• At 2.46pm on Friday March 11, an earthquake measuring 9.0 on the Richter scale occurred off the north east coast of Japan near Sendai, triggering a 10 metre tsunami that was felt across the Pacific Ocean. The earthquake has been ranked as the fifth largest in modern history and the biggest in Japan.

Main Developments

New agencies provide the most accurate and timely compilations of facts of major events. The situation following the great earthquake is clearly still evolving and the economic impact will be felt for years to come. The following report comes from Reuters:

• “Death toll expected to exceed 10,000 from the quake and tsunami, public broadcaster NHK says. About 2,000 bodies found on two shores of Miyagi prefecture, Kyodo reports.
• Japan battles to prevent nuclear catastrophe as there is a hydrogen explosion at the No. 3 reactor of the quakehit Fukushima Daiichi nuclear power plant, which is 240 km (150 miles) north of Tokyo.
• Chief Cabinet Secretary Yukio Edano says the core container at the reactor is intact after the fresh explosion which is unlikely to have led to a large escape of radioactivity.
• Edano says six people were injured after the explosion at the nuclear plant.
• Prime Minister Naoto Kan says the situation at the nuclear power plant remains worrisome and authorities are doing their utmost to prevent damage from spreading.
• Earlier, Tokyo Electric Power Company (TEPCO) said radiation levels at the Fukushima Daiichi nuclear power plant, which is 240 km (150 miles) north of Tokyo, had risen above the safety limit but this posed no “immediate threat” to human health. An explosion blew the roof off at reactor No. 1.
• International Atomic Energy Agency (IAEA) says the lowest state of emergency had been declared at a separate nuclear power plant north of the town of Sendai. But Japan’s nuclear safety agency says there has been a rise in radiation at the Onagawa facility due to leakage from the Fukushima plant and there was no problem with the cooling process there.

• Authorities have set up a 20-km (12-mile) exclusion zone around the Fukushima Daiichi plant and a 10 km (6 miles) zone around another nuclear facility close by.
• Strong aftershocks persisting in the stricken area.
• About 300,000 people evacuated nationwide and almost 2 million households without power in the freezing north.
• The Bank of Japan offers to pump a record US$85 billion into the banking system to soothe market jitters.
• TEPCO says rolling blackout to affect 3 million customers, including large factories, buildings and households.
• Nuclear safety agency rates the incident a 4 on the 1 to 7 International Nuclear and Radiological Event Scale, less serious than Three Mile Island,which was a 5, and Chernobyl at 7.
• Quake triggered tsunami up to 10 metres (30 feet). Waves swept away homes, crops, vehicles and submerged farmland.
• Total insured loss could be up to $15 billion, equity analysts covering the industry say. Disaster-modelling company AIR Worldwide estimates the insured losses from the Japan earthquake at between $14.5 billion and $34.6 billion.”

Financial & economic effects

• The Bank of Japan will expand asset purchases from 35 trillion yen to 40 trillion yen in order to boost liquidity in the economy. The BoJ is
  worried about the impact of the earthquake on household and corporate sentiment.
• The Japanese yen has strengthened against the US dollar since the earthquake on expectation that foreign currency will need to be sold in exchange for Japanese yen to fund the massive rebuilding work. The Australian dollar fell from US100.25c to US99.65c initially after the earthquake. But it rose to US101.60c in US trade on Friday night before easing to US100.75c today.
• The Japanese sharemarket (Nikkei) fell 6.2 per cent on the expectation of weaker short-term prospects for manufacturing companies and the overall Japanese economy. In contrast, shares of construction companies have been well supported.
• Shares of food exporters in the Asian region have been supported on the expectation of higher demand (Sendai is a major food producing region of Japan).
• The Australian All Ordinaries index fell as much as 85 points before retracing to be down 24.6 points (0.5 per cent) to 4710.1 at the close. Uranium stocks fell from favor as investors feared reduced demand in reaction to the explosions at nuclear facilities in demand. In contrast, shares of thermal coal and natural gas producers rose on expectation of demand for alternative fuels following damage to Japanese nuclear facilities.
• Our commodity strategist said: “We expect that a prolonged shutdown of the Fukashima Daiichi power station will increase import demand for fuel oil, coal and LNG, putting upward pressure on coal and gas prices. The quantum of increased coal, LNG and fuel oil demand is hard to estimate and depends on the extent of nuclear outage. But the Fukashima Daiichi nuclear power plant’s capacity translates through to up to 14Mt of thermal coal equivalent – or ~1.5%-2% of world trade per year.”
• Similar to the natural disasters experienced in New Zealand and Australia, the Japanese economy will soften in the short term as production is constrained and consumer and business sentiment are negatively impacted. But activity will be boosted in the medium-term as rebuilding/repair/refurbishment work begins. The Japanese economy contracted by 0.3 per cent in the December quarter and a technical recession (two consecutive quarters of falling output) cannot be ruled out.
• In response to the Kobe earthquake (January 17 1995; magnitude 7.3; damage estimated at US$100 billion) industrial output fell 2.6 per cent in January before rebounding in the following three months.
• The Japanese economy had only been expected to add 0.14 percentage points to the 4.4 per cent global economic growth this year, so the ‘big picture’ impact will be modest.
• Despite high government debt levels (gross debt to GDP stands at 225.9 per cent), Japan should have few problems in securing foreign funding for rebuilding operations. Japan has consistently maintained a current account surplus, estimated at 3.1 per cent of GDP in 2010.

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