A 6.0 magnitude earthquake off central Japan on January 9 resulted in strong shaking, but no tsunami warning has been issued, according to the most recent reports from the Japanese government. The quake struck the Sea of Japan coast, the same area affected by a powerful earthquake on January 1, which caused significant destruction and a death toll exceeding 200, with over 100 still missing. The New Year’s quake, measuring 7.6 in magnitude, resulted in building collapses, fires and infrastructure damage on the Noto Peninsula.
When natural disasters like these happen, they affect the economy in the short and long term.
Natural disasters amplify fluctuations in investor sentiment and information disparities. The study suggests such disasters may contribute to more frequent and severe market manipulation. Testing this theory with NYSE and NASDAQ-listed securities, NOAA disaster data and SMARTS manipulation data, the research reveals an increase in manipulation during disaster periods.
The impact is moderated by community resilience, hazard mitigation programs and operational location, and is more prominent in certain industries like agriculture, health and manufacturing. The findings remain robust across different models, including difference-in-differences analysis.
Natural Calamities and the Stock Market
Nations worldwide face diverse natural hazards, including earthquakes, volcanic eruptions, typhoons, landslides, floods and droughts. Disparities exist in coping capabilities, with developed countries investing substantially in mitigation, unlike developing nations with limited budgets.
The cost of natural disasters has surged to over $100 billion annually, exemplified by the devastating 2004 tsunami in Indonesia. This calamity, triggered by a 9.1-magnitude earthquake, claimed about 230,000 lives, left over a million people homeless and caused economic damages of nearly $10 billion.
A disaster refers to events causing widespread destruction, impacting lives, health, property and the environment. While disasters can stem from human actions like plane crashes and building collapses, their death tolls are often smaller than natural disasters. Nevertheless, they can inflict significant economic damage. A notable example occurred in 2008 when a passenger train collided with a freight train in Los Angeles, claiming 25 lives and causing over $12 million in economic losses.
Japanese Stocks After 7.6 Earthquake
Japanese stocks faced a decline on the first trading day of the year, with electric power companies leading losses after a deadly earthquake in central Japan. The Nikkei Stock Average fell 1.2% to 33,048.58 on January 3. Power companies suffered notable losses, while construction firms recorded gains in the morning session.
Japan Airlines (OTCMKTS:JAPSY) faced a 1.65% decline in morning trading due to expectations of a YEN 15 billion ($104.6 million) operating loss following a collision at Tokyo’s Haneda Airport. JAL later recovered as the company confirmed insurance coverage for the Airbus A350 involved in the runway accident.
The construction sector performed well, driven by recovery efforts in Ishikawa prefecture following a magnitude-7.6 earthquake on New Year’s Day. On January 4, Kajima (OTCMKTS:KAJMY) rose by 5%, Taisei by 4% and Hitachi Construction Machinery (OTCMKTS:HTCMY) by 8%.
The Japanese supply chain demonstrated resilience, with fewer ripple effects on related businesses and supply chains compared to previous earthquakes. The yen traded around 143 against the dollar, similar to levels shortly after the earthquake.
Expectations of a slowdown in monetary tightening arose after the earthquake, according to Masafumi Yamamoto and Masayoshi Mihara of Mizuho. The Bank of Japan is less likely to end its negative interest policy this month due to the earthquake’s impact, aiming to prevent further yen depreciation.
That differs from the 2011 Fukushima earthquake when the yen rose to 76.25 against the dollar on speculation of repatriation, leading to interventions by Japan’s central bank and G7 countries.
Short-Term Impact
Investors often react to uncertainty with risk aversion, leading to a wave of selling across the market. This can cause stock prices to drop, sometimes significantly, in the immediate hours and days following the disaster.
Market volatility, a measure of price fluctuations, typically spikes during such events. Investors become unsure about the future, causing rapid price swings in both directions. That can be a nerve-wracking time for investors, but it’s important to remember that volatility is not always synonymous with losses.
Additionally, the sectors most closely tied to the disaster area typically experience the most pronounced impact. For example, companies in the construction, insurance and utilities sectors in Japan might see their stock prices plummet due to potential damage, insurance claims and disruptions to operations. Conversely, some sectors, like disaster relief or infrastructure repair, might see their stock prices rise in anticipation of increased demand.
Long-Term Impact
The long-term impact of a natural disaster like Japan’s 7.6 earthquake on stocks is a complex interplay of various factors influencing the market over months and even years. Let’s delve into some key aspects.
First, disruptions to vital infrastructure, transportation networks and energy grids can disrupt economic activity and impact company earnings. The extent of damage and speed of reconstruction determine the economic repercussions.
Earthquake-induced damage to manufacturing facilities, logistical networks and supplier bases can interrupt supply chains. That can lead to shortages, price hikes and production delays, affecting certain sectors like manufacturing and retail. Lastly, uncertainty surrounding the disaster’s long-term effects can dampen consumer confidence, leading to decreased spending and impacting companies reliant on consumer demand.
Depending on the economic downturn’s severity, central banks might implement measures like interest rate cuts or quantitative easing to boost liquidity and economic recovery. That can influence overall market sentiment and individual stock valuations.
Investors reassess the risk profiles of companies and sectors based on their resilience to the disaster and potential for future disruptions. Companies demonstrating adaptability and strong recovery plans might see their stock prices stabilize or even increase.
Global Market Interconnectedness
The disaster’s impact on Japan’s economy, a major global player, can affect international trade and investment flows. That can ripple through global markets, impacting certain sectors or companies more than others.
If the earthquake is perceived as indicative of wider systemic vulnerabilities, it can trigger global risk aversion, impacting investor sentiment and leading to broader market sell-offs.
On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
