The Economic Impact of Japan's Monster Quake

The largest natural disaster in Japan’s modern history began with a massive quake with a magnitude of 8.9~9.0 in the Pacific Ocean seabed off the coast of Sendai, north of Tokyo. The effect of this earthquake was like dropping a boulder the size of the Isle of Wight, the largest island in the U.K., into the ocean. It was up to 1,000 times more powerful than the one that hit New Zealand last month and immediately generated deadly tsunamis over 20 feet high. The quake was on par with the most powerful quakes in history, such as the 1960 Valdivia Chile quake (9.5), the 1954 Prince William Sound Alaska quake (9.2), the 2004 Sumatra Indonesia quake (9.1) and the 1952 Kamchatka Russia quake (9.0).

Scientists in Pasadena California now say the Sendai quake shifted the Earth on its axis and shortened the length of a day by a hair. In addition, the force of this massive quake moved parts of eastern Japan as much as 12 feet closer to North America, while Japan’s mainland has shifted downward about two feet.

The tsunamis however created substantially more damage than the quake itself. Coastal towns in Fukushima, Miyage, Iwate and Aomori prefectures in the Tohoku region of Japan were literally swept away, while nuclear power plants in Fukushima were damaged to the point of near core meltdown.

Quake Impact Not Yet Fully Discounted in Stocks

While impact on financial markets, the regional economy and Japan’s people (in that order) is short-term and recovery will eventually come, we do not believe that Japanese stock prices, which were down less than 200 points last Friday, have fully discounted this catastrophe. Immediately after the Kobe earthquake on January 17 1995, the Nikkei 225 lost around 8%, rebounded somewhat, and then eventually hit a low of 26% below the January 1, 1995 pre-earthquake high in July of the same year.

The knee-jerk reaction in the currency markets was a stronger yen, as traders braced for a repatriation of JPY now invested in US Treasuries and other foreign assets back to Japan. However, it is unlikely that a significant amount of funds invested overseas will actually be repatriated to pay for earthquake reconstruction.

As for the impact on JGB yields, the government plans to use JPY200 billion in contingency funds already available for immediate earthquake relief, and will then study a supplementary budget separate from the fiscal 2011 budget for which funding is still being debated in the Diet’s Upper House. For the immediate future, JGBs are more likely to benefit from a "risk off" movement in funds.

Tohoku Region Accounts for Some 8% of Japan's GDP

The most damage from the quake and tsunamis was seen in the Tohoku region, which accounts for some 8% of GDP. In particular, coastal cities in Fukushima, Miyage, Ibaraki and Aomori were hardest hit. These prefectures combined account for just under 6% of Japan’s GDP. Just how much gross domestic product in these prefectures will be affected is still unknown, but electricity, phone communications, roads and port lifelines in these prefecture have been severely compromised.

The worst hit city, Sendai, is in Miyagi prefecture, which has a GDP of about JPY8.5 trillion.

Standard & Poor’s believes the Japan quake is likely to be the most costly catastrophe ever. The costliest quake so far on record was the Northridge, California quake in 1994, which caused $15 billion of insured losses in today’s dollars. Insured losses of course are but a fraction of the total economic costs.

Some analysts believe the economic damage from Sendai quake will be less than from the Kobe quake in 1995, while we believe the Sendai quake could well surpass the economic damage from both the 2004 Indian Ocean tsunami ($10 billion) and the 1995 Kobe Japan quake ($100 billion).

After the Kobe quake, Japan’s industrial production dipped 2.6% MoM in January 1995 but bounced back 2.2% MoM in February and another 1.0% in March, and the entire cost of the Kobe quake was estimated to be around 2% of GDP.

A Credit Suisse report says the initial reports estimate a range from $10 billion to $50 billion. In Europe, the stocks of some of the world's biggest reinsurance companies, including Swiss Re (OTC:SWCEY), Munich Re and Hannover Re fell 4%~5% on Friday on concerns that the deadly combination of earthquake and tsunami will cost them dearly. The stock prices of Aflac Inc (AFL) and Bermuda-based reinsurer Partner Re also saw selling pressure. Investors could also lose millions in investments through seven catastrophe bond transactions totalling some $1.5 billion with exposure to Japanese earthquake.

The stock prices of major Japanese non-life insurers like Tokio Marine (ADR:OTCPK:TKOMY), NKSJ Holdings and MS& AD Insurance also saw stock prices sell off heavily on Friday last week on the assumption they have significant losses from insurance claims.

