The earthquake and subsequent tsunami that has devastated Japan has led to many questions. Many questions simply can't be answered yet - not until the full scale of the disaster has been assessed.
What we can say is that Japan faces a difficult road ahead. The main reason for this is that even before the tsunami hit the country, it was already in a relatively weak position economically speaking. Despite being a rich nation, Japan's debt burden is roughly twice the size of its annual economic output. In other words, the last thing Japan wants to deal with is a large compulsory spending program.
If there's any economic upside, it's that it appears much of the country's industrial areas have been spared from the destructive force of the tsunami. However, much rebuilding will still need to take place. The Japanese central bank has already started preparing for this by injecting money into the financial system.
Over the coming days, weeks and months we will be watching how financial markets respond to the disaster. Specifically we'll be looking at the Aussie dollar, the bond market, uranium stocks, and insurance stocks. All will respond to on-going information about the effects of the natural disaster.
At present, the real impact just seems to have manifested itself in the form of risk aversion. Investors are nervous and uncertain as to how all this will pan out. Investors are selling out of equities as a result.
The focus now, however, should simply be on the recovery effort and looking after those who have been impacted by the disaster.
David Taylor
