BOJ Pledges Support on Japan Quake as Toyota Halts Output

Friday, 11 Mar 2011 04:27 PM

 

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Japan’s central bank pledged to ensure financial stability after the strongest earthquake in at least a century forced Toyota Motor Corp. to shut some plants, knocked out oil refineries and sparked a plunge in stocks.

The magnitude 8.9 earthquake struck off the coast of Sendai, a city of 1 million in the northeast, unleashing a tsunami as high as 10 meters (33 feet) that engulfed towns along the coast. As many as 300 people were killed. The Tohoku region, which includes Sendai, accounts for about 8 percent of the country’s gross domestic product, according to Macquarie Securities Ltd.

The disaster may curb Japan’s recovery from an economic slump in the fourth quarter as Prime Minister Naoto Kan struggles to convince investors about his ability to tackle the world’s largest public-debt burden. While the Finance Ministry said it’s too soon to gauge the quake’s economic impact, the Nikkei 225 Stock Average dropped 1.7 percent yesterday.

“The nagging question in the background here, given that public finances are in such a weak condition already, is this going to push Japan over the edge,” said Brendan Brown, chief economist at Mitsubishi UFJ Securities International in London. “If we’re talking about less than 5 percent of GDP, then it probably wouldn’t be the make or break factor. If we’re talking about much more than that, it could be a catalyst for wider concerns.”

Oil for April delivery tumbled $1.54 to $101.16 a barrel on the New York Mercantile Exchange, the lowest settlement since March 1.

Japan Crude Oil

“This is in response to the tsunami in Japan and the lack of the Day of Rage in Saudi Arabia,” said Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania. “If the Japanese refineries are down, then we’re going to see lower demand for crude oil.”

The temblor set ablaze a Cosmo Oil Co. refinery near Tokyo and closed at least three others, temporarily curbing demand for crude in Asia’s second-largest oil-consuming nation.

“I call on citizens to act calmly,” Prime Minister Kan told reporters in Tokyo yesterday after convening his emergency disaster response team. He also declared a state of “nuclear emergency,” Kyodo News reported, citing Chief Cabinet Secretary Yukio Edano.

The Bank of Japan, which has already cut its benchmark rate to zero in an effort to end deflation, set up an emergency task force and said it will do everything to provide liquidity. The central bank said its settlement system was working and that it was able to settle all accounts without disruption.

Big Earthquake

Policy makers will hold a policy board meeting on March 14 and announce their decision on the same day instead of March 15.

“The BOJ considers it’s better to make a policy decision earlier, following the big earthquake,” said Seiichi Tsurumi, a spokesman at the Tokyo-based central bank. Governor Masaaki Shirakawa will also hold a press conference.

The earthquake struck less than half an hour before Japan’s stock market closed. The yen initially dropped before paring its losses and later advanced at least 1 percent against all 16 of its most actively traded peers. The Stoxx Europe 600 Index slid 0.7 percent at 5:24 p.m. in Frankfurt and the Standard & Poor’s 500 Index was little changed at 11:24 a.m. in New York.

Munich Re and Swiss Reinsurance Co., the world’s two biggest reinsurers, lost 4.5 percent and 4.1 percent, respectively. Aflac Inc., the insurer that got 76 percent of 2010 revenue from Japan, shed 1.8 percent.

“It’s difficult to estimate the economic impact right now,” Takuji Okubo, an economist at Societe Generale SA, told Erik Schatzker on Bloomberg Television’s “InsideTrack” from Tokyo yesterday. “I’m sure this earthquake will reduce Japanese manufacturing output.”

Kobe 1995

The economy may nevertheless weather the shock, which evoked memories of the Great Hanshin Earthquake that hit the port city of Kobe in January 1995, said Richard Jerram, Singapore-based head of Asian economics at Macquarie. While Japanese industrial production dipped 2.6 percent in the month that the Kobe quake hit, it rebounded 2.2 percent the following month and 1 percent in March.

The area around Sendai “is a lot smaller part of the economy than Kobe, so we would expect the damage to be much less serious on the economy,” said Jerram. “The early indications are that it’s not probably going to be all that destructive from an economic point of view.”

Japan’s economy contracted 1.3 percent in the fourth quarter of 2010 on an annualized basis. It shrank 2.7 percent in the same period of 1994.

“The greater the social and economic damage, the larger the threat to the government’s ability and willingness to ward off a fiscal crisis,” Julian Jessop, an economist at Capital Economics Ltd. in London, wrote in a note.

Toyota, Nissan

The quake is disrupting a region that’s a center for auto making in the world’s third-largest economy. Toyota, the world’s biggest carmaker, said it and its affiliates closed three factories, with locations outside of northern Japan operating normally. Nissan Motor Co. said it extinguished two fires at factories and Kyodo reported that the Yokohama-based company halted production at four factories.

“The Tohoku region is one of the major production areas of cars and other products in Japan, so the quake may affect economic activity mainly through this sector,” said Tohru Nishihama, economist at Dai-ichi Life Research Institute Inc. in Tokyo. “In addition, it’s possible to affect food prices as agriculture is another major industry in the region.”

Nippon Paper suspended three Japan plants after the shock, Kyodo reported. All Nippon Airways Co. said yesterday 40,700 people were affected by flight cancellations.

Tokyo Aftershocks

The quake struck at 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo, at a depth of 24 kilometers, the U.S. Geological Service said. It was followed by a 7.1-magnitude aftershock at 4:25 p.m., the service said. Aftershocks continued to affect office buildings in Tokyo.

Televised footage showed a tsunami striking northeast Japan. Outside of Tokyo, Narita airport, the area’s main international hub, closed, Kyodo News reported. Haneda, the main domestic airport, was reopened after closing earlier, it said.

For Kan, managing the aftermath of the disaster may deflect immediate public attention from his becoming embroiled in a political-donation controversy. He had earlier told lawmakers he “had no idea” a political contributor to his office wasn’t a Japanese citizen, violating campaign rules. The Asahi newspaper reported Kan received 1.04 million yen ($12,500) from a South Korean resident. A similar charge prompted the foreign minister to resign March 6.

With opposition parties already calling for Kan to step down and refusing to pass bills authorizing sales of deficit- financing bonds, the tumult had risked prolonged paralysis. Political failure to set a path for reining in the world’s largest public debt has spurred credit-rating firms to lower, or put on notice for a cut, Japan’s sovereign grade.

The head of the Liberal Democratic Party, the biggest opposition group, said it would cooperate with the government to approve extra spending to cope with the disaster.

‘Worst Time’

“We will probably need a supplementary budget to work on this,” LDP leader Sadakazu Tanigaki told reporters after Kan convened a meeting of party leaders. “We will cooperate with all our might.”

Boosting fiscal spending on any reconstruction effort in the wake of the temblor would risk adding to the nation’s borrowing without cuts elsewhere or an increase in taxes. Government debt is set to reach 210 percent of GDP in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development, compared with an estimated 101 percent of GDP for the U.S.

‘There will be fiscal stimulus to reconstruct but Japan already has a budget deficit of close to 10 percent of” GDP and an aging population, Nouriel Roubini, the economist who predicted the global financial crisis, told Bloomberg Television in an interview from London. “This is certainly the worst thing that can happen in Japan at the worst time.”

© Copyright 2014 Bloomberg News. All rights reserved.

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