering: How should we think about the risk of a major release of radiation?

What are implications for yen and the Japanese?

Global contagion a risk?

The nuclear question is the most important one, and with our speakers, we’ll try to assess the base case scenario and the worst casr scenario.

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