An MIT expert panel assessment of the Fukushima Daiichi nuclear power plant situation as of 16 March may be viewed at What we know, and don't know, about Japan's reactors
Subject to a great deal of uncertainties still unfolding, the following is an updated version of my contribution to the ATCA 24/7 Expert Roundtable discourse on the possibility of global financial market meltdown following the Japanese apocalypse and turmoil in the Middle East:
Is the Japan catastrophe -- earthquake, tsunami, cascading nuclear accident, land-sea-air radioactive contamination and volcano -- likely to cause a global financial meltdown?
It is only likely if further nuclear meltdowns threaten and plutonium fears spread beyond Japan while foreign nationals flee, turning risk aversion into panic. This is because
(a) Japan's domestic high-end components activities vulnerable to these apocalyptic disruptions are at the heart of much of the global production chain. This could cause a chain reaction of panic flight in global markets;
(b) Japan may have to liquidate a significant amount of its large US Treasuries to help fund emergency payments and reconstruction on a massive scale. This could accelerate further Treasuries sell-offs in the wake of PIMCO's prescient pre-Japan-crisis sell-out;
(c) The margin for further national debt and purchase by its distressed citizens is not unlimited without affecting Japan's risk ratings;
(d) This chaos may fuel a 'dynamic disequilibrium' amongst investors including hedge funds. George Soros' Theory of Reflexivity may well start to apply.
Will the unrest in the Middle East and North Africa, the Japan catastrophe, and global climate chaos deeply affect the fragile global economic recovery as well as the global capital and commodity markets?
Yes. All these uncertainties will add to market nervousness which could dampen global recovery. In particular, the scenario in Libya, a major oil supplier, remains unsettled and Saudi Arabia, provider of over a third of the world's oil supply, is beginning to feel the heat from Bahrain's unrest. Post-apocalypse Japan will need to import more oil and gas to fuel her reconstruction. The resultant high oil prices would be bad news for global economic recovery.
Could the record breaking rise in the value of the Japanese Yen destabilize global currency markets and undermine the competitiveness of the Japanese industry?
Now the G7 intervention has successfully curbed the dramatic surge of the yen to a post- WWII high of 76.39. Following the Japanese catastrophe, a dramatic rise in the value of the yen is unlikely to drive domestic consumption, which has been driving an overwhelming proportion of the Japanese economy. On the contrary it would compound the problems of Japan's economic competitiveness while a tsunami of repatriated funds to Japan would rattle bond yields and raise the prospect of interest rate rises in Western markets.
Given the complex global supply chains and just-in-time methodology, as well as a reliance on Japanese parts and semi-conductors, will a number of industrial combines across the world lose their competitive advantage and make losses?
What is more immediate is the massive disruption in the global production chain as mentioned in (a) above. The situation may evenutally be reversed as substitute centres are found overseas and as the radioactive dust settles, a Japanese phoenix, having shown such stoic dignity, fortitude and unity in face of adversity, is likely to rise from the ashes on a dynamic journey of reconstrucstion and renewal.
Will uranium miners and nuclear power plant manufacturers feel an economic impact from the disaster, with both taking heavy blows to their market capitalization and credibility?
As China accounting for 40% of nuclear reactors to be built around the world has joined the world's chorus calling for a halt to re-assess safety issues, this is bound to bring uranium down from its high pedestal, until the future of the world's nuclear programs becomes clear.
What will be the effect on global capital markets of continued borrowing by the heavily indebted Japanese government? What will be the crowding out effects for other sovereign governments and private borrowers elsewhere?
The need of an already heavily-indebted Japan to borrow a massive amount is likely to accelerate the global trend where capital becomes more expensive and less plentiful ('Farewell to cheap capital?', McKinsey Global Institute, December 2010). This will also worsen the tightening capital markets after the introduction of the Dodd-Frank Act post-Financial Crisis.
Could these adverse developments in Japan and the Middle East cause a double dip global recession and a severe correction in the interlinked global financial markets?
Notwithstanding successive doses of QEs, with unemployment levels remaining uncomfortably high in the West, the original hope was that the emerging markets' increasing consumption may offer a helping hand. This hope is now shaken with the avalanche in world markets as a result of the Japanese fallout.
Mansoor Mohi-uddin, managing director of foreign exchange strategy at UBS, thinks that the yen's strength is likely to be short-lived owing to the sell-off of Japanese stock by foreign investors, the jump in reliance on imported oil following the nuclear catastrophe, and the question of the long-term sustainability of Japan's finances, amongst other reasons. See http://www.ft.com/cms/s/0/fc404aa6-4fc8-11e0-a37e-00144feab49a.html#axzz1GmwSE5GM
At the same time, rampant demand for capital plus rising inflation fears due to uncertainties of oil suppy, may trigger a global trend of interest rate rises. However, Japan will find it difficult to follow this trend in the light of what has happened. The resultant interest rate divergence is likely to dampen the continuing rise of the Japanese yen.
Indeed, with domestic consumption further weakened, there may be a need to rely more on domestic net exports (at the high end) to boost the Japanese economy in the long term, for which a weaker yen may be needed. See Nouriel Roubini's CNBC interview at http://www.cnbc.com/id/42070388
What about the Arab World in the Middle East and North Africa (MENA) region?
The Jasmine Revolution is like no Colour Revoluion. Not only is its regional impact even more severe, the Jasmine variety is threatening to change the entire balance of international order in the Arab world and beyond.
Tunisia was just the fuse. Authoritarianism notwithstanding, Mubarak Egypt was the lynchpin to broker and maintain in situ Sunni support for Israel against Shiite Iran's regional and nuclear ambitions. Now he is gone and what fills the vacuum remains uncertain.
The fire has spread to Jordan, Libya, Morocco, Algeria, Yemen, Lebanon, and Bahrain, threatening to unseat entrenched authoritarian regimes propped up by the West in the interest of oil and regional stability. The United States, in particular, is caught between the devil and the deep sea. Support democracy and the Jasmine tsunami is likely to gather force to change the entire geopolitical landscape of the Arab World, including Bahrain, home to the US Fifth Fleet and Saudi Arabia, a world oil power-source. This is likely to benefit Shiite pan-Middle East influence. Watch the Arab autocrats crush the popular demonstrations and the United States' credibility will be undermined by double standards.
In any case, one by one, these authoritarian props have become weakened as the genie of educated, frustrated and internet-empowered youth is unlikely to go back into the bottle. A whole new regional canvas is beginning to unfold for new policies and new actors all around.
As I write, Hamas has resumed firing rockets into Israel, the largest barrage in two years. The lethal mixture of Palestine-Israeli conflict, Shiite-Sunni rivalry, oil strategic interests, and the surging Jasmine revolution now threatens to ignite the entire Middle East tinder box sending shock waves around the world.
With what is happening in the MENA region and Japan, it is evident that the world will no longer remain the same.
Andrew
www.andrewleunginternationalconsultants.com
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