For those who believe in a higher power, it seems clear that he (or she) is trying to send a message. Japan suffered a 9.0 earthquake that resulted in a nuclear crisis, 7,000 confirmed dead and half a million displaced residents. With that said, the economic aftershocks might ultimately be felt around the world, as the perverse whims of Mother Nature take precedence over bottom lines and balance sheets.
The damage in Fukushima has been quantified in terms most observers can digest – body counts, missing families and the cost to rebuild. The human toll, however, is far more demanding and inexact. A nuclear catastrophe makes the air unsafe to breathe within 10 miles and corrupts the food and water supply as far as 50 miles away. Moreover, the stress from living 150 miles away from a nuclear meltdown is incalculable, the distance between Fukushima and Tokyo, or Washington, D.C. and Philadelphia. For what it’s worth, D.C. has five nuclear plants within 100 miles of the city.
The affected nuclear facilities have caused rolling blackouts in a nation that represents nine percent of the global economy. With the Japanese manufacturing sector unable to produce car parts, GM has been forced to shut down a plant in Shreveport LA, now considered a non-essential expense. Japan also makes 44 percent of the world’s audio-visual equipment, 40 percent of electronic components and 19 percent of semiconductors. The global economy can be a double edged sword.
The long-term impact on oil prices is still unknown. Nuclear power supplied 30 percent of Japan’s energy, and while short-term demand for oil has been truncated in the wake of disabled facilities, the need for new power substitutes may increase oil prices. Furthermore, global food prices, already on the rise, may see a renewed spike as Japan’s food and water supplies are testing positive for radiation.
It has been reported that the earthquake and tsunami will cost the Japanese economy $250 billion, an untimely expense for a country whose debt is 225 percent of its GDP and recently saw its credit rating downgraded. Unfortunately, help is not on the way: Japan has received $87 million in aid, a far cry from the $514 million pledged after Hurricane Katrina and $275 million for the Haitian earthquake of 2010.
The financial ecosystem may soon be called into question, as 70 percent of the U.S. treasuries are being purchased by the Federal Reserve through Quantitative Easing II, a program that ends in June. Japan is the second largest foreign owner of our debt; who can we count on to pick up the slack? Weak demand for government debt would force interest rates higher, or worse yet, cause uncontrollable inflation if the Fed pursues QE3.
Of course, operation “smoke and mirrors” has been enacted, with the G-7 manipulating the value of the yen, hoping to suppress the currency and increase Japanese exports. This comes after Japan implemented its own version of quantitative easing, pumping ¥25.9 trillion into the banking system since March 11th to support their already sluggish economy.
The earthquake shook more than Fukushima. It impacted Japan’s way of life, posing questions for which there are many answers, none of which are attractive. Investors would be well served to pay attention to upcoming events, account for the prevailing risks in the market and pray for the people in Japan.
They need all the help they can get.