Japan's catastrophic yen-quake
By Scott Sumner
Back on March 11, 2011, Japan was hit by the worst national disaster to strike a developed country in modern times. Last week, Japan was hit by a human made disaster with a comparable effect on the economy (albeit obviously not in terms of human life). I don’t expect many people will agree, but consider the following news report from March 2011:
The rash of buying of Japanese stocks came after the country’s benchmark Nikkei 225 index, the equivalent to the Dow Jones industrial average, fell 16 percent over two days in panic-driven selling, reaching its lowest level since the 2008 financial crisis. The index bounced back nearly as quickly, jumping 5.6 percent on March 16 and 4.3 percent on March 22. The index is now down 7.8 percent since the earthquake.
Japan’s stocks fell a bit over 6% on the first trading day after the earthquake. As the severity of the quake became clearer, stocks plunged as much as 16%. Then, when it became clear the worst case of nuclear disaster would not occur, stocks recovered so that by March 22 they were only down around 7.8%. (AFAIK they leveled off around there, someone correct me if I’m wrong.)
During recent years, major Japanese stock indices have been closely correlated with the forex value of the yen. Late last week, Japan was hit by a yen earthquake, a sharp appreciation in the yen:
The stock market showed a similar pattern, except that the Japanese stock market was closed on Friday, and so the fall that would have taken place on Friday showed up as a much lower opening today. The fall in stock prices since early Thursday is comparable to the fall in stock prices in the weeks after the earthquake:
(Yahoo.com Finance was the source of both graphs)
Even worse, the yen appreciated strongly right after the March 2011 earthquake, so even in that case a good part of the fall in stock prices may have been due to the stronger yen, not the direct effects of the quake. Indeed an emergency meeting of the G-7 was necessary to try to talk down the yen. Notice that the G-7 has no sympathy for the Japanese suffering from 2 decades of deflation—it took a catastrophic earthquake for them to have enough empathy to allow a weaker yen.
The next question is what caused the stronger yen late last week. It’s pretty clear that the initial surge in the yen was due to the Bank of Japan’s unexpected decision not to cut the interest rate on reserves to an even more negative level. I don’t know what caused the further appreciation the next day, but suspect it was related to hawkish statements from government officials, or at least a lack of reassuring statements on the need for more monetary stimulus. If any of my Japanese readers have any information, I would greatly appreciate hearing it.
To summarize, a strong yen that was at least partly triggered by bad monetary policy, can be just as destructive as the worst natural disaster to hit a developed country in modern times. And it’s all so unnecessary.
PS. On the other hand, if you rely on the financial press, you might assume the decision not to cut IOR further into negative territory was good news for Japan.