Japan

Japan is back in recession. The incoming tide just brought in 2,000 bodies. Most major companies, including Toyota, Nissan, Honda, and Sony have shut down all domestic production. Tokyo’s subway system is closed, stranding 25 million residents there. Electric power shortages are a huge problem. Half the country’s nuclear generating capacity is now down. 20,000 expatriates waiting at Tokyo’s Narita airport as foreign companies evacuate staff to avoid a nuclear meltdown. $187 billion worth of credit intervention to “save Japan.”

Jason Kelly, a financial writer living in Sano, Japan, shares his first person experience of the stunning events from the past several days: "The power interruptions and damage to infrastructure are leaving stores in Japan’s earthquake area sold out. Gas stations are rationing, but closing one by one as they go dry. Between a third and half of the shops in my town, Sano, are closed for various reasons, not least of which is to let society catch its breath. The following pictures were taken by mobile phone at stores in Sano"

Following reports that all major banks have pulled their employees out of Tokyo overnight, finally broad evacuations are starting to spread to the ordinary citizens, starting with China. AP reports that: "China became the first government to organize a mass evacuation of its citizens from Japan's northeast on Tuesday, while other foreigners left the country following radiation leaks at an earthquake-damaged nuclear power plant. Austria said it is moving its embassy from Tokyo to Osaka, 250 miles (400 kilometers) away, due to radiation concerns. France recommended that its citizens leave the Japanese capital, while the U.S. government advised Americans to avoid travel to Japan." And while the Chinese concern for its citizens is admirable, what is peculiar is the complete silence as to how China, which is very much downwind from Fukushima, is handling the fears of its own local citizens regarding spreading radiation.

Japan's nuclear crisis has deepened and we deeply regret to say that there is now the real possibility of a nuclear catastrophe. Investor panic has set in with the Nikkei down over 16.5% in two days and the Topic index down by 17% - its worst two-day loss since the 1987 Wall Street stock market crash. The cost to insure Japanese debt has surged to a record with credit-default swaps protecting Japanese government debt for five years soaring 27 basis points to a record of 125 basis points. One UBS trader said that the deteriorating nuclear crisis had led to "near panic across local credit-default swap markets." While most equity indices and commodities have fallen, some sharply, gold has remained resilient and is down 1% in US dollar terms and is higher in Australian dollars which like other so called 'commodity' currencies has come under pressure in recent days. Gold remains marginally higher in all currencies since the tragedy began last Friday.

• Radiation levels at the quake-stricken Fukushima Daiichi
  complex have varied wildly, with a reading of 11,930
  microsieverts at the main gate of the plant at 0000 GMT, up from
  596 microsieverts as of 0630 GMT.
• Elsewhere at the plant, levels reached as high as 400,000
  microsieverts an hour (or 400 millisieverts an hour).
• The government gave no update on the status of a steel
  container surrounding the core of the plant's No.2 reactor,
  deemed by observers as most at risk of a meltdown.
• An explosion on Tuesday at the No.2 reactor had caused
  some damage to its suppression pool, which helps to cool and
  trap the majority of cesium, iodine, strontium in its water.
• Later, there was a fire and explosion at the complex's No.
  4 reactor and this is likely to have contributed to rising
  radiation levels.
• The No. 4 reactor had been shut down for maintenance ahead
  of the quake, but a spent-fuel cooling pool associated with that
  reactor caught fire, causing the explosion.
• The No.4 reactor's cooling pool, where spent nuclear fuel
  is stored, may be boiling and the water level may be falling.
• Radioactivity at the cooling pool is high and Tokyo
  Electric cannot make checks at the site or determine what has
  burned.
• Radiation leakage from complex is likely to spread after a
  fresh explosion at the plant.

All hell is currently breaking loose following an explosion at reactor #2 and a another hydrogen explosion at reactor #4 per Kyodo, leading to a 16% drop in Nikkei futures as blind panic grips Japan. Kyodo essentially confirms there was a reactor meltdown as radiation levels at Fukushima 3 are now 400 times legal levels. And topping it all Japan's warning that all people within 30 kilometers from Fukushima should stay indoors and that the radioactive winds may reach Tokyo in as little as 8-10 hours. The BOJ has just intervened to prevent the yen from surging, as the following chart shows. Our prayers are with the people of Japan.

