How will the Japan earthquake impact global stockmarkets?

Published by Sarah Modlock on 15 March 2011.
Last updated on 16 March 2011

Globe with currencies

London and its European counterparts have so far remained fairly calm following last week's natural disasters in Japan.

Shares in Hong Kong, mainland China, Korea and India all rose on Monday despite concerns about the economic impact of the disaster on the fragile global recovery.

However, Tokyo's Nikkei 225 index dived 6.18% - 633.94 points - to close at 9620.49. Sellers outnumbered buyers as almost five billion shares were traded.

Hit hard by the recession, Japan's economy contracted by a more-than-expected 1.3% in the final three months of 2010. But it remains a key player, accounting for more than 7% of the world economy. And that's why all eyes are on Asia right now.

Production stops, shares tumble

Production was stopped at some of Japan's best-known companies, heavily denting their share prices. Power cuts - whether planned or not - are expected to disrupt factories.

Toyota, the world's top carmaker, Nissan, and Honda suspended production at all plants across Japan and saw shares drop by between 7% and 10.7% on Monday.

Power companies and nuclear power-related businesses also suffered. Toshiba, whose products include semiconductors and nuclear reactors, fell 16%, as did competitor, Hitachi.

Stocks in other sectors also took major hits as investors dumped shares over concerns about economic production and consumption.

Insurance companies - many of which will likely face heavy claims for lost property and infrastructure - also suffered sharp drops.

British insurers Hiscox, Hardy and Caitlin, which do business in Japan were the hardest hit as estimates of potential claims more than tripled over the weekend to $30-50 billion (£19-30 billion) as the scale of the crisis unfolded.

Cosmo Oil, whose refinery has been on fire since the 8.9-magnitude quake, dived 25.2%.

But industrial and materials companies gained on hopes they will be in demand once Japan starts rebuilding. Construction company Kajima rose 17.9% and Nishimatsu Construction soared 21%.

The outages and an overall reduction in the demand for power sent the price of oil down, with Brent crude losing 2.4% to hit a two-week low of $111.16. US light, sweet crude fell by $1.37 to $99.79.

Bank of Japan injects trillions of yen

Meanwhile, the Bank of Japan announced that it would inject 15 trillion yen (£114 billion) into the banking system to stabilise markets - its largest amount ever in a single operation. A further 6.8 trillion yen (£45.4 billion) will also be made available in the next two days.

The bank's nine-member policy board also voted unanimously to keep its key interest rate at virtually zero.

"We will take every possible measure, including providing liquidity, to ensure the stability of financial markets," a bank spokesman said.

Japan's economics minister, Kaoru Yosano, told the Jiji news agency that he was keeping a close eye on the movement of Japan's currency, the yen, which has strengthened.

Impact on UK markets

Prof Douglas McWilliams, the founder of the Centre for Economic and Business Research, told The Daily Telegraph that up to 2% could be wiped off the value of stocks and shares in London - a £30 billion hit to the FTSE 100. "The Kobe earthquake in 1995 hit Japan's GDP by about 2% and I would have thought this could be bigger than that," he warned.

British miners are already absorbing the effects.

Uranium explorers Berkeley Resources, Forte Energy, Kalahari Minerals and Niger Uranium have all fallen on concerns over the future of uranium amid fears of a major radiation leak from the nuclear complex in Fukushima.

"Big questions are already being asked over the future of the global nuclear power build program - the explosion at Fukushima will be grist to the anti-nuclear lobbyists' mill," says Cailey Barker, an analyst at Numis Securities told Reuters.

Across the globe

The share price fall in London follows a similar slide in Australia, where some of the world's biggest uranium miners are listed.

Commodities analysts at Deutsche Bank warned: "Of the four broad commodity sectors, we believe energy markets are likely to be most affected since the country imports approximately 85% of its energy use, with nuclear power representing just over 10% of energy consumed in the country."

They point out that in July 2007, when the Niigita-Chuestsu-Oku earthquake led to the shutdown of the Kashiwasaki-Kariwa nuclear plant, lost nuclear production capacity had to be replaced by other fuel sources such as thermal coal, natural gas, petroleum products (and direct crude burning).

"The disruption to industrial sector activity is likely to have a negative impact on the industrial metals and bulk commodity sectors, in our view. However, we expect attention will turn to reconstruction. We would expect copper and zinc would be the principal beneficiaries of a large scale reconstruction programme."

At the other end of the spectrum, luxury goods will also be far from the minds of Japanese consumers at the moment. But this has pushed shares in Burberry down as its third-largest market has bigger priorities.

British American Tobacco also suffered due to the fact it has an estimated 10% share of the heavily-taxed smokers market in Japan.

Meanwhile, temporary power supplier Aggreko saw shares rise after it confirmed it would supply Japan with some of its self-contained gas and diesel generators.

"We have already signalled our willingness to the relevant authorities and will deploy our equipment as rapidly as possible if needed," the company told Reuters.

This article was written for Interactive Investor

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