Japan

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.

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.

The massive earthquake and tsunami that has rocked Japan is being digested by markets and the economic ramifications and uncertainty is leading to risk aversion. Tokyo gold futures rose on the news with the most active gold contract on the Tokyo Commodity Exchange, February 2012 inching 0.22% higher to 118,000 yen prior to giving up those gains. Gold is marginally lower in dollars but higher in euros, Swiss francs and British pounds. After the falls on Wall Street yesterday the Nikkei was already under pressure when news of the quake broke at the end of the trading day. The Nikkei fell 1.7% today and is down over 4.11% for the week. The Japanese yen was sold in the immediate aftermath of the quake. Counter-intuitively it then recovered and is the strongest currency in the world today (see table). Market participants appear to be seriously underestimating the risk posed by the megaquake to the Japanese economy and assets. Alternatively, there may have been intervention by the Japanese authorities in order to maintain confidence and protect the value of their currency and bonds. The Bank of Japan, like the Federal Reserve, regularly intervenes in foreign exchange markets and has even intervened in equity markets by buying ETFs linked to the Nikkei and the Topix. Considering the sharp selloff seen in equity markets in recent days, gold’s resilience is impressive. Gold is down nearly 1% for the week and a lower weekly close could see the short term momentum change and a period of correction and consolidation.

A massive magnitude 8.9 earthquake, the 5th strongest since 1900 and 7th largest in history, struck Japan last night off the coast of Sendai, launching a 10 meter Tsunami across the entire Pacific ocean, killing numerous people and sending Japan into a tailspin. Bloomberg reports: "Prime Minister Naoto Kan mobilized Japan’s Self-Defense Forces and the central bank pledged to ensure financial stability after a magnitude 8.9 earthquake struck off the coast of Sendai, a city of 1 million, causing damage across the east coast of Japan. “I call on citizens to act calmly,” Kan told reporters in Tokyo after convening his emergency disaster response team. “The Self-Defense Forces are already mobilized in various places. The government is making its utmost effort to minimize the damage,” he said, saying later in a news conference that the impact was widespread. The Ministry of Finance said it’s too soon to gauge the economic impact of the temblor, the world’s biggest in more than six years. Japan’s central bank set up an emergency task force and said it will do everything it can to provide ample liquidity. The BOJ, which has already cut its benchmark rate to zero in an effort to end deflation, had last month said the economy was poised to recover from a contraction in the fourth quarter." The financial reaction was swift: "Japan’s stocks slid 1.7 percent in Tokyo today as the earthquake struck less than half an hour before the market closed. The yen advanced 0.2 percent to 82.77 per dollar as of 5:07 p.m. in Tokyo. The MSCI Asia Pacific Index dropped 1.4 percent as of 5:22 p.m. in Tokyo, with losses accelerating after the quake. Futures on the Euro Stoxx 50 Index fell 1 percent. The central bank said in a statement that its settlement system was working and that it was able to settle all accounts today without disruption." News agencies report a ship carrying around 100 was swept away by the tsunami. The assessment of the impact is only starting and will likely be massive when all is said and done.

When Takahiro Mitani, Chairman of Japan's $1.4 trillion Government Pension Investment Fund (GPIF) expresses concern over his country's mounting public debt, you'd better pay attention...

And just in case the stock market needed a little more risk off impetus...

The two most prominent defenders of the Japan-inflation theme, Dylan Grice and Kyle Bass, have just gotten a key reinforcement:Goldman Sachs. Last night, Goldman released its much anticipated 6th trade, to its roster of top trades for 2011. It just happens to be a bet on Japanese inflation. Which, however, begs the question - is this one of those trades where Goldman is, naturally, on the other side and is selling Japan inflation to clients. If the performance of the Squid's Top 10 trades for 2010 is any indication, we would be very cautious, although the fundamentals presented previously by Grice and Bass certainly present a very convincing case for why Tokyo may soon have no choice but go schizo with money printing (all over again), only this time with the gusto previously exhibited only by such monetary madmen as von Havenstein, Gono, Mugabe and, naturally, von Bernankestein.

A realistic look into just how likely it is that we can experience 20+ years of housing price declines in the US.

Not all debt is the same, so it would seem. Expect runs on Ireland, Greece and Portugal way before Japan despite the fact Japan has twice the debt as a proportion of GDP!