Likely Economic Effects of the Japanese Earthquake

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Living in Chile, I experienced the February 2010 earthquake. That puppy measured 8.8 on the Richter scale at its epicenter. In Santiago, the earthquake registered about an 8.2—and I was on a 15th floor when it happened. Believe me, it was quite the experience. I wrote a first person account of the earthquake here.  

sendai

Graphic: Friday, March 11, 2011

I bring this up in relation to the Sendai earthquake that rocked Japan this past Friday: It was an 8.9 (Richter), and wrought tremendous devastation. As I write, there is as yet no clear accounting as to lives lost, though it is likely in the tens of thousands. At least two nuclear reactor sites have been severely damaged; the Fukushima reactor #1 is close to melting down, and #3 isn’t in much better shape. Hundreds of thousands of people have been evacuated from the area, and further tens of thousands of people are homeless, following the tsunami. And millions of people are without electricity or running water. 

This is a tragedy for the Japanese people—the worst crisis since the end of the Second World War. 

To those of us untouched by the direct effects of this tragedy, we should thank our lucky stars. But rather than gawk at the lurid images coming through the media, it would be smart for us at this time to analyze the likely effects of this disaster on the rest of the world’s economy. 

Many pundits are hawking headlines along the lines of “The World’s Most Indebted Country Will Have To Go Into More Debt!”—but this isn’t necessarily true. Or in fact not necessarily a problem. 

Over the next few weeks, Japanese companies will liquidate foreign holdings, in order to repatriate capital so as to pay for reconstruction. That is, they’ll be selling foreign assets and buying yens. So the yen—if left unchecked—could conceivably rise over the next month or two, a rise that could potentially be substantial, and severely disruptive. 

So the BOJ won’t leave it unchecked: To combat the effects of capital repatriation on the yen—and to provide short term liquidity to the Japanese government—the Bank of Japan has already announced a liquidity window for Japanese banks. There’s no question that this “massive liquidity” they are looking to inject will be expanded to Japanese companies looking to dump foreign assets and spend money on reconstruction. The BOJ invented Quantitative Easing, after all...

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