THE biggest earthquake in Japan's history left the global equities and insurance markets reeling as experts spent the weekend grappling with the financial impact on the world's third-biggest economy and the knock-on effects to the global recovery.
Global markets wobbled, oil prices closed lower, the futures market for grain commodities dived and shares in global insurance and reinsurance stocks fell as analysts began to tally up the losses caused by the earthquake, the tsunami and the implications of a nuclear meltdown in the wake of cooling system damage.
Initial estimates of the damage to the Japanese economy are about $100 billion, with the global insurance industry believed to be exposed to less than $15 billion.
The Japanese government will bear most of the costs as it reinsures most homeowner earthquake insurance policies in a giant pool fund.
Share prices in Japan are expected to fall further when trading resumes today, while in Australia the futures market suggests a gain on opening. But given news over the weekend about the state of nuclear fallout, the loss of life and the disruption to economic activity, investors will be grappling with the impact for some time.
In the short term, economists believe the impact on the Japanese economy will be negative, in part due to physical damage to infrastructure and capital stock and because of the psychological trauma suffered by the Japanese, which is likely to trigger risk aversion, a drop in consumer confidence and an increased urge to save.
This could prove a negative for Australia as Japan is its second biggest export market, accounting for more than $37 billion of exports last year.
Investors expect Japan will be forced to increase its already bloated borrowing in a weak economic environment to finance the massive rebuilding project.
The damage has also triggered a debate about whether the earthquake will be a market-changing event for the insurance sector. Since the start of the year natural disasters, including floods and a cyclone in Australia and an earthquake in New Zealand, have wreaked havoc on the insurance and reinsurance industries, leaving the sector exposed to more than $50 billion in damages.
With so many catastrophes, the expectation is that prices will be pushed higher in the July 1 reinsurance renewals. If prices rise, general insurers will be forced to pass them on in higher premiums.
The insurance industry has been suffering from a so-called soft market. That happens when their prices come under pressure as insurers and reinsurers have lots of spare capital and compete more for business.
Frequently Asked Questions about this Article…
What was the immediate market reaction to the Japan earthquake and tsunami?
The article says the biggest earthquake in Japan’s history left global equities and insurance markets reeling: oil prices closed lower, grain futures dived, and shares in global insurance and reinsurance stocks fell as analysts started tallying the losses and concerns about possible nuclear fallout.
How large are the initial estimates of the economic losses from the Japan disaster?
Initial damage estimates to the Japanese economy are about $100 billion, while the global insurance industry was believed to be exposed to less than $15 billion according to the article.
How could the earthquake affect the insurance and reinsurance industry?
The article notes the sector’s share prices fell as analysts assessed losses. With recent catastrophes this year leaving the industry exposed to more than $50 billion in damages, expectations are that reinsurance prices could rise at the July 1 renewals, which may force general insurers to pass on higher premiums.
Who will cover most homeowner earthquake insurance costs in Japan?
Japan’s government will bear most of the cost because it reinsures the majority of homeowner earthquake insurance policies through a large pooled fund, according to the article.
What are the short-term economic impacts on Japan and its trading partners?
Economists in the article expect a short-term negative impact on Japan due to physical damage to infrastructure and capital stock, and psychological trauma that could trigger risk aversion, lower consumer confidence and increased saving. That could hurt trading partners like Australia, since Japan is Australia’s second-biggest export market (about $37 billion of exports last year).
Will the disaster affect Japan’s government borrowing?
Investors expect Japan will likely need to increase its already large borrowing in order to finance the massive rebuilding effort, the article reports.
Did the article mention concerns about nuclear fallout, and how did that affect markets?
Yes. The article highlights concerns about a possible nuclear meltdown after cooling-system damage, and says ongoing news about nuclear fallout, loss of life and disruption to economic activity added to investor uncertainty and market volatility.
What key things should everyday investors monitor after the Japan earthquake?
Based on the article, investors should watch Japanese share market reopening (expectations of further falls), developments about nuclear contamination, insurance and reinsurance loss estimates, the outcome of July 1 reinsurance renewals and resulting premium changes, and trade impacts on export-dependent economies such as Australia.
Call 1300 880 160
Start a chat
Schedule a call
