Following the recent devastation in Japan caused by the earthquake and resultant tsunami, one surprise was the resultant increase in Yen strength. Now, repatriation of funds by Japanese companies occurs annually at this time of year for accounting purposes, and this effect has been magnified possibly by insurance companies repatriating funds to pay for claims. This does not, however, provide sufficient explanation for the magnitude of the increase.
Effect on stock markets.
The stock market bore a large part of the brunt of the perceived increase of risk in holding Japanese equities, with both Nikkei 225 and Topix indexes suffering their third worst daily declines in history (the second worst was Black Monday in 1987, and following collapse of Lehman Brothers in 2008). In these markets, "circuit-breakers" are set up to prevent economic ruin, and these were activated when, for example, Tokyo Electric Power, Asia's biggest power generating company, fell by the daily limit of 25 per cent.
Effects on business
The main risk to Japan’s manufacturing comes from the earthquake’s impact on the technical supply chain. The quake may trigger a supply shortage for electronic components including batteries and memory chips. Japan makes 44 percent of the world’s audiovisual equipment, 40 percent of electronic components, 19 percent of semiconductors and about 20 percent of all technology products. Toyota closed 12 plant and loses US$72M for each day of closure. Nissan and Honda may also each lose US$24M per day.Total economic impact is estimated at US$240B.
Possible further economic aftershocks
If ever any major holder dumped their US treasury holdings, the world-wide consequences would be devastating. It has often been mooted that such an act by China would cripple the worlds economic structure. The fact is that it would not be in China's interest to do so. Japan, however, may have a reason for selling some of its holdings, in order to pay for the massive rebuilding of infrastructure destroyed by the earthquake and resultant tsunami.
The US's own Pacific Investment Management company which runs the worlds biggest bond fund) last month dumped ALL of its government related debt. How long before similar companies do the same?
Immediately the Lehman Brothers collapse occurred, a friend called to say that this was "Financial Armageddon". Largely, world economies went through a time of huge volatility and loss, but seemed to be recovering nicely. Recently, I read a post from a trader who returned to the forex markets after several years of absence, and was asking why there was so much change in the way markets were behaving. To me, it is simple, the answer is FEAR. During the past few months, pre-Sendai, it seems like the "Risk on/Risk off" mentality has oscillated with increasing frequency, sometimes appearing to be a weekly phenomenon. In "Risk on" mode, commodity currencies do well, and the short-term speculation turns to wherever interest rates are highest, or where they will potentially increase. In "Risk off"mode, their is a marked flight to whatever seems to be the flavor of the month. Right now, Swiss Franc is particularly strong against most pairs.
"Swissy", along with US dollar and the Yen, has always had a reputation as a safe-haven currency.The country has had a robust economic recovery and there are expectations that Swiss interest rates could rise sooner than those in other major economies. So the Franc is seen to be safer and likely to earn more in the near future. The expectations of interest rate rises, however, conflict with the fact that Swiss inflation is currently around 0.5%. SNB is unlikely to find the need for increases at these levels.
In a beauty contest of currencies, however, the Yen is still not seen as "the most ugly".
Effect on stock markets.
The stock market bore a large part of the brunt of the perceived increase of risk in holding Japanese equities, with both Nikkei 225 and Topix indexes suffering their third worst daily declines in history (the second worst was Black Monday in 1987, and following collapse of Lehman Brothers in 2008). In these markets, "circuit-breakers" are set up to prevent economic ruin, and these were activated when, for example, Tokyo Electric Power, Asia's biggest power generating company, fell by the daily limit of 25 per cent.
Effects on business
The main risk to Japan’s manufacturing comes from the earthquake’s impact on the technical supply chain. The quake may trigger a supply shortage for electronic components including batteries and memory chips. Japan makes 44 percent of the world’s audiovisual equipment, 40 percent of electronic components, 19 percent of semiconductors and about 20 percent of all technology products. Toyota closed 12 plant and loses US$72M for each day of closure. Nissan and Honda may also each lose US$24M per day.Total economic impact is estimated at US$240B.
Possible further economic aftershocks
If ever any major holder dumped their US treasury holdings, the world-wide consequences would be devastating. It has often been mooted that such an act by China would cripple the worlds economic structure. The fact is that it would not be in China's interest to do so. Japan, however, may have a reason for selling some of its holdings, in order to pay for the massive rebuilding of infrastructure destroyed by the earthquake and resultant tsunami.
The US's own Pacific Investment Management company which runs the worlds biggest bond fund) last month dumped ALL of its government related debt. How long before similar companies do the same?
Immediately the Lehman Brothers collapse occurred, a friend called to say that this was "Financial Armageddon". Largely, world economies went through a time of huge volatility and loss, but seemed to be recovering nicely. Recently, I read a post from a trader who returned to the forex markets after several years of absence, and was asking why there was so much change in the way markets were behaving. To me, it is simple, the answer is FEAR. During the past few months, pre-Sendai, it seems like the "Risk on/Risk off" mentality has oscillated with increasing frequency, sometimes appearing to be a weekly phenomenon. In "Risk on" mode, commodity currencies do well, and the short-term speculation turns to wherever interest rates are highest, or where they will potentially increase. In "Risk off"mode, their is a marked flight to whatever seems to be the flavor of the month. Right now, Swiss Franc is particularly strong against most pairs.
"Swissy", along with US dollar and the Yen, has always had a reputation as a safe-haven currency.The country has had a robust economic recovery and there are expectations that Swiss interest rates could rise sooner than those in other major economies. So the Franc is seen to be safer and likely to earn more in the near future. The expectations of interest rate rises, however, conflict with the fact that Swiss inflation is currently around 0.5%. SNB is unlikely to find the need for increases at these levels.
In a beauty contest of currencies, however, the Yen is still not seen as "the most ugly".
