Japan

Over time, it’s complacency that kills you...

Japan's 9.0 earthquake is most likely a non-event for the crude oil, but the nuclear power basically has met its Deepwater Horizon.

While nobody has any idea just what lies in store in the coming week which is expected to be abnormally volatile, here is a summary of the key economic events from Goldman's FX desk. "It all came at once last week with the major drivers of market price action rolling across the newswires on Friday. Front, back and centre stage was dominated by the still unfolding tragedy in Japan. First and foremost our thoughts are with those affected by the situation. In terms of asset markets, it is tough to draw concrete conclusions until we have a greater handle on the monetary cost of the disaster which is likely to run into trillions of Yen. There are also many potentially offsetting economic forces at work after a natural disaster, which we will try to assess in coming days and weeks."
The Eurozone summit arguably produced a positive surprise in that steps have been taken to a final political deal at the European council meeting of 24/25 March...The week ahead will continue to focus on developments in Japan and the Middle East and any further political commentary associated with the European summit. The BoJ has shortened its monetary policy meeting to one day on Monday. In addition to pledges to provide ongoing liquidity and the maintenance of financial stability, the BoJ may decide to extend the QE proposals from September in order to shore up confidence

For all who want to be up to speed with all the latest developments out of Japan, below we provide our readers with a live feed from the NHK, or the Japan Broadcasting Corporation.

Breaking news from Kyodo: the cooling system at Tokai, a third nuclear power plant now said to have cooling failures, has stopped according to the fire department. Tokai was Japan's first nuclear power plant. The plant has two reactors: a 1965 built Magnox-type 166MW, and a 1978 built Boiling Water Reactor generating 1100MW. As Wikileaks reports: "This Boiling Water Reactor  was the first nuclear reactor built in Japan to produce over 1000 MW of electricity. By some formalities in the paperwork, the unit is technically separate from the rest of the nuclear facilities at Tokai-mura, but it is managed with the rest of them and even shares the same front gate. The power produced at the unit is sold by both the Tokyo Electric Company and the Tohoku Electric Company." SkyNews adds that the cooling has failed at the bigger, BWR reactor.

Something very serious is happening with Japan's underlying geology: while the north has been paralyzed by the aftermath of the 9.0 magnitude earthquake and resulting Tsunami, and is scrambling to prevent a nuclear disaster, the south is issuing flashing red light signals of its own: the Shinmoedake volcano, which had resumed eruptions after last known was reported in 2009. As Wikipedia notes: " As of February 2011, a lava dome was growing in the volcano's crater." It is unclear if the volcano's activity, which is notable for having been used as a location in the 1967 James Bond film, You Only Live Twice, as the volcano in which the villains' secret rocket base is located, is related to the geological tremors beneath Japan but it is very likely. The question is just how many faultlines will have shifted after all is said and done, and just what may have precipitated all of this.

But it's a LONG, LONG way away.

Hopefully, this will turn out NOT to be as bad as it sounds ...

Contrary to earlier reports that cooling at Reactor 3 at Fukushima has failed (as per CNN and Reuters) and there is now a state of emergency for three reactors at the site, the IAEA has released a report refuting these rumors. It appears that there is a split in news reporting in Japan: on one hand we have the Nuclear and Industrial Safety Agency which seems to present a downside case, while the government is obviously spinning news in a favorable direction. While the Japanese government is likely not to be trusted much with truthful data dissemination, jumping the shark on rumor spreading is probably not in anyone's favor either. That said, with the government losing credibility (see prior Stratfor post), the question is just whom can the public trust, if not the Japanese government and media? Furthermore, if there is another accident at Fukushima, and the government's credibility is completely destroyed, what happens next: after all the BoJ needs as much "market faith" as it can muster ahead of its decision on Monday to flood the money markets with JPY2 trillion (sound familiar). If the government eats up all the street cred of Shirakawa, the BOJ rush to action may end up doing far more bad than good.

Japan’s Nuclear and Industrial Safety Agency (NISA) said March 12 that the explosion at the Fukushima Daiichi No. 1 nuclear plant could only have been caused by a meltdown of the reactor core, Japanese daily Nikkei reported. This statement seemed somewhat at odds with Japanese Chief Cabinet Secretary Yukio Edano’s comments earlier March 12, in which he said “the walls of the building containing the reactor were destroyed, meaning that the metal container encasing the reactor did not explode.”