Interrupted Semiconductor Supplies

Because Japan produces more than 40% of the world's NAND flash memory chips -- and 15% of its DRAM -- the earthquake could seriously affect worldwide semiconductor supplies, according to analysts such as Jim Handy of research firm Objective Analysis.

Even a two-week shutdown of fabrication plants would remove from production a sizable share of wafer production, causing major price swings and short-term shortages. Not everyone agrees with the Objective Analysis view, however. Market research firm iSuppli does not believe that DRAM and NAND production will be affected by the quake. Micron (MU), Toshiba (ADR: OTCPK:TOSBF) and Elpida Memory production facilities in the region were far enough away from the tsunamis to avoid damage. That said, many electronic manufacturer factories in region won’t be buying or shipping product until earthquake damage is repaired. This includes Sony (SNE), Murata (ADR: OTCPK:MRAAY), Renaissance Electronics and Shin-Etsu Chemical ( ADR: OTCPK:SHECY) factories.

Interrupted Automobile Supplies

Automobile shipments will also be disrupted, as the media showed pictures of Nissan (ADR: OTCPK:NSANY) autos in port for shipment being swept away by a tsunami and Nissan halted production at all four of its Japanese assembly plants. Toyota (TM) has stopped production at two assembly plants and two parts factories in Tohoku, including one operated with Panasonic (PC) that produces batteries for hybrid vehicles. Honda’s (HMC) Suzuka assembly plant was closed for only a short time on Friday but its Sayama auto assembly plant would be closed through Monday. Operations at the five assembly and parts plants for Fuji Heavy (ADR: OTCPK:FUJHY ) Subaru vehicles were halted.

Fire Damage at Petrochemical Plants

JX Holdings (ADR:JXHLY.PK)and Cosmo Oil have had to shut down operations at facilities in Sendai and Chiba because of serious fires, as did JFE Holdings. Chemical firms have also shut down operations in the area.

Damages and Cleanup of Fukushima Nuclear Power Facilities

In 2007, Tokyo Electric Power was forced to shut the Kashiwazaki-Kariwa Nuclear Power Plant after Niigata-Chuetsu-Oki Earthquake, and posted its first loss in 28 years. In 2008, the plant had not re-opened and Tokyo Electric posted its second loss.

TEPCO has a total of 10 nuclear power plants at two sites in Fukushima Prefecture that produce 9,000KW of power or some 20% of total power generated by TEPCO.

The explosion of the first reactor after it entered the early stages of core melt-down and the infusion of sea water to cool dangerously high temperatures in the reactor probably means the company will have to scrap this reactor. Replacing this 40-year old reactor with a state-of-the-art new reactor would cost about $6.6 million for a reactor with 2,200KW output capacity. In addition to lost revenues, repair costs and possible payments to residents affected in the area, TEPCO could see another couple of years of losses.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Comments

[amcsulb09]

Just thought everyone who doesnt know about HAARP Technology, should invest sometime and learn about it and see what it does. Lets not assume that Chile's, China's, Japan's and Haiti's earthquakes were all mere causes of mother nature. I know there is something more going on behind the scenes that no one knows about. Why the majority of the human beings are so passive and don't question what seems to be skeptical in nature. How many earthquakes have occured in the past 5 years with an increasing rate in the magnitudes. Come on people, wake up!

[Jim P. Smith]

I think this is good news for US auto workers (both US and foreign brands), regardless of which brand they serve.

[Pitbull Trading]

I think people are trying so hard to spin everything to make more bagholders jump into the market at exactly the time they shouldn't. Anyone with half a brain knows we can swing back down the 20% rally the fed has blatantly manufactured for the manipulators. Sure, buy buy buy, a natural disaster is bullish now. This board is becoming worse than fox news, if people are really that dumb, thinking this is a 'bullish' happening for an already over-indebted country, you deserve to lose your hard earned money. The markets need a healthy correction, just pool together your cash and be patient, for it is coming. Hopefully only 10% or so to scare the funny money out of stocks, but more could be in order.

[Moon Kil Woong]

I think bears trying to capitalize off of this event are the worst. The world is behind the recovery of Japan and the Japanese have proven incredibly resilient. No other country could suffer such a quake so close to a major city and done so well.

