TOKYO (MNI) – The Japanese economy is now braced for unprecedented
economic shocks following a devastating earthquake which hit northern
Japan on Friday, as the killer quake now threatens the nation’s output
activity, power supply and distribution, while showing no signs of
stabilization.

The 9.0-magnitude quake initially struck Miyagi Prefecture,
northern Japan, on Friday, killing more than 1,600 people so far and
shutting down two nuclear power plants and some thermal power plants on
the Pacific coast in one of the nation’s worst natural disasters.

The Bank of Japan took immediate action, injecting a total of Y12.0
trillion of funds through two same-day settlement operations in its
largest-ever single-day operation and deciding to increase its asset
purchase program.

The Nikkei 225 Stock Average tumbled Monday to the lowest in more
than four months and the yen surged to the highest since last November
versus the dollar at one point, as investors fretted about the aftermath
from the quake.

Nonetheless, economists point out that medium-term prospects are
not so dark, as the government now prepares to compile a huge
supplementary budget to reconstruct the quake-hit area.

“The killer quake, given its impact on power supply and
distribution, may cripple the nation’s recovery in the near-term,” said
Kazuto Uchida, chief economist at Bank of Tokyo Mitsubishi UFJ, a unit
of Japan’s largest financial group Mitsubishi UFJ Financial Group Inc.

Toyota Motor Corp and other automakers suspended production at all
their domestic plants today due to difficulties in procuring auto parts
following Friday’s deadly earthquake that hit Japan’s northeast Pacific
coast regions.

Its smaller rivals, including Nissan Motor Co and Honda Motor Co,
also halted their domestic plants, while Mitsubishi Electric Corp and
Toshiba Corp also joined the list of Japanese manufacturers which
suspended their domestic factories.

Tokyo Electric Power Co said late Sunday it will launch planned
rationing of power in its service areas from today to prevent massive
blackouts in the wake of Friday’s powerful earthquake in Tohoku area,
northern Japan.

The company, known as Tepco, said the measure will last until the
end of April, adding that it may take similar action during the summer,
depending on demand.

The company’s service area covers Tokyo, Chiba, Gunma, Ibaraki,
Kanagawa, Saitama, Tochigi, Yamanashi and part of Shizuoka prefectures.

Tokyo Metro Co, the operator of subways in downtown Tokyo, and
private railway operators such as Keio Corp, Odakyu Electric Railway Co
and Tobu Railway Co, reduced the number of trains running today.

“Total damage stemming from the quake in Tohoku may top the cost of
the damage of the Great Hanshin Quake in the short-term,” said Masaaki
Kanno, chief economist at JP Morgan Securities.

JP Morgan Securities lowered its estimate for Japan’s real GDP
growth to 1.7% at an annualized rate in the first quarter from the
earlier projection for +2.2% and that for the second quarter to 0.5%
from the previous estimate for a +2.2%.

The Great Hanshin Quake in 1995, which killed more than 6,000
people, caused direct damages of Y9.9 trillion and indirect damage of
Y2.6 trillion in Hyogo Prefecture, whose gross domestic product stood at
Y19.5 trillion based on 2005 data.

GDP of Miyagi Prefecture, the epicenter of the deadly quake,
totaled Y8.5 trillion, while that of Iwate and Fukushima prefectures
stood at Y4.5 and Y7.9 trillion, respectively, according to the 2005
data.

The Nikkei 225 Stock Average ended the day down 6.18% at 9,620.49,
the lowest close since Nov. 4, and the yield on the 10-year JGBs fell
4.5 basis points to 1.20% in typical risk-off trade.

The yen also reached more than a fourth-month high of Y80.72, the
highest since November, on concerns that Japanese insurers will
repatriate their overseas money to settle claims.

Japanese general insurers paid a total of Y78.3 billion to settle
claims on earthquake insurance policies after the Great Hanshin
Earthquake in 1995, according to the General Insurance Association of
Japan.

Air Worldwide, which offers risk consulting services, said that
based on currently available information, insured property losses from
the earthquake that struck Japan on Friday will range between Y1.2
trillion to Y2.8 trillion.

“Japan must take appropriate action to prevent the harmful
appreciation of the yen that can exaggerate the impact of the earthquake
on the economy,” said JP Morgan’s Kanno.

The Bank of Japan today decided to increase the size of
asset-buying program by Y5 trillion to Y40 trillion, saying that the
nation’s production activity will weaken and the sentiment of household
and corporate sector will deteriorate in the wake of the quake.

The Japanese yen hit a record high of Y79.75 on April 19, about
three months after the Great Hanshin Earthquake.

“If the yen appreciates beyond reasonable levels, Japan may not
hesitate to carry out foreign exchange market intervention,” Kanno said.

While the quake may shake the nascent recovery in Japan and its
financial markets in the near-term, economists are more or less
optimistic about the mid-term outlook for Japan.

“Assuming that Japan can take policy action in timely and
appropriate manner, Japan can overcome the aftermath from the
earthquake, as lessons from the Great Hanshin Earthquake suggest,”
Uchida said.

The government of Japan compiled a total of Y3 trillion in
supplementary budgets in 1995 to help reconstruct the quake-hit area.

Japan’s real GDP growth quickened to 2.3% in fiscal 1995 and 2.9%
in fiscal 1996 from 1.5% in fiscal 1994.

Still, some economists warn of downside risks to the Japanese
economy in the longer-term viewpoint.

“The lifeline for the Japanese economy has fallen apart,” said
Mitsuru Saito, chief economist at Tokai Tokyo Securities.

“Given the latest quake’s impact on distribution network and power
supply chain which may take some time to be reconstructed, negative
impact may exceed any positive impact stemming from reconstruction
works,” he said.

“If the lifeline for the Japanese economy fails to recover to the
pre-quake levels, selling of Japanese assets, including the yen, may
begin and it may take place in force,” Saito said.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4835 **

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