As I deeply contemplate with shock the extent of the devastating earthquake and tsunami that hit Japan on Friday last week, my heart goes out to victims and survivors of the tragedy and to their families. This disaster will go down in history books as one of the largest natural disasters in Japan's history. And as I extend my prayers and sympathy to the people of Japan its crucial to note that there are two big forces at work, external and internal. We have very little control over external forces such as tornadoes, earthquakes, floods, disasters, illness and pain. What really matters is the internal force. How do we respond to these disasters?I indeed share with them the grieve and empathize with them and may our good Lord grant them the courage and grace to rise and carry on.
Japan’s Economy
Japan’s economic markets are reeling from the devastating earthquake and tsunami that smacked north-eastern Japan on Friday, but the tragedy, which has led to death of tens of thousands and swept whole villages out to sea, has so far had very limited impact on markets in the rest of the world.Although economic analyst are guarded in their words the reality is dawning to the world on the real impact.
Investors are holding the line now, in order to better understand the true economic impact of the disaster. As one analyst put it “we can’t help feeling that the markets are being too sanguine about the implications of what is happening in Japan,” says Julian Jessop, an economist with Capital Economics based in London.
Japan stocks plummeted on Monday, falling 6%, this is the by biggest margin since December 2008, while the yen hit a four-month high at US¥80.60. In an apparent response to shaken markets, the Bank of Japan announced it was injecting a record ¥15-trillion or US$183-billion into the economy with a promise of more liquidity to come if needed.North American and European stocks also fell, however, losses were much more muted. Limited losses on equity markets outside Japan likely reflects the Bank of Japan’s monetary actions and a belief that the economy can rebound from the disaster fairly quickly.
The tsunami/earthquake will be a hit to Japan’s economic growth, but the liquidity being added to the economy by the country’s central bank will help ensure a swift recovery later this year.
It cannot be ignored that there is going to be a huge human cost and there is still plenty of uncertainty, but this is just a temporary setback for the economy.Compared to the Kobe earthquake in 1995 that cost US$100-billion.The European Union leaders have agreed to nearly double the size of the bailout fund used to help indebted members have also helped temper losses, as have falling oil prices.Crude is down as much as 4% since March 7, as the unrest in North Africa – with the exception of Libya – looks to be settling after last week’s.There is widespread belief that natural disasters can eventually be turned into a positive economic catalyst for the country as demand for reconstruction increases.
At the same time, many investors think Japan’s reliance on export-led growth has relegated it to 'passenger of the global recovery rather than a main driver.'Markets may be too optimistic about Japan’s impact on the global economy and warns there could be plenty of downside yet to come.For a start, private domestic demand was already fragile before the disaster struck and the public finances in a dire state.The chances of a rapid economic recovery are slim but the chances of a major fiscal crisis have increased. Given Japan’s importance as a global investor this could have major repercussions around the world.
Its can also be observed that crude demand weakened after Japan’s worst earthquake on record forced refineries to close. The yen gained as investors bought the domestic currency as a haven.Oil slumped 1.5 percent to $101.16 a barrel at 4 p.m. In New York and earlier fell 3.6 percent for its biggest drop since November. The MSCI World Index erased a loss of as much as 0.5 percent and the Standard & Poor’s 500 Index gained 0.7 percent to 1,304.28 as higher-than-estimated profit forecasts from Steel Dynamics Inc. and Pall Corp. lifted commodity and industrial shares. Japan’s Nikkei 225 Stock Average slid 1.7 percent. The yen rose 1.3 percent versus the dollar, the most since August.
If you think Japan’s quake tsunami combo looked bad,then there may be worse to come. We might just get financial devastation on top of a human and physical disaster.If history is anything to go by it could be monumental. Just look what happened when Mother Nature made an unexpected call in 1987. On October 15 and 16 a hurricane hit southern England.As the cost estimates of the disaster grew insurance companies started to dump their holdings of stocks and bonds so they had cash to pay the mounting claims. By Monday October 19 there was enough to selling to cause the stocks to slide by over 22% in New York. It was Black Monday. It was worse in London than New York.So what can we expect this time? Well, we are already seeing the first-order effects. Insurance company stocks are selling off. That’s likely a gut reaction.
The broad second-order impact will be felt when insurance companies start selling assets to pay claims. Exactly where we’ll see that will depend on which insurance companies are most exposed to this disaster and then what assets are those particular companies holding.
By identifying that, we’ll know where the heaviest selling pressure will be. Likely it will be in long-dated corporate bonds plus dividend paying stocks. That could cause some dislocation in the bond market as well as stocks.The other effects will be that of large volumes of money moving across the globe. We’re already seeing the Japanese yen rally against the dollar as insurance companies repatriate funds ahead of claims rolling in.
The earthquake has forced shutdowns across a broad spectrum of the country's industries, but the bigger impact for companies could come in the weeks ahead as the disruptions make their way through the global supply chain.The 8.9-magnitude earth quake, one of the largest on record, has crippled activity for now in a country that is a critical source of parts for consumer electronics, as well as a key producer of automobiles, auto parts, steel and other goods.
In a nutshell the Japan economic impact of the Tsunami cannot be over-emphasized.It will not just be felt within Japan but globally due to Japanese economic global standing.
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