Friday, March 11, 2011

Economic Effect of Quake Likely “Much Bigger Than Anyone Can Imagine”

“Anyone who tells you that they have a handle on the economic consequences of this event is wrong,” writes High Frequency Economics chief economist Carl Weinberg in a note this morning about the economic effects of an 8.9 magnitude earthquake in Japan. The Standard & Poors 500 was initially unsteady on Friday morning, but was trading flat by 1:45 pm. West Texas oil futures for April delivery briefly fell below $100, but have climbed back slightly to trade at $100.75.

Weinberg says that many effects of the natural disaster may not be immediately apparent. But one of the largest issues that banks throughout the world will have to address is a potential liquidity crunch among Japanese citizens. “The currency market has already started speculation about a rush of repatriation of funds by locals, and the demand for yen that will generate.”

Damage to Japanese ports from the tsunami could also be devastating, as the country might not be able to move goods or import oil if the ports have been substantially damaged.

Weinberg also says the quake will result in high insurance costs. But James Schuck of Jefferies & Co. said initial indications were that the insurance impact could be limited.

“At this stage insured losses from the Japanese earthquake appear limited. We are working on the assumption of a $10bn industry loss. The impact on (re)insurer balance sheets is likely to be around 5%. We expect some rate momentum in the upcoming Japanese/CAT renewals, but not enough for the total industry cycle to turn. Tsunami and aftershocks remain real risks, and this will drag on sector performance.”

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