Japanese Quake Shouldn't Shake Yen

MARCH 12, 2011    THE WALL STREET JOURNAL

By JAMES SIMMS

Japan is reeling from one of the most powerful earthquakes in its history. But economically, the nation has proved resilient in the past. The last large-scale quake, the January 1995 disaster around Kobe that killed over 6,000 people, didn't cause long-lasting economic damage, even though it was home to a key port and cut the nation's transportation network in half.

This time the quake didn't hit a major economic hub and was far from the economic heart of Japan that runs from Tokyo south to the Osaka area. Even after the Kobe disaster, the nation's economy expanded at an annualized rate of 3.4% in the first quarter of 1995. And the $120 billion spent on rebuilding arguably helped drive growth in the subsequent quarters.

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Xinhua/Zuma Press

The prefecture of Miyagi, where the effects of the latest quake were concentrated, accounts for less than 2% of the nation's gross domestic product. Including the other two prefectures that were hit hard, however, that doubles, and for the entire Tohoku region the number is 8%. The area that includes Tokyo, the Kanto region, accounts for nearly 40% of GDP and seems largely unaffected.

One major risk is that the disaster knocks out certain key suppliers for big firms elsewhere in the country. Given the just-in-time manufacturing system, that could have large follow-on effects. But overall, learning from their bumbling after Kobe, the government appears to have responded more quickly, which hopefully will lessen the loss of life and property. The disaster also appears to have brought the opposition and ruling parties together to work on rescue and reconstruction efforts. It may lead them to get past the impasse that's threatening to stall the passage of legislation for next fiscal year's budget, which includes a key corporate tax cut.

Japan, unlike New Zealand after its recent quake, can't cut interest rates much. There may be more quantitative easing from the Bank of Japan's emergency meeting Monday. But that is unlikely to reverse the yen's surge. Given that the same happened to the currency after Kobe, due to safe-haven flows and Japanese repatriating funds, traders are likely to keep betting on a repeat.

Write to James Simms at james.simms@dowjones.com