Japan’s central bankers will convene an emergency meeting today to discuss measures to calm financial markets after a magnitude-9.0 earthquake struck off its northeast coastline at 2.46pm on Friday.
The worst of the news emerged after stockmarkets in Japan closed on Friday, leaving the Nikkei stock average down just 1.7% at 10,254. In Hong Kong, the Hang Seng index lost 1.6%. However, Nikkei futures plunged to below 10,000 in New York trading on Friday and the market will likely continue to fall today, as investors react to the full extent of the damage.
In currency markets, the yen appreciated as Japanese companies and insurers repatriated offshore funds to meet the costs of the disaster. Despite initial rumours that stockmarkets in Tokyo and Osaka would close today to contain panic selling, it now seems that both markets will open as normal.
The quake’s epicentre was in the Pacific Ocean, 130 kilometres east of Sendai and 373 kilometres northeast of Tokyo, where the Pacific tectonic plate meets the Okhotsk plate. It is the biggest tremor to hit Japan since records started in the late 1800s and was so powerful that it knocked the Earth 25 centimetres off its axis and moved Japan’s northeast shore by four metres, according to scientists. It also triggered a devastating tsunami that sent a huge wall of water towards Miyagi prefecture in the Tohoku region.
Despite its distance from Tokyo, people in the city quickly realised that the tremors signalled an unusually large quake.
“The ground shocks were bigger than any that I have experienced before,” said Soichiro Monji, Daiwa SB Investment’s chief market strategist, in an email sent from the firm’s Tokyo offices on Friday.
Many others conveyed similar messages. “Seeing the extent that the neighbouring building was swaying very vividly confirmed this was a stronger-than-normal earthquake,” said Richard Heyes, Japan head of equity markets at Citi, whose offices are in the centre of Tokyo’s financial district. “With only minutes before the market closed, there was a flurry of last-minute activity before people were able to regroup and realise all was under control and nobody was injured.”
The earthquake caused chaos in the capital, but did little serious damage. Trains stopped running, mobile phones were useless, elevators shut down and many office workers were stranded at their desks overnight, including Monji, but there were few serious injuries as buildings, roads and bridges withstood the initial quake, as well as repeated smaller tremors that continued throughout the weekend.
Businesses in Tokyo are well prepared for earthquakes and quickly put continuity plans into practice, but disaster rehearsals rarely focus on such a benign set of circumstances. Banks and other companies typically provide helmets and rations to workers in the event of earthquakes, but instead of dealing with mass casualties and all-out calamity, employers in Tokyo found themselves with a different problem: hundreds of perfectly healthy staff with no way to get home.
“By around 8.30pm we had approximately 300 staff who either don’t live within the nearby vicinity or wanted to remain in the office at that time,” said Andrew Smith, a spokesman at Barclays Capital in Tokyo. “We provided food and drinks for these staff and tried to organise group coaches for those that lived in areas close by to each other. We booked pregnant, disabled, and older members of staff who had no way to get home into hotel rooms. We also managed to secure hotel rooms for the female members of staff who had no way to get home. A core team of around 15 staff worked through the night contacting staff and ensuring their welfare. Those who remained in the office were provided with blankets.”
Most banks carried on working after the quake, with staff at some offices having to walk up and down 30 or more floors to get food or take a break.
“I am always impressed with the resilience, hard work and dignity of the Japanese people,” said Jackie Kestenbaum, a spokesperson at UBS in Tokyo, who added that some members of the bank’s senior management stayed in the office on Friday night to provide leadership to stranded staff members. Everyone got home on Saturday, as most banks reported.
In a different part of town, Daiwa was holding a conference for 1,300 investors and 320 issuer companies at the Prince Park Tower in Tokyo when the earthquake struck. “Many one-on-one meetings were held in rooms around the 20th floor where the tremor was felt very strongly. The building was swinging,” said Kozue Niida, a spokesperson at Daiwa. “It was scary even for Japanese people, who are used to earthquakes, but for some of the overseas investors it was very scary.”
Even so, the conference continued, with some of the main presentations going ahead as planned in the afternoon, though all one-on-one meetings were cancelled.
Some bank staff stuck in offices busied themselves analysing the probable effect on markets and the overall economy. Those initial assessments predicted that the earthquake’s greatest damage had already been wrought, with the devastation to lives and livelihoods in the northeast — a largely rural area that contributes around 6% to Japan’s economic output.
“The overall economic damage caused is expected to be contained,” wrote Monji, while stuck in the Daiwa office on Friday night. “While the Nikkei 225 declined almost 180 points on the back of today’s earthquake, we expect it to regain any lost ground early next week. Looking at sectors and stocks, insurance companies may be the most negatively affected by the earthquake because of anticipated payments of insurance claims. In addition, banks and utilities whose businesses have higher exposure to the Tohoku prefecture might experience a sell-off early next week as well.”
