The impact of Friday's earthquake on the Nikkei

A lot has been written about the yen’s performance post the Kobe earthquake in 1995. This analysis looks at the performance of the Nikkei and finds that the downward pressures on the index back then were not all earthquake related, and the Nikkei may be able to bounce back from Friday’s devastating events quicker than it did in 1995. However, a period of volatility lies ahead for as long as the economic damage is not quantified.

Market moves after the Kobe earthquake in 1995:

The Nikkei prior to Kobe:

Back in 1995 the Nikkei had been in a downtrend ever since reaching a high in June 1994. Then the earthquake struck on 17 January 1995, which intensified this move and weighed on the index until it reached a low in June that year.



The immediate reaction in the Nikkei post the Kobe quake was a drop of 8 per cent during the next 5 days before rebounding more than 6 per cent the following week. After that the overall index declined some 24 per cent until the middle of 1995 before reaching a low. However, the protracted decline was not only due to the earthquake, it was also down to the emergence of a wave of non-performing bank loans, which threatened the overall banking sector and spooked the market. Although the government had come up with a plan to recapitalise the banks it was deemed woefully inadequate, which weighed further on sentiment.



The contrast between 1995 and today is that up until Friday the Nikkei had been trading fairly well on the back of a strong global economic recovery and stellar corporate results. These conditions remain intact, and crucially, unlike 1995, Japan’s banks are not going through a crisis and are not burdened with bad debts. This should protect the index from the protracted sell-off experienced in the aftermath of the Kobe quake.

The large fall in the Nikkei today was largely due to risk aversion post Friday’s quake. Although we believe that gains in Japanese stocks will be limited until the economic damage can be quantified, the index is due a pullback after today’s sharp move that sent the index crashing through major support levels. Some levels to note: Below 9,500 (the NKY closed at 9,620 today) the next support level comes in at 9,150 – the November low – and then 8,500 – the low reached in August, prior to QE2 by the Fed. On the upside the first resistance level lies at 9.500 then 9,839 – the 200-day moving average.

Source: FOREX.com

14.03.2011