The financial impact of Japan's Earthquake

A devastating earthquake hit Japan off the coast of Sendai, sending tremors and resulting tsunamis in the surrounding area.

There have been many injuries, 26 reported deaths so far, damages to buildings and infrastructure, and the shutting down of businesses. Meanwhile, the Bank of Japan (BOJ) has pledged to support the financial markets with liquidity. It will hold a meeting next Monday and announce specific measures.

Aside from the human tragedy, the earthquake is expected to negatively impact the economy in the short term.

Asian equity markets closed with losses, as Japan’s Nikkei-225 dropped 1.72 percent. Global risk sentiment has generally been dampened as European stocks, US stocks futures, and oil futures fell. In particular, reinsurance stocks like Europe-traded Swiss Re (VTX:RUKN) and Munich Re (BIT:MUV2) were hit.

Reinsurance companies are expected to pay out to Japanese insurance companies who bought catastrophe coverage from them.

The Japanese yen, meanwhile, has actually rallied despite the BOJ’s dovish tone. The key reason is the expected repatriation flows; insurance companies (foreign and domestic) need to make payments to Japanese entities to cover damage payments, so they’ll need to convert foreign currencies to the Japanese yen in order to do that.

After the 1995 Kobe earthquake, the yen soon rallied 5 percent against the US dollar, according to analysts from Connecticut-based Faros Trading. In the three months following that event, it rallied 20 percent.

In the medium term, Japan’s economy should rebound strongly. The country is no stranger to natural disasters and has proven its ability to recover from them in the past. When natural disasters strike, competitive and modern economies like Japan quickly finance rebuilding efforts by tapping into savings and borrowing.

The economy, after the initial earthquake shock, is therefore expected to expand faster-than-usual on rebuilding spending.

Email Hao Li at hao.li@ibtimes.com

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