U.S. markets plunge on fears of nuclear catastrophe in Japan


The Tokyo stock market plunged after an earthquake and tsunami of epic proportions laid waste to cities along Japan's northeast coast. (Eugene Hoshiko/AP)
March 15, 2011

U.S. stocks dropped sharply into the red early Tuesday following a global sell-off on fears that what appeared to be a serious but contained nuclear accident in Japan is turning into a full-blown catastrophe.

Within minutes of the opening of the markets, the Dow Jones Industrial Average fell 2.27 percent as all 30 stocks that comprise the index dropped; the S&P was down 2.2 percent; and the Nasdaq dropped 2.66 percent. Stocks in several sectors, such as makers of parts for nuclear energy plants, were at their 2011 lows.

Gold tumbled over $40 on Tuesday and oil prices were plunging. Uranium and other nuclear power stocks were weaker. Among the only stocks rising were from companies that compete with nuclear energy businesses: solar stocks.

The New York Stock Exchange said it would invoke the so-called rule 48 to smooth volatility. This rule, which was approved by the Securities and Exchange Commission in 2007 but is rarely used, means that market makers will not have to disseminate prices ahead of opening.

Overnight in Japan, the benchmark Nikkei 225 stock average plummeted 10.6 percent to 8,605.15, after declining as much as 14 percent during the day. Tuesday’s rout followed a 6 percent drop Monday. Those declines occurred despite an infusion of yen Monday and Tuesday by the Bank of Japan to try to prop up the nation’s financial system.

Western financial markets had largely brushed off the impact of the disaster on Monday, with the Standard & Poor’s 500 down a modest 0.6 percent. But on Tuesday, stocks were trading sharply lower in Europe and on Wall Street.

The devastation wrought by the earthquake in Japan has disrupted production of automobiles, computer chips and other goods and threatens the world’s third-largest economy at a time when it was already vulnerable.

While the global economy is under threat from turmoil in the Middle East and financial troubles in Europe, the calamity in Japan creates another risk. The immediate response has been to temporarily shut down much of Japan’s industrial production. Japanese power supplies could be strained for some time because of trouble at several nuclear plants. And the heavily indebted country will need to borrow more money to rebuild, potentially straining its finances.

“The timing couldn’t be any worse,” said Nicholas Szechenyi, a senior fellow at the Center for Strategic and International Studies. “Japan was just starting to have some positive economic numbers, and the international community is still adjusting to the impact of the financial crisis.”

The area of Japan that suffered the most direct hit from the earthquake and tsunami accounts for a relatively small part of the nation’s industrial output. But damage to infrastructure — roads, rail lines, electricity — is more widespread.

That disruption has compromised the ability of Japanese manufacturers to obtain supplies and electricity to continue producing and the ability of their employees to get to work. It is too soon to know how much world supply chains for key goods will be affected. Global businesses have worked around national disasters in the past, such as the Indian Ocean tsunami in 2004 and Hurricane Katrina in 2005.

Many auto plants across Japan have shut down, at least temporarily, wrote auto analyst Paul Newton of IHS Global Insight, who described the situation as fluid. Some of the shutdowns are due to rolling blackouts and disruptions to “the country’s transport infrastructure, affecting everything from parts delivery, personnel mobility, and shipping activity at the country’s ports.”

Toyota idled all of its Japanese factories through Wednesday, halting production at 45 percent of the company’s global production. Nissan, Honda, Suzuki, Mazda and Mitsubishi reported varying amounts of damage and temporary shutdowns at their Japanese plants.

Japan’s top corporations include major global brands that have moved production overseas. Honda has projected that its operations in the critical North American market will not be greatly affected.

There are also potential disruptions in the supply and shipping of electronics, particularly of semiconductors and key materials used in making LCD panels, according to a report from IHS iSuppli, which researches electronics supply chains.

Like their auto industry counterparts, many Japan-based electronics companies announced the temporary closure of manufacturing facilities this week, including Sony and Panasonic. Analysts said there could be price swings for certain chips produced in Japan until the facilities resume normal operations.

The nation’s central bank announced cash infusions Monday and Tuesday totaling more than $280 billion to keep the country’s financial system stable and its trading system functioning. On Tuesday, it pumped 8 trillion yen into the financial system, a day after a record 15 trillion yen infusion. The bank said it would expand a program of buying bonds and other assets to 40 trillion yen, up from 35 trillion, to support the economy in the longer term.

Insured-property losses from the quake could amount to $14 billion to $35 billion, according to Air Worldwide, a risk consulting company.

Japan is groaning under government debt equal to twice its yearly economic output, proportionally the world’s largest load. But analysts said the country should have the financial muscle to deal with the reconstruction and be able to borrow what it will need to bounce back without using nontraditional methods, such as spending down its trillion-dollar stockpile of international currency reserves.

Although Japan’s gross domestic product will probably suffer in the short run as economic activity grinds to a halt, economists said, it will bounce back in the coming months as reconstruction begins. But it is too soon to determine the lasting impact the disaster will have on the Japanese or global economies.

“The full extent of the devastation caused by the earthquake and tsunami that struck northeastern Japan on Friday only began to become clear at the weekend, and the economic impact remains highly uncertain,” John Higgins, an analyst at Capital Economics, said in a report.

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