The great Tohoku earthquake that hit Japan last Friday (March 11) and the terrible devastation resulting from the subsequent tsunami still need to hit home in the financial markets.

The best way to analyse the current situation is to look at what happened in the financial markets after the Kobe earthquake on January 17, 1995. The Nikkei 225 held up reasonably well in the first day or two after the quake but was down 8% a week later. After several failed rallies the Nikkei eventually bottomed in June that year, marking a fall of 25% since the quake.



The S&P 500 hardly moved on the news of the quake and continued to power ahead.



The yen initially faltered, succumbing by 1.4% against the US dollar but the latter bore the brunt of the quake to reach a bottom 18.3% lower against the yen and 13.4% against the reconstructed euro in April 1995.



Precious-metal prices (gold and platinum) were unfazed by the earthquake but gained strongly with the sell-off of the US dollar. Industrial metal prices were severely hit, though, sinking by approximately 17% to a low in May 1995.



Global bonds rallied immediately after the earthquake, ending the bear market that commenced at the end of 1993. The bull market in global bonds continued into 1996.



Mark Twain once said that history does not repeat itself, but it does rhyme. But let us look at what may be different this time.

The impact on the global economy as a result of the Tohoku earthquake is likely to be devastating on Japan’s economy as the Tohoku region contributes around 8% of Japan’s GDP. Japan’s relevance in the global economy is significantly smaller than it was in 1995. In 1994, prior to the Kobe earthquake, the country’s GDP was 17.9% of the world GDP. In 2009 Japan’s economy shrank to 8.7% of the world GDP, resulting in its relevance falling by more than 51%. China’s economy, on the other hand, contributed 2.1% to the world GDP in 1994 and grew to 8.6% of the world GDP in 2009, and we know China surpassed Japan’s economy in 2010.



The aftershocks on the East Asia and Pacific region as a whole are also likely to be much more muted than in 1995. In 1994 China contributed only 7.8% to the region’s economy, while by 2009 it surged to 35.3%. India’s contribution more than doubled to 9.3% since 1994. On the other hand, Japan’s contribution fell from 67% to 35.9% in 2009.



In 1995 the rebuilding of Japan was spearheaded by public investment spending but the Japanese policy makers are hamstrung in 2011. I quote from an article by Dismal Scientist titled “Macroeconomic Ramifications of Japan’s Earthquake”: