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Experts warn that the disaster in Japan will cause a financial tsunami
Material posted: -Publication date: 07-04-2011

Despite the fact that Japan is slowly beginning to return to normal life, and the threat of a nuclear Holocaust still hangs over the land of the rising sun, experts continue to discuss possible effects of Japanese tragedy on the global economy.

As for Japan, estimates are, but they are not optimistic. Thus at once make the remark that we abstract from the "nuclear factor", suggesting that the situation at the NPP in a short time returning to normal and the problem will not become from a local crisis in a global atomic collapse. Indeed, in the case of radiation disaster to talk about the prospects of the world economy, probably, it is pointless (it is very difficult to evaluate the damage). Now, returning to Japan and the consequences of the recent disaster for the Russian and world economy.

One of the features that jumped pragmatic Western investors and experts in the eye after the earthquake in Japan was a sharp appreciation of the yen. It would seem somewhat counter-intuitive market behavior: the Japanese economy bears human losses and multibillion-dollar financial losses, and the rate of the national currency is going up rapidly.

So, almost immediately after the disaster, on March 17, before the opening of the Japanese stock exchanges experienced an unprecedented event: for the first time in the postwar history of the Country of the rising sun the pair USD/JPY fell below 77 yen per dollar, in less than an hour the yen strengthened against the dollar by more than 4 %, which for the currency market is a tremendous leap day. The earthquake happened in any other country in the world, we probably would have witnessed the fall of the local currency, but not in the case with the country of "samurai". The reason for this atypical reaction in the special role of Japan in the world economy.

Since the end of last century, Japan is one of the main suppliers of capital on the world financial market. Having a high rate of savings among the population, huge reserves of industrial corporations, pension and insurance institutions for the past twenty years, Japan has actively invested in foreign assets. So, at the end of 2010 the amount of Japanese portfolio investment in foreign assets reached $3.2 trillion dollars, the net external investment position portfolio investment is $1.5 trillion dollars. The main conclusion that we can draw from these figures is that the land of the rising sun is not only one of the largest exporters of high-tech products (cars, electronics, etc.), but also a key net exporter of capital in the world.

Moreover, for the most complete understanding of the role of foreign investment in the Japanese economy, it helps to look at the balance of payments of the country. From this statistics it is apparent that in recent years the investment income of the Japanese is twice the earnings from exports. That is, in fact, "trading in capital" is the Country of the rising sun even more significant sector of the economy than industry.

Now back to the recent disaster that claimed the lives of thousands of people and resulted in multibillion dollar losses. It is difficult to predict how this horrific event will affect the Japanese economy, but one thing is clear already now – Japanese companies and individuals would require an enormous amount of financial resources for recovery. So, insurance companies will be forced to accumulate huge amounts of funds for payments to victims (insurance of life and health, earthquake insurance, job loss, etc.), companies also will have to seek the means to restore production, in the end, money will be needed, and ordinary citizens to meet primary needs (food, new housing).

How the Japanese can get these tools? The answer is quite simple: "print" accumulated reserves (those foreign investments of Japanese companies and households) amounting to several trillion dollars stashed away in foreign bonds, shares and deposits. In the coming months, Japanese companies may start to massively withdraw funds from foreign assets to cover their own needs, hence the "illogical" movements of the currency market. Speculators immediately realized that in the near future to industrial enterprises, insurance companies and other institutions will have to massively repatriate (return from abroad) funds to Japan to cover the huge costs. While returning from abroad in USD, EUR need to convert into yen, and hence the demand for the latter will increase dramatically.

Thus, after two decades, during which Japan was sponsored by world markets, the situation changed dramatically, and "samurai" are beginning to return their money. The possible withdrawal of Japanese capital from the markets, without exaggeration, can be extremely devastating event for the world economy, because it implies a fall in asset prices in many segments of the global financial market. Despite the huge volumes of the world financial system, the withdrawal of funds by Japanese investors may not go smoothly. Thousands of trading strategies and schemes, built on cheap Japanese funding, can be destroyed, therefore increases the likelihood of multibillion-dollar losses from those who adhered to the strategy of "yen carry trade" (when financial institutions took the yen under near-zero rates, convert them into dollars, euros, pounds, etc. and has invested in more profitable overseas deposits, bonds, stocks).

Of course, "razrulit" situation again may be the main Central Bank in the world – the U.S. Federal reserve, which "lightly press the button of the printing press" can compensate for fallen Japanese demand. However, while representatives of the US monetary authorities chose a different path. So, the fed in company with other G7 Central Banks promptly reacted to the Japanese events, conducting the first joint currency intervention to curb the yen on forex. The fed, ECB, Bank of England and Canada March 18, 2011 sold the yen (from their reserves) in order to prevent further excessive strengthening of the Japanese yen, and together with it and trying to prevent panic among Japanese residents, which would only worsen the situation. As a result the first wave of sales in the financial market in a joint effort to recapture was successful, and the G7 Central Banks has covered the increased demand for the yen.

At the moment, investors are taking a pause for awareness of the scale of losses in the Japanese economy, besides it is still not clear how the story would end around the "Fukushima-1". Anyway, the situation is still unstable and the demand of Japan in financing has not disappeared. In this regard, financial flows continue to be routed to Japan and much will depend on the speed (intensity) of the repatriation processes. On the other hand, bringing funds from the bond market, the Japanese will redirect a portion of their commodity markets because local companies need raw materials (hydrocarbons, metals, etc.) to restore facilities and infrastructure, i.e., Japanese investment will probably flow from the capital market in commodity segment. Of course, for commodity exporters (especially sellers of oil and gas, due to an expected reduction of nuclear generation in Japan) this development is a positive thing, but it is unlikely the global economy overall sharp rise in commodity prices bodes anything good. Especially considering that the "Japanese factor" global inflation in the world now spins harder, undermining the already precarious position of the world economy.

All of the above is only one side of the coin, not the most iridescent. But in the current events in Japan, as it blasphemously sounds, and positive aspects. The damage caused by the tsunami and earthquake, can be the impetus for accelerating economic growth in Japan, increasing investment, consumption and, eventually, to disperse inflation, which for the Japanese economy are still rather perceived as a benefit (of course, we are talking about moderate inflation). The last two decades the land of the rising sun is "economic hibernation", in expert circles have long referred to as events since the early 90-ies of the Japanese economy, "lost decade (two decades)". Now there is a chance for a jump, but all this is only short term opportunities, because without fundamental structural changes as the Japanese and world economy today, most speak at least some sustainable long-term economic growth.


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