Disasters and Financial Markets: More fallout from Japan’s crises

Jayati Ghosh

The massive and unfolding tragedy in Japan encapsulates in extreme form the intersection of the three crises that this blog deals with. The unprecedented earthquake and tsunami were obviously unpredictable natural disasters, but they also reflect the growing ecological fragility that is at the heart of the fears about the looming environmental crisis. The nuclear emergency that has erupted thereafter in the Fukushima nuclear installations is an extreme outcome of a particular pattern of development that has been heavily based on maximising energy sources, including the placing of nuclear reactors in known seismic and tsunami-prone zones. That these unbelievably tragic occurrences could then call forth massive financial instability is an indication of how far we have allowed our economies to become hostage to the most egregious market forces, even in times of colossal calamity.

The enormity of this catastrophe, and how much worse it could still get, are surely mind-numbing. What stand out are the heroism, stoicism and discipline not only of those affected, but of ordinary Japanese who are coping with immediate devastation as well as fears of unspeakable nuclear fallout. The particular heroism of the workers engaged in the desperate struggle to limit the damage to the Fukushima nuclear reactors (at almost certain grave risk to their own lives and health) is also remarkable.

No such discipline or heroism is evident in financial markets, or among the “pundits” who populate the media analysis of the business world. This is a country that is in the throes of the worst calamity in living memory, with the number of dead still unknown, huge settlements and much infrastructure completely devastated, many areas still unreachable, survivors further battered by adverse weather and extreme cold – and now entering completely uncharted territory with the real threat of nuclear meltdown.

How have financial markets responded to this? By pummeling this economy further, in the form of capital flight and massive declines in stock market valuations in the days immediately following the earthquake, and by expressing vociferous demands that the Japanese government immediately take action to “calm nervous markets”, as if those in charge really had no other more pressing occupation at present.

When markets opened the week after the earthquake and tsunami hit the east Japan coast, the Tokyo Nikkei index fell sharply as fear hit the stock markets. On Tuesday 15 March the value fell by 11 per cent, the largest drop in a single day since the 1987 financial crisis (from which many argue the Japanese economy has still not really recovered). The slight recovery the following day was not so much a sign of stability as of the likely volatility in the days to come, as was confirmed by the drop the next morning.

One player in the Japanese financial markets  noted that they are “hostage to the next headline”. The frenetic market activity has reached a point at which some investors have even called for a temporary halt to trading until there is some sign of things settling down.

As a result, the Bank of Japan has had to provide massive amounts of emergency financing, in the form of “quantitative easing”, on a daily basis. In the four days from March 14-17, the central bank pumped in more than 60 trillion Yen (more than $740 billion) in a bid to stabilize the markets. These enormous giveaways are not to those actually affected by the disaster, but to financial markets that apparently need this expensive reassurance. But even so, speculative activity has continued to roil the markets.

Meanwhile, perceptions that that Japanese insurers would have to repatriate funds to cover part of the disaster payments have generated speculative pressures that caused the yen to appreciate, even as stock markets have plunged. This adds further financial insult to already grievous injury, as the rising yen then puts other pressures on the Japanese economy, which still continues to be heavily dependent upon external trade. These are quite apart from the actual effects of the disaster, which have obviously affected production dramatically.

And in the midst of all this, we have commentators appearing on financial media, tutting away about how Japan’s economy was already weak, about the various ways in which productive activity will be affected, about the hit that the global nuclear industry is taking and – worst of all – about how the Japanese government needs to do much more to bring back investor confidence.

The obscenity of this combination defies description. In the midst of a catastrophe of unimaginable magnitude, with enormous humanitarian tragedies, the government has to concern itself with appeasing financial markets that will otherwise punish a society that is struggling valiantly to survive. Do we need any more evidence of the completely bizarre and even immoral way in which we have all chosen to organize economic life in the 21^st century?

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