Repercussions of Japan quake seen to be minimal: Macquarie

Compared to the Kobe quake on 17 January, 1995, Macquarie believes the impact should be lower.

Miyagi, home to Sendai and the most affected by the quake, accounts for 1.7% of the population and the same proportion of GDP. Tohoku as a whole is about 8.0% of GDP. Initial reports suggest that Tokyo has not been badly damaged (Kanto accounts for nearly 40% of GDP).

By contrast, Kobe made up almost 4.0% of GDP and the importance of its port and its geographic position between Osaka and Western Japan meant that the disruption was significant.

There are two basic economics-related concerns. The first is that the fragile economic cycle is not in a position to withstand significant disruption. The second is that the combination of a softer economy and the additional strain on public finances will put upward pressure on bond yields.

Despite the scale of the disaster, it is hard to find much evidence in the macroeconomic data of the effects of the Kobe earthquake. Industrial production dipped 2.6% MoM in January 1995 and then bounced 2.2% in February and a further 1.0% in March. Costs were put at about ¥10tr. GDP growth was 3.4% QoQ annualised in 1Q95.

The equity market fell 8% in the week following the Kobe quake. The currency did not move significantly at the time, although it rose in subsequent months to a peak of just past ¥80/US$ in mid-April, but this did not seem to be related to the Kobe earthquake (there was significant trade tension with the US at the time). The BOJ cut rates in April in response to the strong currency, not the earthquake. Significant yen repatriation that could push the currency higher and, at an extreme, disrupt global markets, looks unlikely.

Similarly, bond yields did not move much in the immediate aftermath of the Kobe quake (although public finances were not in bad shape at the time), but yields fell in subsequent months as the stronger yen helped to reduce growth expectations and the economy headed into deflation.

Inevitably there will be microeconomic disruptions, as there were after Kobe and even Chuetsu. However, many firms reportedly diversified supply chains in the wake of Kobe, so the impact should be lower.