Earthquake could break Japan’s fragile economic recovery

14th March 2011

The BBC reported that the Japanese central bank made the move as Japanese shares tumbled on the first trading day after an 8.9 earthquake and tsunami devastated the country's north-eastern shore.

Amid record share trading, the Nikkei index ended down 6.18% at 9,620.50 points.

Production was stopped at some of Japan's best-known companies, heavily denting their share prices.

European stocks also began the day lower, with German shares hit hardest. The main Dax index fell 1.3%, dragged lower by power companies and insurers.

The UK's FTSE 100 and France's Cac 40 indexes were down about 0.3%.

The Guardian quoted a report which said that Japan could lose as much as 1% of gross domestic product (GDP) this year. 

Last month Japan was overtaken by China as the world's second-largest economy. Japan lost its 42-year old ranking after the Chinese economy grew 9.8 per cent between October and December last year.

Japan had been emerging from the global recession with commentators pointing out that it had many world- class companies which were fully exposed to growth in Asia, but trading at a discount to global peers.

Shogo Maeda, head of Japanese equities at Schroders said the yen had strengthened slightly on anticipated repatriation of money by Japanese companies.

"It is no surprise that insurance companies and manufacturing companies, with plants near the earthquake's epicentre, have sold off, while construction and housing companies are well supported. In addition, TEPCO's share price (Tokyo Electric Power Company), which owns the nuclear reactor at Fukushima, has suffered."

It is clear in the short term that uncertainty will persist, as Japan implements a massive relief operation to look after the people most affected by the disaster.

Economic activity is bound to decline in the short term, but, with the progress in relief work and the recovery in infrastructure, we believe the economy should once again return to a recovery track.

The region hardest hit by the earthquake and tsunami accounts for about 7% of the national output. The Tokyo Metropolitan area has remained largely unaffected by the earthquake, and, so far, the financial markets are functioning as usual.

"Based on the information currently available, we do not believe there has been serious overall damage to the business sustainability of many Japanese companies. As more information becomes available from the companies with regard to the damage caused, we think the market will become more stable."

Michael Wood-Martin, fund manager Japanese equities at Henderson, said Japan improved its disaster response systems in reaction to poor  performance in the aftermath of the Kobe earthquake in 2005.

2 thoughts on “Earthquake could break Japan’s fragile economic recovery”

  1. Anonymous says:

    Adam Posen sets out his radical solutions today ” How to do more”……whilst I see you are not an ‘easer’ I would be interested in your response to his evidence that impaired credit supply ( as opposed to demand for it) is choking off SMEs in the home UK economy.

    1. Simon Ward says:

      Sorry, I saw only assertion not evidence. In the July CBI survey of manufacturing SMEs, only 10% of firms indicated that inability to raise external finance was a constraint on investment versus 58% and 33% citing uncertainty about demand and an inadequate net return respectively.

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