Japan has been hit by the magnitude-9 earthquake -- the world's largest in the past six years. Disasters like this are called catastrophes as they badly damage social and economic conditions in the affected country (or several countries as after the 2004 Indian Ocean earthquake near the northern part of Indonesia's Sumatra Island). Moreover, such disasters are commonly considered rare and occasional. Because human beings have not yet learnt to accurately predict the timing and location of natural disasters, the forecasting is based on probability parameters that are quite insufficient. However, some experts argue that the frequency of natural disasters has been increasingly high: just in the past 100 years the world saw around twenty earthquakes that caused multi-billion damage and killed thousands of people. However, if we speak about a specific region, for instance, Japan, the recent earthquake is comparable to the calamity that the country experienced in 1923.

The earthquake impact on Japan's economy has been severe: thousands killed, tens of thousands missing, hundreds of thousands rendered homeless, the Honshu Island's northeastern coast suffering severe losses, gas pipelines damaged. However, the response from stock markets to the Japanese calamity turned out more than moderate: the day after the earthquake NIKKEY index fell just 5%, US and European indexes saw minor drops while Hang Seng Index went up (see the figure).

Figure. Some exchange indexes movements

Source: Bloomberg

These movements of indexes were determined by several factors. First, the immediate policies of Japan's central bank aimed at easing the monetary policy and preventing liquidity deficit will help the economy go through the revival period more smoothly. Consequently, Japan's industry could avoid extra losses. Secondly, although domestic demand is declining and a number of companies are reducing their activities, the need for capital investments has increased significantly after the earthquake.

15 March investors gave a more pessimistic evaluation of the situation: the stock exchange indexes faced another drop by several pct (NIKKEY tumbled more than 10%). The Japanese nuclear accident was the main cause of the markets' negative reaction. The threat of the nuclear reactor failure and contamination of the area could lead to irretrievable losses in the Japanese economy. Moreover, the disaster has strongly impacted the nuclear industry that could see another period of disuse (the nuclear growth was paused for 20 years following the Chernobyl disaster). Every single nuclear accident drives up the demand for hydrocarbon resources and alternative sources of energy. The breakdowns at the Japanese power stations could give an impulse to development of ecologically friendly and safe renewable sources of energy.

By Galina Kovalishina,
Head of Corporate Finance Department