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Japan's Nikkei Collapses; Yen Remains Bid For Now on Repatriation Flows

Japan's Nikkei Collapses; Yen Remains Bid For Now on Repatriation Flows

2011-03-15 04:39:00
Jonathan Granby,
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The benchmark Nikkei Stock Average has violently collapsed Tuesday after Prime Minister Kan said a “substantial amount” of radiation was leaking from a nuclear power plant affected by Friday’s massive earthquake and tsunami. Indiscriminate selling hit all sectors as investors divested themselves of their holdings sending the Nikkei down by double-digits (-12.8% upon publishing). The drop comes after Monday’s 6.2% decline. Elsewhere in the region Hong Kong’s Hang Seng Index fell 3.8%, China’s Shanghai Composite dropped 2.1% and Australia’s S&P/ASX tumbled 1.9%. Meanwhile, US equity futures are already lower by well over 2%.

Japans_Nikkei_Collapses_Yen_Remains_Bid_For_Now_on_Repatriation_Flows_body_nikkei.png, Japan's Nikkei Collapses; Yen Remains Bid For Now on Repatriation Flows

The latest sell-off increased in intensity after another explosion was reported at Tokyo Electric Power Co.’s Fukushima Daiichi plant’s No.2 reactor, after explosions at No.1 and No.3 reactors. Prime Minister Kan said there was a high risk of radiation leak from the facility, and asked residents near the facility to stay indoors saying “substantial amounts of radiation are leaking in the area”.

On the currency front, Usd/Jpy is unchanged on the day with the yen still finding bids on the back of massive repatriation flows. However, as per Joel Kruger’s Morning Slices report from Monday, “while trillions of Yen have been pumped back into the economy, there are still a number of questions that have yet to be answered and could ultimately weigh heavily on the Yen going forward. Our colleague, a well know currency strategist at a major bank outlines these points quite succinctly:

JPY buying is likely to be the immediate market reaction to the devastating earthquake. Unlike New Zealand, Japan has external assets which it can repatriate to finance rebuilding. The rebuilding means that there will be a period of extremely rapid Japanese growth which would be yen supportive. [However] the further out you look the bigger the question marks.As businesses decide to rebuild, they may decide to rebuild elsewhere. Yen strength already was inducing them to relocate. Now that there is additional capacity to replace, the foreign FDI expansion may accelerate. The uncertainty about the Japanese nuclear program and how any retrenchment would affect energy supplies may also on the margin encourage capital exports.

[Additionally], however necessary, the Japanese authorities are hardly starting from a position of fiscal strength in their rebuilding program. FX investors may expect the government to put enormous ongoing pressure on the BoJ to keep rates low for an extended period. Especially if the private investors are favoring FDI over domestic investment, the burden of recovery may fall on an already extended government.

If the net outcome is a lower business capital stock, more government spending and accommodative BoJ policy, a weaker yen would seem needed to crowd exports in. What is less clear is the timing in moving from the short term of capital inflows and repatriation to the longer term risks discussed above, and what guideposts will be in place to tell us that the transition is happening.”

Broadly speaking, volatility in the markets has picked up across the board as a result and markets are expected to continue to trade in this manner for the remainder of the day. A combination of pre-existing geopolitical uncertainty in the Middle East and North Africa, more questions surrounding the stability of the Euro-zone, softer economic data out of China, an earthquake in New Zealand, and the current Japanese crisis have all opened the door for a major potential shift in the construct of the markets.

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