All those hoping (here's looking at you Mo) to see a prompt bounce back in Japan to baseline economic levels may be in for some disappointment. Reuters reports that according to various sellside analysts, the impact to Japanese GDP (which is virtually tied with China for the world's second largest economy), could be anywhere between 3 and 5%. "Quake-hit Japan  faces a recovery and reconstruction bill of at least $180 billion, or 3 percent of its annual economic output and more than 50 percent higher than the total cost of 1995's earthquake in Kobe. The Kobe earthquake is estimated to have cost $115-118 billion, or 2 percent of GDP in 1995 terms. This time -- in a still unfolding disaster -- initial estimates from Credit Suisse and Barclays put the cost at $180 billion. Mitsubishi UFJ Securities and Sarasin expect the cost could run as high as 5 percent of GDP. Mitsubishi's estimates take into account a wider economic cost including a loss of tax revenues, subsidies to various industries of the affected area, loss of productivity following rolling blackouts on top of straight reconstruction costs." And it could be far, far worse: "some extreme projections of the longer-term cost look at figures closer to $1 trillion over several years." And as we first quantified over the weekend, the reinsurance caps for real estate losses are maxed out at about $60 billion. Which means either the government will leave those with insurance policies to split pro rate proceeds that refunds amounts owed at a big haircut, or in tried US fashion, will have to step in with emergency transfer funding measures, capitalized through the issuance of tens if not hundreds of billions of new debt. As for who will buy that debt, we look forward to Bill Gross' next letter for clues thereto. In the meantime, look for global GDP to be cut by at least 1-2% by the sellside pundits "shortly" especially as the way for QE3 is paved by the likes of Jan Hatzius who is lucky to have a force majeure on his second "Golden Age" call.

All corporate earnings forecasts have just been rendered meaningless. We could be putting in a 50 year double top on the yen here. Taking a bite out of global economic growth. Flipping from a +2% GDP growth rate to -3% in two minutes. International trade takes a major hit. The looming electronics parts shortage. The death toll could go to six figures. Don’t rush out and short Japanese insurance companies. (FXY), (YCS), (EWJ).

The media is still banging the nuclear fear drum over and over again to keep people watching but the reality is that the chance of a catastrophe, at this point is very slim...

The damage control comes earlier. In an Op-Ed just posted at the FT, Pimco executive Mohamed El-Erian has presented his thoughts on why the Japanese devastation, while disrputive, will eventually lead to another GDP surge: "Japan’s economic growth rate will fall in the immediate aftermath of the natural disasters before rising sharply due to reconstruction activities." Yet even by Pimco standards it is not all good news and the immediate effect will likely be a jump in inflation per the former Harvdardite: "Disruptions to supply chains and the loss of inventories will cause shortages and inflation to spike temporarily from very low levels. The fiscal deficit and public debt will rise meaningfully due to lost revenues and, more importantly, emergency spending. The central bank will ease monetary policy which, given policy interest rates floored at the zero bound, will involve the provision of extraordinary credit and liquidity facilities. Last, the country will receive transfers from abroad, including the repatriation of funds held outside the country by Japanese residents." What however received no mention is Pimco's lamentation that the firm will no longer be able to frontrun Japanese buying of Spanish (and Eurozone in general) bonds: a plan that is certainly put on indefinite hold.

Our expectation that TEPCO CDS will fly this morning has just been confirmed with a market indicated 92 bps wider from Friday close at 133 bps. We expect this number will soon be at multiples as the fall out to the company is increasingly exposed to the market: to wit - news from Kyodo that the fuel rods at Reactor number 2 at Fukushima (which has so far not exploded) have now been fully exposed. Should there be a trifecta of explosions at Fukushima, TEPCO will likely not survive the public fury aftermath. And in related news, the Japanese government had just announced it will release 3 days worth of oil reserves. Per Wikipedia, Japan has the world's second largest strategic reserve, with state controlled reserves of petroleum at eleven different locations totaling 324,000,000 barrels.

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.

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.

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.

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.