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Japan Stock Turmoil Adds Economic Pain Amid Reactor Fires

Japan Stock Rout Threatens Deeper Economic Pain
Pedestrians walk past an electronic stock board outside a securities firm in Tokyo. Commodities fell. Photographer: Haruyoshi Yamaguchi/Bloomberg

Japan’s failure to contain radiation risk from a crippled nuclear power plant, and the resulting turmoil in stocks, threatened to worsen damage to the economy from last week’s earthquake and tsunami.

The Nikkei 225 Stock Average fell 16 percent the past two days, the steepest tumble since 1987, before recouping some of the loss today with a 5.7 percent advance by the close in Tokyo. Bank of America-Merrill Lynch yesterday further cut its forecasts for gross domestic product, which shrank last quarter, and JPMorgan Chase & Co. may do the same.

“The earthquake’s damage on the economy’s much, much larger than we originally thought,” said Masaaki Kanno, chief Japan economist at JPMorgan in Tokyo. “Continued stock turmoil and disruptions to production will drive the economy into an extremely severe state.”

With the fiscal year-end coming March 31, the share slide may weaken corporate and bank balance sheets, while the damage to confidence risks an erosion in spending beyond the immediate hit from the March 11 catastrophe. More robust asset purchases from the central bank and a quicker effort to assemble a fiscal stimulus package could help assuage the damage, analysts said.

‘Unprecedented’ Action

“Given that Japan is in an unprecedented emergency situation now, the central bank should also do something unprecedented,” said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “There’s a chance the BOJ could call an emergency board meeting to add more monetary stimulus” before the end of the month.

Market turmoil continued yesterday after the Bank of Japan eased policy and poured a record 15 trillion yen ($184 billion) of cash into the financial system on March 14. As he boosted the central bank’s asset-purchase program by 5 trillion yen, Governor Masaaki Shirakawa warned the BOJ had to avoid underwriting government debt to maintain its credibility.

Government default risk soared to the highest on record yesterday, according to data from CMA that goes back to 2004, before retreating today. The yen was little changed as of 5:45 p.m. in Tokyo after climbing 2.8 percent the past three sessions amid speculation Japanese investors would repatriate assets.

Prime Minister Naoto Kan’s Cabinet has refrained from indicating the scale of the supplementary budget aimed to fund reconstruction.

Goldman Estimate

The magnitude-9 temblor and the ensuing tsunami devastated northeastern Japan, knocking out cooling systems at a nuclear plant 220 kilometers (137 miles) north of Tokyo. Goldman Sachs Group Inc. analysts estimated the total cost of the catastrophe is likely to reach 16 trillion yen, 1.6 times the amount of the earthquake that hit Kobe in 1995.

Economy Minister Kaoru Yosano told reporters after markets closed yesterday it was too early talk about the possibility of the government buying stocks to support the market. He said markets will eventually stabilize, and that the economy was healthy.

Chief government spokesman Yukio Edano and Finance Minister Yoshihiko Noda have both indicated they will likely use 200 billion yen in leftover funds from the current-year’s budget for relief spending and that it would be difficult to roll out an extra budget for the year that ends March 31. Noda isn’t contemplating a tax increase to help pay for stimulus, ruling party lawmaker Yoshihiro Kawakami said after meeting with him.

‘Lasting Repurcussions’

“This is a horrible shock with lasting repercussions,” Stephen Roach, non-executive chairman of Morgan Stanley Asia Ltd., said in an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” “The Japanese economy has been a weak economy for over 20 years and it could continue to display further if not even a more significant deterioration in the quarters ahead.”

“You can’t look at reconstruction as a plus for any society, you’re simply replacing something that has unfortunately been destroyed,” Roach said.

Shares accelerated their decline after Kan said at a news conference yesterday the danger of radiation leaks is rising at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant. The nuclear facility was crippled by the tsunami and two explosions and a fire, radiation levels jumped in cities as far away as Tokyo.

Blackout Impact

“Everything depends on how this situation with the nuclear power plants evolves,” said Masayuki Kichikawa, chief economist at Bank of America-Merrill Lynch. Kichikawa said the effects of the power outages implemented by Tokyo Electric indicate the disaster’s aftermath will shave 0.5 percentage point off of his 2011 growth estimate, more than the 0.2 to 0.3 reduction initially calculated. Before the earthquake, the bank saw Japan’s GDP rising 1.7 percent this year.

“If radiation spreads and more people have to stay secluded indoors, that delays the point of recovery for eastern Japan that much more.”

Tokyo Electric has begun rolling blackouts that will continue until the end of April to conserve power after the tsunami crippled its nuclear facility 135 miles (220) kilometers north of Tokyo. Factories have suspended or reduced operations as a result, and reduced train service in the city kept many of the nation’s workers from getting to work.

Toyota, the world’s largest automaker, said it may lose output of at least 40,000 vehicles with the electricity shortage while the immediate natural disaster has already damaged 2,300 of Nissan Motor Co.’s new vehicles.

Hit to GDP

Analysts at Goldman Sachs said in a research note yesterday that if the blackouts continue through the end of June, GDP will shrink at an annual 2 percent pace in the second quarter; if they continue through the end of December, the economy will keep contracting for the year.

Kanno at JPMorgan said a continued drop in equities would force him to “slash down our GDP forecasts drastically, and we may have to predict big contractions.” Two days ago, Kanno, who used to work at the BOJ, had cut 0.5 percentage point from his first quarter growth forecast, bringing it to 1.7 percent, and lowered his second-quarter projection to 0.5 percent from 2.2 percent. He anticipated an acceleration in the second half.

Kyohei Morita, chief economist at Barclays Capital in Tokyo, said the power of monetary policy is now limited and what investors are looking for is government action.

“It may too early for the government to know what to include in any recovery plan, but things are unlikely to settle down until we start to see at least more discussion of a stimulus.”

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