While the market reaction from the Japanese disaster has thus far been limited, Societe Generale’s Takuji Okubo sees some very specific responses to come when viewed through the prism of recent earthquake history.Japan experienced a significant earthquake in 1995 near Kobe, that resulted in a immediate economic slip, but then a bounce back that increased growth for the year. That doesn’t mean you should expect an equity market boom in Japan, however.
From Takuji Okubo:
Equity: The earthquake will affect the Japanese equity market negatively. In 1995, the Topix lost 8% of its value in the week after the earthquake hit Japan on January 17. The Topix regained half of the loss in the following week. In the following months, Japanese equities went on to lose about 20% of their value, but we would attribute the decline to the surge in yen. The yen strengthened from over 100 JPY/USD at the beginning of 1995 to 80.6 JPY/USD in April 1995.
Rates: The earthquake’s impact on bond markets is less clear, but with a likely easier monetary stance following a disaster, the earthquake should lower bond yields. In 1995, the 10yr JGB yield was hardly changed in the weeks following the earthquake.
FX: Implications for the yen are also not straightforward but, in our judgment, the yen would rather appreciate than depreciate, because of its negative correlation to risk.
You should expect some sort of stimulus from the Japanese government, but not much considering the country’s debt position, according to Okubo.
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