Costs of the quake are initially estimated at $1-$2 billion, according to JPMorgan. That is a fraction of the $102.5-billion worth of damage caused by the Kobe earthquake of 1995, which was a 6.8.
A number of oil refineries caught fire along the northeast coast and at least 11 nuclear reactors have been closed. Insurance stocks took a hit and stocks are extending to fresh lows.
The Bank of Japan issued a statement promising to provide ample liquidity. The central bank’s meeting will be held, as scheduled, on Monday, but will be cut to one day.
Analysts think more stimulus may be announced, depending on how events play out over the weekend. But rebuilding efforts are likely going to be painful given the government’s already-high debt load.
Here is what analysts are saying about the fallout:
Takuji Okubo, chief economist, Societe General in Tokyo
“I think we will see industrial production suffer one day’s loss of output in March at most and with the south mostly intact I think the impact, even for manufacturers, will be limited, as they may be able to shift production to southern regions. I don’t think annual economic growth will be affected at all. In 1995, after Kobe quake quarter-on-quarter growth stood at 0.8 percent, so annualized 3.6 percent which is actually pretty strong. I think we’re likely talking here about fatalities reaching hundreds, rather than thousands, like in 1995.”
Adrian Foster, head of financial markets research, Rabobank International in Hong Kong
“If you think about the weather damage that we have seen around in Australia and (the quake in) New Zealand of course recently, I think New Zealand was the only central bank to cut rates in reaction, so that was some bit of an unusual move and I don’t think that monetary policy reaction is a conventional reaction anyway, so this is clearly a massive fiscal challenge.”
“The pictures of the tsunami — seems like it’s extremely devastating. I am still looking at the event which is unfolding and I don’t know what their policy reaction will be. But clearly Japan is experienced with earthquakes, so I am sure they have the reactionary capabilities. What the government sits down and comes up with is anybody’s guess. Seeing the way the situation is still, there is no other conclusion that one can come up with for now”
Vincent Tsui, economist at Standard Chartered Bank in Hong Kong
“It is still too early to assess the damages as we are still seeing aftershocks.
We see a sharp correction in the yen and the BOJ might maintain its dovish policy stance at a meeting next week. At a time when the global oil price surge has hit the global economic recovery outlook on which Japan is heavily dependent on, this development will influence them to maintain a dovish stance on policy.”
Brad Bechtel, managing director, Faros Trading
“Important things to note in the context of what has happened in Japan. History on the USD/JPY reaction to emergencies, especially huge earthquakes, is actually very JPY positive. Initially the knee jerk is to sell JPY, but the reality is that JPY strengthens dramatically.
“What we saw with the Kobe earthquake in 1995 the drop in USD/JPY was 20% over 3 months. The reason for this is the huge repatriation flows that occur on the back of these sorts of disasters. So Japanese locals bring assets back into JPY.”
“Insurers that now have to make JPY payments to Japanese have to buy JPY and any international aid flows that get sent to Japan are also going to be in JPY. This creates a very positive bias in the JPY in the immediate short term. Looking at other international disasters we saw the same impact to the local currencies in places like Thailand and Australia.”
Tim Condon, chief economist for Asia at ING in Singapore
“The wisdom of the crowds show that the markets are taking it very badly but I would wait for a clearer picture to assess how bad it is. Some are drawing a parallel with the RBNZ here and are expecting the BOJ to act but I think the BOJ is fairly stingy in this matter as evident from the Kobe earthquake. It is still too early to tell whether there will be continued selling in the stock markets. The construction sector might get a big boost out of this.”
Tsutomu Yamada, market analyst, Kabu.com Securities
“The extent of the damage is hard to tell but it seems devastating for the northern Japan economy. The government must act quickly to announce support packages and the central bank should pump more money into the economy. Some manufacturers have factories in the quake-hit area and they will face challenges in rebuilding these facilities. But what’s more important is that this quake could hamper Japan’s overall economy which just started showing some positive signs.”
Mitsushige Akino, fund manager, Ichiyoshi Invesment Management in Tokyo
“We still don’t know what’s the damage like, but stocks will probably fall on Monday, especially shares in those companies that have factories in the affected areas, but on the whole the sell-off will likely be short-lived. Just like during the Kobe quake in 1995, the stock market reaction will be momentary, also because the epicentre was far from Tokyo, and it isn’t likely to affect Japanese economy as a whole.”
IHS Global Insight analysts Lilit Gevorgyan, Neil Ashdown and Sarah McDowall
“Although the main concentration of industrial Japan appears unaffected, the extent of the infrastructural damage will be severe. The natural disaster could also upset the country’s nascent economic recovery while exacerbating the country’s ballooning public debt issues, as spending by the Tokyo government will surge to meet emergency response costs.”