According to Heyes at Citi, the longer term outlook for equities depends on “the response of the BOJ and any monetary injection, coupled with any government stimulus package”.
Even on Friday, analysts in Tokyo were already looking to the January 1995 Kobe earthquake for precedents. That disaster caused ¥10 trillion in damages, or about 2.5% of Japan’s gross domestic product, yet the economy recovered quickly thanks to government stimulus measures, according to a commentary released by Nomura.
However, the early hopes of a quick recovery this time are now being revised. Nomura released a new commentary yesterday that predicted a worse economic outcome.
“The size of the economy of the main earthquake-affected region is roughly the same as that of the area hit by the Great Hanshin (Kobe) earthquake in 1995, but with this Tohoku Pacific (Sendai) earthquake affecting road networks, power plants and other infrastructure over a wide area, we expect the short-term economic impact to be greater than the Kobe earthquake,” it said.
It went on to note that the area affected by the Sendai quake is home to a large number of IT-related companies and that as a result the Japanese economy is now likely to take longer than expected to exit its current lull.
“We had projected an April-to-June exit but now forecast July to September or possibly October to December,” the report said. “We forecast that the largest negative impact on quarterly real GDP growth will emerge in April to June 2011. We think a slump in the domestic economy caused by the earthquake is an overly pessimistic outlook.”
Nomura expects government stimulus measures for the Sendai earthquake to exceed the ¥3 trillion it injected after the Kobe quake and says that the finance ministry has indicated that it will tap the remaining ¥203.8 billion of special reserves in this year’s budget to fund rebuilding measures in the short term. “We think rebuilding demand will probably take some time to emerge,” said Nomura.
The extent of the damage is bound to exert downward pressure on equities early this week, but Nomura expects that both the Nikkei and Topix will find support from investors somewhere around their 200-day moving average. That means 9,840 for the Nikkei and 873 for Topix.
Market participants are looking to the central bank to implement additional monetary-easing measures and Nomura expects the bank to increase the scale of its asset-purchase facility from around ¥5 trillion at present to ¥8 trillion to ¥10 trillion, which should not cause any alarm in the markets.
The government and central bank are likely to coordinate the timing of such moves and will be watching how markets react today, particularly the rising yen and plunging stockmarkets.
The central bank has said that it will continue to assess the possible effect of the earthquake on financial markets as well as on financial institutions’ business operations, and stands ready to take action as necessary to ensure the stability of financial markets and the smooth settlement of funds in the coming week.
The human toll continues to rise and could end up in the tens of thousands. In the town of Minami Sanriku alone, more than half the population — 9,500 people — are thought to have been swept away when the sea rushed two miles inland. Thousands of others are still unaccounted for, including the passengers of four missing trains.
The combination of the strong earthquake and extensive flooding has also caused a nuclear emergency. Engineers at two of Japan’s nuclear plants fought through the weekend to cool overheating reactor cores after the government declared a nuclear emergency on Friday. Industry experts have said there is no danger of a Chernobyl-like disaster at the Fukushima plant, which is owned by Tokyo Electric Power (Tepco).
Japan generates more than one-third of its electricity from nuclear power, making it the world’s third-largest producer. Nomura analyst Shigeki Matsumoto said that 11 reactors in total have been shut down at the Fukushima No 1 and No 2 nuclear power plants, operated by Tepco; the Onagawa nuclear power plant, operated by Tohoku Electric Power; and Japan Atomic Power’s Tokai No 2 nuclear power plant.
Matsumoto estimated yesterday that Tepco will need to spend ¥45 billion this month on alternative fuel supplies to meet shortfalls, and Tohoku Power will need to spend ¥16 billion. In the meantime, prime minister Naoto Kan said yesterday that power outages will affect the whole country.
Earthquakes are one of the biggest threats to Japan’s nuclear power industry and have caused problems in the past. In 2007, Tepco’s Kashiwazaki-Kariwa plant, the world’s largest, was shut down after a magnitude-6.8 tremor caused radioactive water to spill into the Sea of Japan — it took almost two years for the first reactor to be restarted. In 2008, wastewater also spilled at the Kurihara plant after the reactor’s cooling towers cracked and damaged the core during a quake.
At Fukushima, the earthquake first knocked out power and then the tsunami swamped diesel backup generators at two of its reactors. That left staff unable to pump coolant into the cores to stop them overheating, and the ensuing struggle focused on controlling the pressure inside the reactor. By Sunday, seawater was being used to cool the reactors in an untested effort to prevent an explosion of the reactor core.
Both Citi and Daiwa have pledged ¥100 million towards relief efforts and other banks are expected to announce similar donations today.
As the world watches an unfolding human disaster, it is back to work for most bank staff in Tokyo today. “We expect to operate as normal,” said Heyes at Citi.
