What next for Japan?
By
MoneyWeek Editor
John Stepek Mar 14, 2011
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The numbers arising from the Japanese earthquake are horrific.
The official death toll is around 1,600. But estimates in the press talk of more than 10,000 people being killed. More than 350,000 are in emergency shelters. Aftershocks are still rocking the area. And all eyes are on the developing situation with the country's nuclear plants.
It goes without saying that this is a terrible human tragedy. You only have to look at the pictures spread across every newspaper this morning and over the weekend, to understand that.
It's our job here at MoneyWeek to look at the economic and financial consequences. Particularly given that Japan is a country we've always been keen on as an investment.
So what is the likely economic impact of the earthquake and other disasters? And what does it mean for your investments?
The Bank of Japan is being far more aggressive than in the past
Unsurprisingly, Japan's stock market tanked this morning. The Nikkei 225 ended 6.2% lower, its biggest fall since December 2008. The Topix was down by even more – around 7%.
The Bank of Japan – Japan’s central bank – has pumped 15 trillion yen (around $180bn) of emergency funds into the money markets to try to cushion the Japanese economy. The BoJ is also extending its quantitative easing programme (QE). The QE scheme – which involves buying everything from government bonds to exchange-traded funds – will now be worth around $120bn.
The yen – which had at first strengthened against the dollar – fell back in the wake of the BoJ's actions, which were more aggressive than analysts had expected. This is a marked difference to what happened after the Kobe earthquake in 1995. Back then, the yen strengthened sharply. This was partly down to insurers selling overseas assets to raise yen to cover the costs of the earthquake. The stock market also fell by around 24% in the next six months.
But Kobe may be a poor guide to what happens this time around. There may still be pressure from repriation. But there were other factors behind the strong yen in 1995, such as the Mexican crisis of 1994, say economists at Nomura. And the BoJ is clearly ready to act to keep the currency from rising too strongly.
Indeed, Capital Economic reckons the yen is likely to continue to weaken. The Japanese government will have to spend more money to pay for reconstruction. With the BoJ buying more government bonds, this prospect won't necessarily push up bond yields yet. For now, a fiscal crisis is not "imminent", a senior vice-president with ratings agency Moody's told Bloomberg. But given that the country is already hugely indebted then more spending just brings the "tipping point" that bit closer.
As for the stock market, as Marcus Ashworth of Execution Noble points out, the Nikkei was up at 19,000 when Kobe hit. "So any dip may be fleeting for all but the most badly affected stocks."
What about the rest of the world?
There's bound to be some disruption to global trade, with factories across Japan shutting down and the threat of rolling blackouts ahead. But the most obvious impact right now for the rest of us is on energy demand. For now, the price of crude oil has eased off. But that may be more as a result of the "risk-off" trade – in other words, it's more down to speculators pulling some hot money off the table.
Japan is the world's third-biggest oil importer as it is. And it'll need to replace the power capacity lost as its nuclear plants have shut down. Around a fifth of nuclear capacity has been lost, according to the FT. Of course, the flipside is that with factories shutting down, there will be less demand for power. So it remains to be seen how this plays out in the short term.
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But in the long run, it's hard to see how this can be positive for global energy supply and demand. For one, this is very bad news for the nuclear industry. Up until now, the industry seems to have been gaining ground the PR war over 'safety'. Nuclear has increasingly being described as a 'green' energy and bracketed with wind and solar.
However, this latest disaster will raise questions both about safety, and also about how far the industry and its regulators can ever be trusted to abide by and enforce safety rules. The biggest beneficiary, as the FT suggests, could end up being natural gas. Gas "emits less carbon dioxide than coal and is becoming more readily available thanks to new production techniques." We'e covered natural gas several times in the recent past – you can read more about it here.
We'll be looking at the full implications of the earthquake as things develop in the next issue of MoneyWeek magazine, out on Friday. If you aren't already a subscriber, you can get your first three issues free here. For now, my advice is – if you have money in Japanese stocks, this isn't a reason to bail out. But the outlook for Japanese government bonds is probably even worse now than it was before.
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