The earthquake and tsunami that struck Japan on March 11 was a terrible tragedy that killed thousands and resulted in hundreds of billions in property damage. The natural disaster also had an impact on the position of Japan in the global economy, affecting the value of the Japanese yen versus other major currencies, as well as affecting GDP growth in Japan and other countries in the region. (For related reading, also take a look at The US Dollar And The Yen: An Interesting Partnership.)

TUTORIAL: Economic Indicators To Know

Cost Estimate
The final cost of the natural disaster will not be known for years, but the Japanese government recently estimated the damage in a range between US$200 billion to US$300 billion. This makes the earthquake and Tsunami the costliest natural disaster in history.

Currency Impact
The initial reaction in the currency markets was a strengthening in the value of the yen versus the U.S. dollar, something that might seem counterintuitive to many investors due to the large amount of expenditures required to repair the physical damage to Japan. The yen continued to rise in value and eventually reached a post World War II high of approximately 76 yen to the dollar.

One reason the yen might have strengthened in value compared to other currencies is that the market felt that the Japanese government and corporations might have to liquidate part of their large non-yen denominated investment portfolio to fund relief and reconstruction efforts in Japan.

The Japanese government is the second largest foreign owner of U.S Treasuries after China, with $886 billion in holdings as of March 15. The market may have anticipated a partial liquidation of these and other investments and subsequent repatriation back into the yen.

Bargain Hunting
Another explanation for the strength in the yen might be a surge in buying of Japanese equities as bargain hunters looked for value in the Japanese stock market. The Nikkei 225 Index fell immediately after the earthquake struck, declining from the 10,400 level to a low near 8,200 a week later. This decline might have been seen as a buying opportunity by many institutional investors who then needed to buy yen to purchase Japanese stocks.

Warren Buffett, the famous value investor and CEO of Berkshire Hathaway (NYSE:BRK), said that the natural disaster would not impact Japan's economy and noted that events like these have historically provided opportunities to purchase stocks.

Export Economy
The strong yen eventually started to concern the Japanese government as that economy is based on exports and is impacted by currency rate fluctuations, with exporters hurt when the yen rises in value against other currencies. Toyota (NYSE:TM) estimates that every one yen move in the Japanese currency versus the U.S. dollar will cost the company $380 million a year.

This concern led to a joint intervention into the currency markets by Japan and several other members of the Group of Seven, an informal association of some of the largest industrialized countries in the world. This coordinated effort to sell yen brought the exchange rate back to the 82 level.

TUTORIAL: Introduction To The Forex Market

GDP Impact
The cost estimate by the Japanese government covers only reconstruction and does not include any effect on the economy from the natural disasters. Economists have mixed opinions on the impact of these events on GDP growth.

The area in northern Japan hit by the earthquake accounted for an estimated 7% of the country's GDP, and was also the location of a large number of industrial facilities owned by major Japanese corporations. There was also a significant impact on the supply of power in Japan as many nuclear and other electricity generation plants were shut down as a result of the earthquake.

Supply Chain
The disaster in Japan may result in disruptions to production and an impact on the supply chain in many industries around the world, with the automotive industry being most affected. Honda Motor Company (NYSE:HMC) and other automakers were forced to cut output at plants across the world due to the disruption.

These negative effects on the economy are offset by the huge amount of spending that will be required over the next year to rebuild the areas devastated by the natural disasters. The Japanese government has also acted quickly to limit the impact of power shortages, with increased imports of fossil fuels to make up for lost power output.

The private sector has started to shift production from the affected area to other factories if possible, and has also moved quickly to restart production at factories that were originally taken offline. Hitachi (NYSE:HIT) recently announced that full production at its main plant would resume in April 2011, a disruption of only one month.

Other companies moved even quicker. Kyocera (NYSE:KYO), which makes products ranging from chemicals to phone handsets to semiconductors, restarted production at four factories within one week of the disaster.

The disasters also have a collateral impact on other economies in the region. The government of Taiwan estimates that its own GDP growth will be reduced from seven to 20 basis points in 2011, as the country expects to see exports to Japan be reduced by $1 billion due to reduced demand from Japanese companies. The Council for Economic Planning and Development still sees GDP growth between 4.72% and 4.81% in 2011.

The Bottom Line
The recent earthquake and tsunami that devastated Japan was a horrible tragedy that also had a ripple effect on the currency and equity markets, as well as an unknown impact on economic growth throughout the world. (For additional reading, see Lessons Learned: Comparing The Japanese And US Bubbles.)

Related Articles
  1. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  2. Investing

    Latin America’s Economic Forecast

    After a ten-year run, the economies of Latin America are in a decline. For sustainable, long-term growth, the region needs structural reforms.
  3. Budgeting

    How to Travel to Tokyo on a Budget

    Planning a trip to Tokyo? Here are a few ways that you can make the trip more affordable.
  4. Economics

    The 4 Countries That Produce the Most Food

    Learn about the four food superpowers -- China, India, the United States and Brazil -- and what sets them apart from the rest of the world.
  5. Investing

    How China’s Slowdown Affects Your Latin American Investments

    China's economy is slowing down and its major Latin American trading partners will feel the headwinds, as will your Latin American investments.
  6. Investing

    Aging Japan Is an Arrow in the Back of Abenomics

    There are many factors affecting Japan’s economic difficulties, but the true killer of Abenomics may simply be Japan’s aging population.
  7. Economics

    These Will Be the World's Top Economies in 2020

    Discover the current economic forces that are anticipated to significantly shift the landscape of the world's most powerful economies over the next decade.
  8. Stock Analysis

    The Biggest Oil Producers in Asia

    Learn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
  9. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  10. Stock Analysis

    The 5 Biggest Russian Oil Companies

    Discover the top Russian oil companies by production volume and find out more about their domestic and international business operations.
  1. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  2. Is Mexico an emerging market economy?

    Mexico meets all the criteria of an emerging market economy. The country's gross domestic product, or GDP, per capita beats ... Read Full Answer >>
  3. Is Japan an emerging market economy?

    Japan is not an emerging market economy. Emerging market economies are characterized by low per capita incomes, poor infrastructure ... Read Full Answer >>
  4. Is Argentina a developed country?

    Argentina is not a developed country. It has one of the strongest economies in South America or Central America and ranks ... Read Full Answer >>
  5. Is Brazil a developed country?

    Brazil is not a developed country. Though it has the largest economy in South America or Central America, Brazil is still ... Read Full Answer >>
  6. Are Social Security payments included in the US GDP calculation?

    Social Security payments are not included in the U.S. definition of the gross domestic product (GDP). Transfer Payments For ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!