“Here it is worth noting that Miyagi prefecture accounts for 17.1% of the Japanese population and the same level of GDP. The economy is heavily dependent on growing rice and there will be repercussions for industries operating close to the coast, particularly the fishing and shrimp industry.”
“Meanwhile, the impact of the natural disaster is already being felt across Asia’s financial markets, intensifying the uncertainty amid political turmoil in the Middle East and concerns over European debt. Owing to the extensive damage caused to infrastructural networks in Japan, particularly in the north-west, IHS Global Insight has downgraded the operational risk rating by 0.5, from 1.75 to 2.25.”
Tsuyoshi Segawa, equity strategist, Mizuho Securities
“As far as I can see on TV, Tokyo and northern Japan have been significantly damaged and that might trigger panic-selling after the weekend. There is a possibility that some construction-related companies’ shares rise just like back in 1995 when we had the Kobe earthquake. But we are still unsure about macroeconomic effects at this moment so investors should not be making guesses and carefully assess the situation.”
Yasuo Yamamoto, senior economist, Mizuho Research Institute in Tokyo
“We still don’t know the full scale of the damage, but considering what happened after the earthquake in Kobe, this will certainly lead the government to compile an emergency budget. The government would have to sell more bonds, but this is an emergency, so this can’t be avoided.”
“Given where the Bank of Japan’s benchmark interest rate is now, they can’t really lower rates. The BOJ will focus on providing liquidity, possibly by expanding market operations.”
“There are car and semiconductor factories in northern Japan, so there will be some economic impact due to damage to factories. We can expect consumption to fall. This could temporarily pull down gross domestic product.”
Derek Holt, vice-president, Scotia Economics
“The risk trade had looked to be temporarily on the mend before news of a massive 8.9 earthquake off the northern coast of Japan hit, alongside tsunami warnings that spread across the Asia-Pacific region… A wave of shut downs – many driven by automatic emergency pre-paredness plans – swept through power plants and factories, and airlines cancelled flights. All else simply takes a back seat this morning.”
Sherry Cooper, chief economist, BMO Financial Group
“The yen as surged because so many are repatriating Japanese foreign investments to deal with the disaster. Right now, all conventional wisdom is standing on its head…”
“Investors should never knee-jerk react in such situations. This is the reason we preach diversification and liquidity. The world and events are much bigger than we can ever plan for. Japan is a major net importer and consumer of oil—thus oil prices fall. Stocks have fallen off sharply as investors look for safe havens. The worst of the early decline in stocks is in the insurance sector.
“The full effect of the disaster on global businesses is yet to be known, but clearly it will be negative and substantial. Japan, with the help of the rest of the world, is as well equipped as any nation to deal with the damage and the rebuilding, but reverberations of the quake around the world will be large, but temporary.”
Brad Bechtel, managing director, Faros Trading
“JPY initially weakened and then rallied sharply on anticipation of repatriation flows from Japanese and insurance companies that may have to make payments to locals. The playbook from the Kobe earthquake in 1995 was for USD/JPY to drop 5%.”
Camilla Sutton, chief currency strategist, Scotia Capital
“The combination of risk aversion and speculation that Japanese firms will repatriate funds back to Japan has been positive for JPY, however the medium term impact is likely far more negative than the market is currently pricing. We look for USDJPY to close this quarter at 82 and to drift slowly higher into year-end.”
Andrew Cox, G-10 strategist at Citigroup
“The trajectory of USDJPY in the coming weeks will be driven by the degree of economic disruption, the scale of insurance flows, and the monetary and fiscal response. The broader effects on the Japanese economy will not be understood and digested by the market in the near future as the market interprets the degree to which reconstruction efforts and any changes in consumer confidence and domestic demand impact the recent signs of a renewed pickup in the Japanese economy.”
“Unlike the Kobe earthquake in 1995, earthquake insurance is now more widespread and there will likely be substantial flows and JPY buying by reinsurers. However, the scale of insurance flows is likely to remain unclear in the near term and will not occur for 6 to 12 months.”
“We expect that the FX market will take its cues from the immediate monetary and fiscal response. The scheduled two day Bank of Japan meeting starts on Monday, March 14. Prior to the earthquake, our economists did not expect any change to policy rates or the size of the asset purchase program. However, in the aftermath of the earthquake, further accommodative monetary policy is a likely outcome as the central bank will be focused on ensuring financial stability.”
“We do not expect that JPY will continue to strengthen as it did following the 1995 Kobe earthquake. The degree of foreign repatriation assets is likely to remain muted and we continue to expect that USDJPY will rise in the coming months as expectations of the Fed’s move away from monetary policy unorthodoxy build and forward rate differentials continue to widen.” For the latest updates PRESS CTR + D or visit Stock Market news Today
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