Tsunami & Finance - April 2011
From Riviera Times
What are the consequences for the Japanese financial marketJapan experienced the biggest earthquake in its history. The industrial region of Sendai which represents about 8 per cent of Japanese GDP, is the worst affected. Many factories will remain closed for weeks, the potential cloud from the nuclear accident could be a threat to the big cities on the south coast and could paralyse the country. In the short term, food and energy could become scarce and the whole country may suffer frequent power cuts.
Will this event impact on the world economy?
Several experts evaluate the direct damages at more than 3.5 per cent of Japanese GDP. But with regard to the nuclear accident, these events will inevitably have a negative impact on global growth. Although the government is already highly indebted, it will have to issue more bonds to finance the rebuilding and to help the victims. The Japanese central bank and private and institutional investors will buy these bonds. Also, as the Japanese hold a lot of foreign investments, they might sell a part of them to invest in their own economy directly or through bonds. This move could make the Yen stronger
and might be a problem for Western bond markets, especially for US Treasury bonds.
What about financial markets?
Surprisingly, the Tokyo Stock Exchange opened as usual, the next working day. Investors panicked and sold Japanese stocks (Nikkei index down -20 per cent in two days) on a massive scale, pulling down the already weakened global stock markets. As a comparison, the Kobe earthquake in 1995 made stocks dive for almost six months, in total decorellation with the other markets. Thus, if investors keep on selling irrationally, Japanese stocks might become even more affordable in the months to come. For instance, a hardy investor may consider buying Yen today and invest on Japanese stocks later, when prices are lower.
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