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Quake disaster requires economic response
Stock prices went into a free fall amid growing economic worries sparked by Friday's calamitous earthquake and ensuing malfunctions at a quake-hit nuclear power plant.
On Tuesday, Tokyo stocks plummeted below 9,000 points. The 225-issue Nikkei Stock Average plunged 1,015 to close at 8,605 after temporarily falling nearly 1,400 that day.
The plunge came after the Nikkei stock index had fallen below the 10,000 level on Monday. This means stock prices have plummeted an astonishing 1,800 points from Thursday's close since the massive temblor struck the Tohoku and northern Kanto regions.
The huge drop in stock prices is sure to dampen corporate and consumer sentiment and serve as a major cause of economic deterioration.
The government and the Bank of Japan should take all possible fiscal and monetary steps to allay investors' anxiety and underpin the economy and stock prices. These authorities should also keep close watch on any speculative moves that could exacerbate the current turmoil.
The Tohoku Pacific Offshore Earthquake has dealt a crushing blow to production bases and physical distribution networks used by corporations to stay in business. Market players are increasingly apprehensive that stagnation in manufacturing, marketing and other corporate activities will continue for extended periods.
Rising tensions due to the sequence of explosions and failures at the nuclear power plant in Fukushima Prefecture have added to the prevalence of uncertainty in the market. To make matters worse, there is no telling when electric power companies in quake-stricken areas, including Tokyo and neighboring prefectures, will be able to restore their impaired power supply capability.
All of these factors compound the difficulty of shoring up stock prices.
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BOJ should do more
Admittedly, the acute crisis facing the Fukushima nuclear power station must take priority. However, the authorities cannot afford to put off taking measures to prevent the worsening of the economy.
On Monday, the central bank moved to increase the amount of money to be injected into money markets by 5 trillion yen, an additional measure aimed at complementing its existing quantitative easing policy. This was followed by the bank's continued efforts to inject a massive amount of funds Tuesday.
We believe the central bank has made the right decision. Nonetheless, there is no denying that these measures were too small to defuse the crisis. The bank will be tested over its decision about how and when additional easy-money policies will be implemented.
Undoubtedly, the central bank implementing monetary policies alone will not be enough to overcome the ongoing crisis. Swift action in rehabilitating the devastated areas and preventing an economic downturn will oblige the government to implement fiscal stimulus measures. With this in mind, the government and all political parties need to swiftly consider budgetary measures and special legislation designed to rebuild these areas.
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Avoid an overly strong yen
It is also necessary to closely watch any new moves on foreign exchange markets. The markets are trending toward a rise in the value of the yen. This seems to reflect growing speculation that Japanese and other corporations are seeking to convert their foreign-currency assets into yen, a move apparently aimed at containing risks and anticipating emergencies the ongoing crisis may pose for them.
The current crisis must not be allowed to deal a double blow to the economy in the form of falling stock prices and a strong yen. The government and the central bank should take determined action to prevent the yen's appreciation, including market intervention.
The Great Kanto Earthquake of 1923 may be illuminating in this respect. The government of those times adopted a greatly curtailed budget for post-quake rehabilitation projects. This policy was intended to ensure that the goal of restoring fiscal health took precedence over post-quake reconstruction.
The austerity budget was combined with other misguided government policies, including what was intended to be benign neglect of a rise in the yen's value. As it turned out, all this triggered deflation, paving the way for a financial panic that gripped the nation in the early part of the Showa era (1926-1989).
The government and the central bank must take this bitter lesson to heart in dealing with the current crisis. They must not neglect to control an economic crisis that could emerge from such a catastrophe as the latest killer quake.
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