Impact of Tsunami on Japanese Economy

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  • Topic: Japan, Economy of Japan, Tsunami
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  • Published : November 28, 2011
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A Report on Japanese Crisis

Japan came to a standstill with calamities, three at a time striking the country on March 11, 2011. The catastrophic Tohuku quake of immense magnitude of 8.9 on the Richter scale set off Tsunami waves that rose upto 10 mts high. Huge Tsunami waves washed out everything possible in Japan, rendering half a million people homeless and before leaving Japan, it initiated nuclear crisis too, to ensure further damages. Nuclear crisis is showing no signs of ending, all the more delaying the rebuilding processes in Japan.

Damage exceeding 15 Trln Yen (approximately 3% of GDP) is estimated to have caused by these waves. Consumer Confidence is deteriorating and the disruption in production activities due to the ongoing leakage of dangerous radiation from its Fukushima No 1 Nuclear plant is expected to worsen GDP drop in Japan. Auto plants, electronic factories and oil refineries have been shut across large parts of Japan.

Tsunami and Japanese Economy

The biggest city in Japan that was hit by earthquake and Tsunami was Sendai. This area is known to be the trading area, which is interlinked with other areas of Japan. In this area, demand and production is highly dependant upon other places of Japan than economies outside Japan. Unlike Tohuku earthquake, Kobe earthquake of 1995 hit the exporting economy of Japan, and had more impact on countries outside Japan. Comparatively, there is less number of industries in Tsunami hit area of Japan. However, the main cause for the worry is disruption of Power supply. The monthly growth is expected to slide by 0.1%.

Japanese Government acknowledged that the nuclear threat is increasing and is serious. As the nuclear threats still persists, Japan may limit their dependence on nuclear power in future and might rely on traditional source of oil and coal for their energy requirements. Higher dependence on oil and coal can push prices higher in Japan and add to its overall inflation. Besides, the liquidity injections by Bank of Japan and the rebuilding activities that could arise in Tsunami struck areas of Japan could arise some price pressures. In order to calm the financial markets, BoJ has pumped funds to the tune of 32.5 Trln Yen( ie. $400 Bln) into the system. In other words, probability of shifting of deflationary trend that Japan has been facing for the last two decade to price pressures cannot be ruled out at this juncture.

In the immediate aftermath of Tohuku earthquake followed by Tsunami, Yen skyrocketed to touch record highs on the back of repatriation of funds by Japanese insurers and companies to meet the claim requests and reconstruction activities. Stronger Yen can be detrimental for Japanese exports sector adding more to the surging Japanese debts. On contrary, as the purchasing power of Yen improves, it will reduce their cost of recovery efforts, as most of their goods and resources requirements are being imported. In such a background, Japanese policymakers will be tempted to maneuver Yen movements than any other measures and as such huge volatility in Yen can be looked upon.

However, G7 meeting was held post Tsunami in a week’s time and they announced coordinated intervention by Fed, Bank of Japan and Bank of England to check drastic appreciation in Yen. ECB and Bank of Canada too joined the coordinated intervention. This kind of joint move by central bank officials was earlier witnessed in 2000 in Euro and failed to achieve the desired result. This time how successful is the multilateral intervention is something to be watched upon.

Insurers covering catastrophes go in for Reinsurance. So it is the Reinsurance companies than the Insurance Companies who will have a direct impact. Immediately after the incident, all markets doomed and so, to that extent Insurance Companies’ investment might take a hit. Global insurers are not exposed to nuclear risks as it is not privately insured. It is the semi-public Japan...
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