Though China gets all the media attention, Japan is still a critical supplier of numerous high-tech parts in the global supply chain. The Japanese global corporations have learned from experience that anything they make in China will soon be pirated, so they have withdrawn all the really high-tech manufacturing to the home islands. I suspect most analysts are complacent about the possible global ripple effects of these quakes, simply because Kansai and Tokyo were largely spared. Given its great stability and wealth, Japan seems an unlikely candidate for social or financial changes triggered by a natural disaster. I am not so sure it is immune to these forces, given the fragility of its central State and local government finances and its sclerotic Power Elites and political machinery. The quiet stoicism of the next few months may give way to more systemic and possibly transformational forces than most observers believe possible.

After private Property and Casualty reinsurance companies got whacked on Friday on broad yet unquantified concerns about imminent losses, it is time for a deeper dive into the structure of how prepared Japan is to handle what are sure to be tens of billions in earthquake insurance claims. Using information from the Non-Life Insurance Rating Organization of Japan, we find that there is a clean distinction between the liabilities borne out by the private P&C sector and where reinsurance companies step in to fund losses on residential earthquake losses. A more nuanced breakdown comes from JPMorgan's Siddharth Parameswaran: "In Japan there is coverage provided for earthquake, through two distinct forms: 1) Coverage for losses of residences (governed by "Earthquake Insurance Law," It is covered by the domestic insurance industry and the Japanese Earthquake Reinsurance ("JER") Commission); and 2) Coverage for commercial losses internally insured and externally reinsured without involvement of the government." Of the former two, the first is far more important due to the pervasive losses of real estate in most of the northeastern coastal areas, which according to some estimates will reach in the tens of billions. The three numbers to keep in mind when evaluating potential liabilities are ¥115 billion (or $1.4 billion) which is the threshold for 100% private insurance coverage; next is ¥1.925 trillion ($23 billion), which is the limit on a 50/50 split between losses for private insurers and the JER (or $11.5 billion each), and lastly, ¥5.5 trillion through which 95% of all losses are borne by the government, and 5% by the private industry. In other words the total possible private losses to private P&Cs before reinsurance funding kicks in is about $16.5 billion, while the government stand to lose at most ¥4.3 trillion (or $52 billion). At this point losses are capped, and claims are pro-rated among all claimants. Should total losses surpass about $64 billion in real estate values (at various loss thresholds), claimants will have to settle for pennies on the dollar.

While there may have been a tsunami in Japan (and Money McBags heard rumors that it was caused by...

With much conflicting and biased news coming out of the mainstream media in its perfectly explainable attempt to prevent panic among the population, the World Nuclear News has released the best and most objective analysis of the events that have transpired and that have yet to transpire at Fukushima we have read to date.

The damage control to the Fukushima explosion reported earlier is coming fast and furious. According to CNN, "the explosion at an earthquake-damaged nuclear plant was not caused by
damage to the nuclear reactor but by a pumping system that failed as
crews tried to bring the reactor's temperature down, Chief Cabinet
Secretary Yukio Edano said Saturday. The next step for workers at the Fukushima Daiichi plant will be to
flood the reactor containment structure with sea water to bring the
reactor's temperature down to safe levels, he said. The effort is
expected to take two days." While the government is trying to play down the threat from the explosion, it has nonetheless double the evacuation zone radius from 10 to 20 kilometers: "Radiation levels have fallen since the explosion and there is no
immediate danger, Edano said. But authorities were nevertheless
expanding the evacuation to include a radius of 20 kilometers (about
12.5 miles) around the plant. The evacuation previously reached out to
10 kilometers." Next steps are to flood the reactor with salt water. NHK reports: "The
TEPCO Fukushima Daiichi nuclear power plant in Fukushima Prefecture is
believed to be exploded, and in order to prevent corruption, the
containment vessel will be filled with sea water to cool containers and
vehicles used by the SDF pump I. According to the Ministry of Defense,
work will begin at 8:00 pm, and that it expected to end around 1:00 am
on March 13 (or roughly 11 am Eastern)." And while containment efforts peak, the leakage is reported to be in the range of 1015 microsieverts / hr. In the meantime, confusion in Japan is pervasive as up to a million people are without power. And while we hope the outcome of the Fukushima situation will be prompt and favorable, the economic devastation to the country will be pervasive for weeks to come.