The effects of the devastating earthquake that hit Japan were felt across global markets on Friday last as oil prices fell, stock markets wobbled and the yen rose on the foreign exchange markets.
Japanese companies and investors raced to repatriate their assets, selling dollars and other foreign currencies, and were also expected to sell European and U.S. government bonds, to prepare for the cost of rebuilding their domestic economy.
Early estimates of the cost of the quake for major insurers were put at $10-15 billion, while the leading economist Nouriel Roubini — known as Dr Doom for predicting the credit crunch — warned that the quake could not have hit at a worse time for a Japanese economy struggling with a budget deficit of almost 10 per cnt of gross domestic product.
“This is certainly the worst thing that can happen in Japan at the worst time,” Roubini said.
The Japanese economy contracted 1.3 per cent from October to December and there were concerns about the impact the tragedy might have on the global economy.
Analysts at the investment house Brown Brothers Harriman said: “The typical expectation, based on past experience, is for Japanese investors to repatriate funds.” The Bank of Japan — which has no scope to cut rates, because they are already at zero per cent to stimulate growth — moved quickly to promise a policy update on Monday, rather than Tuesday.
“The bank will continue to do its utmost, including the provision of liquidity, to ensure the stability in financial markets and to secure the smooth settlement of funds, in the coming week,” the central bank said.
The dollar fell to 81.99 yen by lunchtime on Friday in New York while the price of U.S. crude fell to as low as $99 a barrel, although Brent crude was at $113 a barrel. There were concerns that major insurers such as Munich Re and Swiss Re might have to issue profit warnings as their budgets for natural catastrophe claims had already been depleted by the Australian flood and New Zealand earthquake. The FTSE 100 in London closed at 5828, its lowest level since December.
Work at factories run by major companies such as Toyota and Sony was suspended and oil prices fell because Japan — the third largest oil importer — was expected to need less. The expected reduction in demand took the heat out of oil prices which have been inflated by the instability in the Middle East.
However, there was an impact on wholesale gas prices, which rose by almost 4 per cent in the U.K., for example, after six of Japan's reactors were shut down.
Japan generates about a third of its electricity from nuclear and it could be months before all its reactors are back online.
Analysts said it was likely Japanese utilities would buy up extra cargoes of liquefied natural gas (LNG) to power reserve gas plants to make up the shortfall.
Analysts were searching for comparisons with the quake that hit the port of Kobe in January 1995 and had a total economic cost of $100 billion, or 2 per cent of GDP. It also caused a 1,000 point fall in the Nikkei — an event that led to rogue trader Nick Leeson being exposed. Barings Bank, his employer, collapsed as a result of the vast losses Leeson had run up, just a month later.
“When the Kobe earthquake hit, markets reacted by selling Japanese stocks. The Nikkei 225 fell by 7.5 per cent in the days following. By contrast, Nikkei futures show only a 2 per cent fall for Monday. There was little, if any, discernible effect on the yen during the Kobe disaster. Currently the yen is holding up well, and may even be supported by insurance claims which may require substantial conversion of dollars to yen,” said analysts at Dutch bank ING.
But economists were concerned that the Japanese authorities had fewer options to stimulate the economy than they did in 1995. Julian Jessop, chief international economist at Capital Economics, said: “At the very least, the scope for fiscal stimulus to mitigate the economic damage is much less than it was in 1995.”
He thinks the authorities will repeat their actions and introduce special loan facilities to help those areas most affected.
Joy Ferneyhough, head of insurance research at Banco Espirito Santo, noted that the quake had not hit Tokyo, where the heaviest insurance losses could be expected. Major insurers will now be scrambling teams of loss adjusters to the affected areas. Some of them will be trading at the Lloyd's of London market, which said it was “far too early” to assess the potential cost. “Our efforts will be focused on dealing with claims quickly and helping people and businesses recover,” Lloyd's said. — © Guardian Newspapers Limited, 2011