As for insurance, although insurance is largely a racket to overcharge people consistently for known risk, in events like this they serve their purpose well. Let us hope the payments flow freely and the people devastated from this can recover much better than US insurers dealt with New Orleans. I have a feeling they will. If so, the US should regulate insurers more like Asia and prevent terribly poor behavior like that of AIG. I still think AIG should be sold off and shut down and its executives stripped of all power. But that's just me I guess. I think Washington prefers to let fat cats do whatever they please as long as their PAC and lobbyists pay them.

[Peter Cooper]

Stocks are flashing red across the board, this is the start of a major correction with key supports broken,

[Tokyo Picker]

I always thought Great Britain was the largest island in the UK.

[Tack]

The human tragedy notwithstanding, this unfortunate destruction is going to prove very stimulative to the Japanese economy and will benefit their trading partners, too. Post-disaster histories confirm that all the required rebuilding will increase monetary velocity and is very economically positive.

For those who can look past the hysterical selling in Japanese shares (now in progress), which are just setting up excellent value opportunities, keep an eye on JPP and DFJ, as vehicles for investing in Japan's recovery.

[Darrel Whitten]

Article errata;
As pointed out by several commentators there are several errata in the article.

1) The Prince William Sound Alaska quake was in 1964, not 1954.
2) TEPCO's Fukushima plants produced over 9,000 MW, not KW.
3) A new nuclear reactor will cost more like $6.6 billion, not $6.6 million.

[Khyan]

It's MW not kW

[David Roskoph]

The sun is setting on Japan as a major global power. They have unreproduced themselves out of existence, making their economy mathematically impossible before this disaster. They will recover to be sure but their placement on the world's economic role will only continue to slide.

[Alexanda Duma]

It may be a typo but the output of the TEPCO nuclear power plants have to be 9,000 MW instead... I guess everyone will catch on. A good article none the least. It's a knee jerk moment for mankind...investors are picking bones after the dead...Sad but its real. If Japan built these Nuclear plants 40 years ago and lasted this long with no major manmade incidents, then I would considered this as an exordinarary accomplishment. The latest design should be a lot more efficient and safe. Look at France - 70% of their energy is from nuclear plants and they make a go of it and not heavily depend on foreign oil. There are a lot to consider. Instead of spending money on military and trade blood for oil, we need to fine tune our think processes. This OIL commodity and impact has not been dealt with since 1970's. Let's pause a moment for mankind.

[Just Ducky]

Yep, this is Japan, not Haiti. They have resources to rebuild. As long as FOX/CNN/MSNBC don't spin the "sky is falling" mentality, the market should be fine. But we know that won't be the case.

[avgjoe]

Don't forget Pat Robertson. I'm sure there will be some idiotic drivel from this guy too.

The Japanese are hard working and organized. They will recover.

[apberusdisvet]

It is always the unexpected Black Swan event that turns out to be the force that begins the domino effect. The world economy is hardly stable. Japan is the world's 3rd largest economy and it is unlikely that it will have positive GDP for the next few years. This is addition to its already heavy debt load. I have no idea how an already fragile Eurozone will be affected or how this will affect the declining USD, but it cannot be bullish.

[cynic2011]

"it is unlikely that it will have positive GDP for the next few years".

Really? I've never heard of a country having negative GDP. I've heard of many cases where a country has negative growth of GDP but never negative GDP.

[mattyw]

This might hurt next quarter, but I think with all the new construction that will occur, this will end up being a positive for the country, and will improve the world economy. Shocks to the economy such as this have generally short term effects. So long as the world is willing to loan to Japan to help them rebuild, they'll come back faster than we think.

[mdmrjsds]

If destruction like this is a positive for an economy, then we should have the US Air Force periodically bomb New York City and Washington DC.

Perhaps you too can see the correspondence with Keynes idea of paying people to dig holes and fill them in? If that works so great, why not just give people money for doing nothing so they can consume? At least Keynes didn't advocate destroying existing infrastructure in order to employ people rebuilding it.

[MrVincent]

China not to change plan for nuclear power projects

BEIJING -- China will not change its plan for developing nuclear power projects but will learn a lesson after a massive earthquake in Japan resulted in a radioactive leakage, vice-minister of Environmental Protection Zhang Lijun said Saturday.

"China has 13 sets of functional nuclear power equipment and tests have shown all of them are safe," Zhang told a press conference on the sidelines of the national parliamentary session in Beijing.

China is "keeping a close eye" on the development of the earthquake's impact on Japan's nuclear facilities, he said.

"Some lessons we learn from Japan will be considered in the making of China's nuclear power plans," he said. "But China will not change its determination and plan for developing nuclear power."

