BOJ Pledges Liquidity on Japan Quake as Toyota Shuts Plants

BOJ Pledges Liquidity on Japan Quake as Toyota Shuts Plants
Japan’s central bank pledged to ensure financial stability after the strongest earthquake in at least a century forced Toyota Motor Corp. (7203) to shut some plants, knocked out oil refineries and sparked a plunge in stocks.

The magnitude 8.9 earthquake struck off the coast of Sendai, a city of 1 million in the northeast, unleashing a tsunami as high as 10 meters (33 feet) that engulfed towns along the coast. The Tohoku region, which includes Sendai, accounts for about 8 percent of the country’s gross domestic product, according to Macquarie Securities Ltd.

The disaster may slow a recovery from a contraction in the fourth quarter as Prime Minister Naoto Kan struggles to convince credit rating companies he will get a grip on the world’s largest public-debt burden. While the Finance Ministry said it’s too soon to gauge the earthquake’s economic impact, the Nikkei 225 Stock Average dropped 1.7 percent and insurers Munich Re and Swiss Reinsurance Co. led declines in European trading.

“It’s early days,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, said in an e-mailed note. “But the horrific events in Japan bear very close watching from a financial perspective, given the bloated problems in Japan’s public sector.”

The price of crude oil fell 3 percent to $99.66 per barrel. The temblor set ablaze a Cosmo Oil Co. refinery near Tokyo and closed at least three others, temporarily curbing demand for crude in Asia’s second-largest oil-consuming nation.

Disaster Response

“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, adding later at a press conference that the impact was widespread.

The Bank of Japan (8301), which has already cut its benchmark rate to zero in an effort to end deflation, set up an emergency task force and said it will do everything it can to provide liquidity. The central bank said its settlement system was working and that it was able to settle all accounts today without disruption.

Policy makers will hold a policy board meeting on March 14 and announce its decision on the same day instead of March 15.

The earthquake struck less than half an hour before Japan’s stock market closed. The yen initially dropped before paring its losses and later advanced at least 1 percent against all 16 of its most actively traded peers. The Stoxx Europe 600 Index slid 0.9 percent at 12:06 p.m. in London.

Munich Re and Swiss Re, the world’s two biggest reinsurers, lost 5.3 percent and 5.8 percent, respectively.

Kobe Quake

The economy may nevertheless weather the shock, which evoked memories of the Great Hanshin Earthquake that hit the port city of Kobe in January 1995, said Richard Jerram, Singapore-based head of Asian economics at Macquarie. While Japanese industrial production dipped 2.6 percent in the month that the Kobe quake hit, it rebounded 2.2 percent the following month and 1 percent in March.

The area around Sendai “is a lot smaller part of the economy than Kobe, so we would expect the damage to be much less serious on the economy,” said Jerram. “The early indications are that it’s not probably going to be all that destructive from an economic point of view.”

Japan’s economy contracted 1.3 percent in the fourth quarter of 2010 on an annualized basis. It shrank 2.7 percent in the same period of 1994.

Flight Cancellations

This year’s quake is disrupting a region that’s a center for auto making in the world’s third-largest economy. Toyota, the world’s biggest carmaker, said it and its affiliates closed three factories, with locations outside of northern Japan operating normally. Nissan Motor Co. said it extinguished two fires at factories and Kyodo reported that the Yokohama-based company halted production at four factories.

“The Tohoku region is one of the major production areas of cars and other products in Japan, so the quake may affect economic activity mainly through this sector,” said Tohru Nishihama, economist at Dai-ichi Life Research Institute Inc. in Tokyo. “In addition, it’s possible to affect food prices as agriculture is another major industry in the region.”

Nippon Paper suspended three Japan plants after the shock, Kyodo reported. All Nippon Airways Co. said 32,700 people were affected by flight cancellations.

Aftershocks

The quake struck at 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo, at a depth of 24 kilometers, the U.S. Geological Service said. It was followed by a 7.1-magnitude aftershock at 4:25 p.m., the service said. Aftershocks continued to affect office buildings in Tokyo as recently as 5:21 p.m. local time.

Televised footage showed a tsunami striking northeast Japan. Outside of Tokyo, Narita airport, the area’s main international gateway, closed, Kyodo News reported. Haneda, the main domestic airport, was reopened after closing earlier, according to Kyodo.

For Kan, managing the aftermath of the disaster may deflect immediate public attention from his becoming embroiled in a political-donation controversy. Earlier today, he told lawmakers today he “had no idea” a political contributor to his office wasn’t a Japanese citizen, violating campaign rules. The Asahi newspaper reported Kan received 1.04 million yen ($12,500) from a South Korean resident. A similar charge prompted the foreign minister to resign March 6.

Debt Burden

With opposition parties already calling for Kan to step down and refusing to pass bills authorizing sales of deficit- financing bonds, the tumult had risked prolonged paralysis. Political failure to set a path for reining in the world’s largest public debt has spurred credit-rating firms to lower, or put on notice for a cut, Japan’s sovereign grade.

The head of the Liberal Democratic Party, the biggest opposition group, said it would cooperate with the government to approve extra spending to cope with the disaster.

“We will probably need a supplementary budget to work on this,” LDP leader Sadakazu Tanigaki told reporters after Kan convened a meeting of party leaders. “We will cooperate with all our might.”

Boosting fiscal spending on any reconstruction effort in the wake of the temblor would risk adding to the nation’s borrowing without cuts elsewhere or an increase in taxes. Government debt is set to reach 210 percent of GDP in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development, compared with an estimated 101 percent of GDP for the U.S.

‘There will be fiscal stimulus to reconstruct but Japan already has a budget deficit of close to 10 percent of’’ GDP and an aging population, Nouriel Roubini, the economist who predicted the global financial crisis, told Bloomberg Television in an interview from London today. “This is certainly the worst thing that can happen in Japan at the worst time.”

To contact the reporters on this story: Chris Anstey in Tokyo at canstey@bloomberg.net; Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

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