Make or Break for Japan

“The most expensive natural disaster”  - Reuters

Hefty cost on insurers

Source: The National

That is what experts say that the disaster in Japan is going to be. Insurance companies are expected to have to payout anywhere from 15 to 35 billion dollars as compensation, but this will not be nearly enough to cover everything. An early estimate of 100 billion is being thrown around, but many think even this is not enough to replace and rebuild everything the earthquake and tsunami destroyed. Replacing the infrastructure alone will be around $40 billion. Additionally, the escalating problems at the Fukushima Daiichi nuclear power plant where explosions have been rocking the nuclear reactors since the earthquake, has led to fears of radiation leaks and this has put the Nikkei index into a freefall. 

The first I heard about this catastrophe came on Friday morning when a guy asked me if I’d heard about the tsunami.  He then proceeded to tell me:

“If you have anything invested there you should sell it now.
The market will go into a free fall.”

Market reaction

A massive drop occurred on Tuesday after the already significant drop on Monday of 6.2% (the first trading day after the disaster). The index dropped by 10.55% or 1,015.34 points and ended up at 8,605.15. The Nikkei index was also down Tuesday hovering on the 8,227 mark.  To help stabilize the market, the Bank of Japan pledged on Sunday that they would pump 15 trillion yen ($183 billion) into the economy to reassure global investors about the stability of Japanese financial markets and their banks. This is almost five times what was put into the market after the Lehman collapse in 2008 and they are offering to buy an additional 3 trillion yen of government bonds.

Forecast is bleak

Biggest investment bank in Japan, “Nomura”, has forecasted that the recovery of the economy is now going to be delayed by at least six months and that the GDP growth figures will most likely flat-line for the rest of the year. Previous expectations were that the economy would expand by 1.4% in the second quarter this year. Also, the world economy is probably going to be affected with increased inflationary pressure and short-term stimulus for the recovery.

Source: CIA World Fact Book

Unsustainable

Japan already has one of the highest debt ratios in the world and will surpass 233% of the GDP in 2012. This is an unprecedented rate and Japan is the only country gaining such a high level of debt during peace time. Japan already got a downgrade on its rating in January, how will they fair now with the rating agencies? Japan’s financial minister has stated that the agencies should give leeway to the Japanese finances due to the crisis.


For years experts have said that the economy in Japan needs a more significant boost to push it out of the deflationary cycle that it has experienced since the financial collapse in the ‘80s.  It is a hard point to make, especially in light of the recentness of the catastrophe, but maybe this could give Japan’s fragile economy the chance to push itself out of its decade-long economic stall and regain its position as a strong financial player. A darker path could be that this catastrophe will break the Japanese finances and push it further down the spiral of economic contraction and stagnation; a spiral it would then never be able to lift itself out of without default.