As the subcontinent is dipped in colors of the Cricket world cup, as political parties prepare for forthcoming state assembly elections in five states in India, a tragedy stuck in Japan. It was hit by 8.9 M earth quake followed by devastating Tsunami on its North-eastern coast and now news about accidents in its nuclear reactors.
Enough has been discussed in various media about the damage the tragedy has caused such as monetary loss of billions and trillions of dollars and loss of human population, not less than 10,000 in number; and I am sure much more discussion will take place on these subjects in the time to come. However, I am writing this blog post to identify some potential impact this tragedy will have on the economy.
Enough has been discussed in various media about the damage the tragedy has caused such as monetary loss of billions and trillions of dollars and loss of human population, not less than 10,000 in number; and I am sure much more discussion will take place on these subjects in the time to come. However, I am writing this blog post to identify some potential impact this tragedy will have on the economy.
- As investors and corporates in Japan, try to recover from the tragedy, then would require huge amount of cash for the same. They might withdraw their investments from the government treasuries/ bonds and equity markets.
- The equity markets will fall because, first investors will be withdrawing money from the market by selling their equities and their are less numbers of people willing to buy these securities; and second because company's performance itself would be under pressure, due to temporary stoppage of work, high raw material prices etc.
- As people start to withdraw money from government securities, government will find it tough to raise money from the market. This will result in the yield on these instruments going northwards.
- As government is not able to raise money from the market, it has no other option but to borrow money from abroad or to print the money. Borrowing money from abroad may not be very feasible idea, considering lower rate of interests in Japan and definitely printing Yen, would be the most attractive idea for Japanese government. More money = more inflation.
- Inflation will go up, first because government will print more money for reconstruction and other normal expenses, but second because simply their is little supply against high demand.
- Food prices will go up. World is already reeling from the poor staple crops last season and the Japanese disaster has made the matter worse.
- A significant portion of the electronic items has equipments sourced from Japan, which is definitely going to be affected at least for a shorter period.
- As Japanese bonds themselves not buying enough buyers, their demand for US securities will reduce significantly, which may affect the economic recovery in the US.
- Japanese economy may ultimately show some positive growth, after showing years of stagnancy, as it tries to rebuild the lost infrastructure.
- Global companies dealing with providing infrastructural support may benefit from the reconstruction in Japan.
- The most hit would be the reinsurance companies, who would be approached for the claim on loss of properties and lives. Many smaller insurance companies would not be hit significantly, as they typically re-insure and pass on the risk to bigger insurance giants. The share prices of reinsurance giants has already taken hit (to the tune of 15-20%). These were already under pressure, after recent floods in Australia and earthquake in New Zealand. However, as insurance companies are smart, they would probably increase the premium amount for new insurance (similar thing happened in US after 9/11, when re-insurers increased the air insurance premium by USD 1 per head). The higher premium would definitely surprise (positively) the market in terms of expected earnings for the next financial year.
- Overall, I believe Indian economy may have very little impact due to this disaster