......

www.chinadaily.com.cn/...

[Davewmart]

Japan's nuclear plants were hit by a double hammer blow of the fifth largest earthquake ever recorded and a 33ft high tsunami, and have almost all shut down just fine.
The damage so far seems to be to secondary structures and have resulted in relatively minor radioactive releases due to venting to relieve pressure.
Where it has had to be done, pouring seawater extracts the heat just fine although it damages the reactor.
The main containment vessel which Chernobyl simply did not have has not even been stressed as yet.
In spite of the FUD spread by nuclear opponents about the nuclear operatives are 'engaged in a desperate battle against time' it is a battle where time is on the side of containment ie exactly the opposite to that which they are claiming.
If you are going to get a substantial nuclear melt down this is most likely to occur in the first few hours after shut down, when the reactor has been running hot.
Even by last night the reactor would be likely to have cooled down to a point where it was only emitting around half of one percent of that which it had when running.
ie the chances of melt greatly decrease if it did not happen shortly after unsuccessful close down.

Confounding the massive explosion at Chernobyl with what happened in the subsidiary structure explosion is also to confuse events with utterly different risks.
That appears to have been due to pressure being vented and the gases containing hydrogen which reacted to cause an explosion outside the containment vessel, which is totally different to the containment vessel being breached.

Similar venting may be needed at no 3, which might cause an explosion, but we are not talking about cracking the main containment.
So we might have an event which causes minor releases of radioactivity and certainly a great deal of expense, but the doom-mongers are peddling snake oil.

The only places where this may be used in a substantial way to restrict build is where it was not going to happen anyway, such as Germany, where a large part of the public has been convinced that the economy can be run on ground-up unicorn horns, but in practise runs on coal which kills huge numbers through air, water and soil pollution.
Places like China where there are actually being built will press on, but will be able to make things even safer due to experience gained in this, the ultimate stress test, which nuclear, unlike gas and oil, is passing with flying colours.

[Flankar]

From your data on the quake to your info regarding specific closures, I find your information misleading and often erroneous.

[cynic2011]

Can Tepco survive this without going bankrupt? They've lost a good portion of their service area overnight and will be scrapping a significant portion of their nuclear facilities. This will put a major dent in their equity,if not eliminate it completely.

I would guess that they will receive unlimited support from the government but what effect will that have on the common equity?

It always comes down to the same old question: who pays?

[mattyw]

I would think they would have insured against this catastrophe.

[nobby73]

Actually, I very much doubt they are. The premium for insuring a nuclear power plant against earthquakes in Japan? Nobody would underwrite that, not even AIG....

[mattyw]

Lloyd's might have...

[Roger Knights]

"the 1954 Prince William Sound Alaska quake"

should be "1964"

[O. Young Kwon]

It is an extremely unfortunate event for Japanese people. In a long run, however, I believe that the Japanese economy in the future will be better and healthier.

The reasons are twofold. One is that it may be a momentum for the government to pursue its ongoing reforms on trade and domestic economic problems such as free trade agreements, agricultural subsidies, unproductive over-constructions, etc.

The second point is that big banks' balance sheets are strong so that banks will support fully with the government. yk

[Uber Vandal]

Perhaps this might be bullish for Natural Gas stocks, if nuclear power plants across the world begin to shut down after this disaster.

[Davewmart]

Very few reactors are in zones as earthquake-prone as the Eastern Japanese seaboard, although no doubt that will not stop Greenpeace mounting a typical campaign of disinformation.
So far the score is one killed at a nuclear plant, in a crane accident not through radiation, against unknown numbers in the huge fires and clouds of deadly smoke emitted from the oil and gas installations that were damaged.

[cynic2011]

You might be correct,but the emotions are more important in the minds of the voters and policy makers. Personally I am pro nuclear but I consider myself to be in a small minority. As an investor I assume nuclear is dead as a doornail.

[pdtor]

I agree with you, but this is a knee jerk reaction. Will this be a buying opportunity for uranium stocks. I do not see obama championing nuclear energy................... for that matter any energy that is not green. In the long run we need nuclear power plants for a sustained form of energy, but it will take a political environmental hit

[Davewmart]

Thanks for the article.
Typo:
'Replacing this 40-year old reactor with a state-of-the-art new reactor would cost about $6.6 million for a reactor with 2,200KW output capacity'
S/be $6.6bn. and 2,200MW.