Today's Coming Crisis Movie

Saturday, March 12, 2011

Japan's fiscal fix deepens -- Quake compounds Japan's financial misery

Today, concern over the human suffering in Japan naturally dwarfs any worry about how much it will cost to rebuild earthquake-hit areas.

But as the scale of the tragedy comes into fuller view in coming weeks, the impact on Japan's unsteady economy and stretched fiscal position – and the implications for markets -- will start to weigh heavier.

First, the facts. The quake, at 8.9 on the Richter scale Japan's biggest ever, has killed hundreds of people. An oil refinery caught fire and residents near a nuclear reactor were forced to evacuate.

Japanese stock markets dropped and the cost of insuring against a default on Japanese debt rose 6%, according to CMA Market Data. Bond prices rose as investors pulled back from risky assets.

Like the oil spike that roiled markets in recent weeks, Friday's quake offers yet another reminder of how vulnerable aging, slow-growing, debt-burdened economies are to a shock even in what is supposed to be a period of global economic expansion.

"Japan's economic recovery has lost momentum and a large part of the reconstruction costs will add to the government's significant debt burden," writes Julian Jessop at Capital Economics. He writes that the disaster could make it even more painful for the latest Japanese government to take long overdue action to produce a plan that would put spending on a more sustainable track. (read more)