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Economic Shocks May Jolt Japan, Trade Partners

Wednesday, 16 Mar 2011 06:01 PM

By Hans Parisis

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Japan's nuclear-safety agency yesterday maintained its rating of the accident at the Fukushima Dai-Ichi plant, operated by Tepco, at four on a seven-point global scale.

However, Andre-Claude Lacoste, head of France’s Nuclear Safety Authority (ASN), said: “The incident has taken on a completely different dimension compared to yesterday (Monday). It is clear that we are at level six.” Make your choice while the situation at Fukushima continues to worsen.

By the way, Three Mile Island was a level 5; Chernobyl was a level 7, which was the only level 7 event so far. Workers at the Fukushima Dai-Ichi plant have been evacuated after radiation levels became too dangerous for them to remain. Fukushima, and possibly a plant in Tokai as well, are now damaged beyond repair.

Reuters reports foreign bankers are fleeing Tokyo as Japan's nuclear crisis worsens. IFR, a Thomson Reuters publication, spoke with 14 bankers from the bond-syndicate and equities desks of Citigroup, JPMorgan, Deutsche Bank Morgan Stanley, Bank of America-Merrill Lynch and BNP Paribas who had fled for the safety of Hong Kong, Singapore and Seoul through the week or were trying to get out. The institutions won’t confirm the report.

So, besides the size of the human disaster and pain of which literally nobody has a decent level of insight at this moment, I think it could be helpful for the investor to try to get some ideas of the ramifications that probably will take place in the aftermath of the Japanese 2011 disaster.

I have no doubt at all the third-biggest economic power in the world is now irrevocably bound for a complete breakdown of its fiscal position. While we see an additional threat emerging to the Japanese economy, it will not be limited to Japan alone, but also the economies of all its foreign trading partners. No, the problem won’t be that Japan could be running out of cash, but that it will be drowning in it.

What worries me and what bodes ill for the future is that the Bank of Japan (BOJ) now has doubled its long-term QE (quantitative easing) program, saying it wants to “pre-empt deterioration in business sentiment … from adversely affecting economic activity…” and to “… make contributions … to overcome deflation…”

This means that Japan will use its printing press to try to suppress the economic fallout of its unseen catastrophe. Because of that, we will see interest rates rise in Japan in the not so far future. That will have serious consequences for the rest of the world.

For now at least, Japan is not short of Japanese yen, but it lacks bridging materials, potable water, medical supplies, construction steel, electric power, etc. I don’t see a solid future for the yen.

For now, we don’t know how far “risk aversion” could go because of the catastrophe that is still developing in Japan. Besides, it’s also a fact that “risk aversion” could further strengthen by what is happening in the Middle East and North Africa as well as with the European PIIGS sovereigns: Portugal (which just saw its debt rating downgraded to two notches above junk), Ireland, Italy, Greece and Spain.

Investors should not overlook we are now in “margin calls” territory where crowds could rush for the exits at any time.

That said, investors should also keep in mind there will be a serious need to plug the nuclear power gaps in various places in the West.

I would keep an eye on natural gas, because probable increased demand for LNG in Japan and Continental Europe might just rattle the cage of the “natural gas shorts.” As always, we’ll have to wait and see what happens.

Finally, uncertainty at high levels is here to stay for the foreseeable future.

Under these circumstances, I wouldn’t be afraid of having dollars and being “overweight” in gold or, let’s say it in another way, buying cheap “insurance.”

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