90 seconds at 9 am with BNZ

90 seconds at 9 am with BNZ: Why the Japanese catastrophe might not be as bad for the global and NZ economies as it first appears

14th Mar 11, 9:02am by Bernard Hickey

Bernard Hickey details the key news over the weekend in 90 seconds at 9 am in association with Bank of New Zealand, including news of the worst natural catastrophe in Japanese history.

An earthquake on Friday evening registering 9.0 on the Richter scale off the north east coast of Japan triggered a monster Tsunami that wiped out towns, killed thousands and has damaged nuclear power plants.

The scale of the devastation appears unfathomable, but economists say the impact on the global economic recovery and on the Japanese economy may be less than first feared. See more here at Bloomberg.

The affected region produces around 8% of Japanese GDP and the Japanese economy represents around 8% of global output. Once the world's second largest economy, Japan is now the third largest behind China.

Economists say the earthquake and Tsunami may actually be several magnitudes smaller in its impact than the Kobe earthquake of 1995, which initially reduced Japanese GDP by 1.9%.

However, Toyota has shut all its plants in Japan and Sony has also shut many plants. It's also not clear how any nuclear power meltdowns or shutdowns might affect power supplies across Japan. The Bank of Japan is expected to announce an emergency injection of cash into the banking system later today. See more here at Bloomberg.

Three nuclear power reacts are in danger of melting down, although none have yet to release significant amounts of radiation. See more here at Bloomberg.

Any economic impact on New Zealand and on insurance rates may also be relatively light, and certainly much less than the impact of the Christchurch earthquake.

Japan is now New Zealand's fourth largest buyer of exports behind Australia, China and America. New Zealand sold around NZ$3.8 billion worth of exports to Japan last year, which represents around 2% of our GDP. So any disruption to affects a relatively small part of our output.

Also, it's possible that the Yen will strengthen in coming months against many other currencies, including the New Zealand dollar. The Yen rose 21% after the Kobe earthquake as Japanese companies and insurers repatriated funds to help pay for insurance and rebuilding costs. That may actually boost New Zealand export returns in New Zealand dollar terms.

The Japanese earthquake and Tsunami are also not expected to further boost insurance costs. Most Japanese companies and individuals insure with Japanese companies, few of whom have taken out reinsurance contracts with large global reinsurers such as MunichRe, ZurichRe and the Lloyds of London market. See more here at Bloomberg.

Many Japanese businesses and companies are also under insured. Some experts are saying the Japanese quake bill for global reinsurers may actually be less than the Christchurch quake bill.

The final aspect for the New Zealand government to watch is the cost of issuing debt on global markets. Japan's government is now expected to have to borrow more to fund the rebuilding of the damaged parts of the economy. The Japanese Prime Minister has called the disaster the worst since World War II.

Japan's government debt to GDP ratio is already around 200% of GDP and it has recently been downgraded by credit rating agencies. If the Japanese government has to borrow heavily offshore that may push up interest rates for such government debt issues, making it more difficult and expensive for the New Zealand government to issue debt in a more competitive international marketplace. See more here at Bloomberg.

More than 90% of Japanese government debt is held by Japanese institutions, although that is changing as Japan's population ages quickly and pension funds have to start selling assets to pay out to pensioners.

The New Zealand dollar was slightly firmer against the US dollar over the weekend, rising to 74 USc.

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55 Comments

by kjbxtc | 14th Mar 11, 9:28am 1300048104

will the ocr stay at 2.5 for long bernard?

by Wolly | 14th Mar 11, 9:44am 1300049075

Bollard will hold his pork offering until after the election....keep your eye on the imported costs made public...petrol and diesel...and on food prices...rates...insurance premiums...these things will tell you how quickly the true rate of inflation is moving up...expect the fuel companies to hold off major rises until post the election...ditto any other entity wanting National to remain in office.

by Bernard Hickey | 14th Mar 11, 10:14am 1300050853

Economists are not expecting another cut and the RBNZ Governnor himself has said he won't cut again. He was specific in saying the cut would be unwound once Christchurch rebuilding starts.

cheers

Bernard

by Wolly | 14th Mar 11, 9:39am 1300048793

So you see...the Duke has failed to understand the need to earn before one spends..and the need to pay off debt before thinking about taking on new debt....and the Duke sees no benefit from NZ being a nation of savers....the Duke really does believe you can solve a debt crisis with greater debt.

by Boatman | 14th Mar 11, 12:32pm 1300059132

Duke ... Think about this, becuase no one else has .... The Japanese public are massive foreign savers because domestic rates are so low .

Mrs Watanabe is a huge influence on the New Zealand Carry trade .

She is likely to want to "cash in" and take her money home to Japan

Expect the Kiwi $ to fall somewhat in the next few weeks

by Wolly | 14th Mar 11, 1:09pm 1300061395

We stand in awe of your superior understanding of matters economic and financial Duke. Shouldn't you be busy providing Treasury with an advanced guide to the rebuilding of the NZ economy?

by Snarlypuss | 14th Mar 11, 9:53am 1300049636

How productive is New Zealand with the majority our present and future savings ( the debt we've already taken on and spent) tied up in property; just sitting there ,waiting for a price rise so that all the holders can become instantly ''rich'!?

by Snarlypuss | 14th Mar 11, 10:13am 1300050830

That's all come to an end. Housing as a consumption and 'savings' item has finished ~( debt repayment and downsizing, now, being the order of the day; that's 'anti-consumption') It's cash....savings time....

"The Reserve Bank ( of Aussie) has remarked that surprising levels of debt are held by people in their late 50s and early 60s at a time when earlier generations would have paid off their homes....People aged 55 to 64 had average net assets of about $440,000, of which about $300,000 was in their house and the remainder was financial assets......Through most of their careers, the baby boomers viewed the capital gains on their home as their biggest source of savings. Their high level of consumption was secured by that asset and for some time, that was supercharged by the equity withdrawal from their housing."

by steven | 14th Mar 11, 10:30am 1300051818

Which for them and us is bad news.....they will have expectations that their lifestyle willcontinue into old age......but if their private assets no longer fund that they will try and get it via blackmail of the ballot box.

regards

by steven | 14th Mar 11, 10:27am 1300051665

In terms of growth, all the above does is stimulate churn and if its profitable more ppl will work in the area....this is what has happened over the last 15+ years....So we have three issues,

1) We have more churn which does not make NZ richer exporting does. Some individuals get richer, but NZ does not....given the increase in debt as well, thats bad news IMHO.

2) We have a growing number of ppl working in the housing/property sector that produces questionable benefit when its beyond a certain size (in terms of GDP %) and when its based mad specualtion.

3) We borrow to build from offshore, that means with a huge bubble in property (here the property is not worth the piece of paper its written on) NZ is exposed to financial shocks that could do to us, what has been done to irelend, except we dont have the EU to bail us out....(not that I think the EU bailout[s] will work anyway)

In terms of "get a clue" its pretty much obvious you lack any understanding or care of these issues.....

regards

by powerdownkiwi | 14th Mar 11, 10:33am 1300051987

"hence stimulating economic growth"

Dukey's another one who doesn't understand doubling-times and limits to growth, then?

Or is it just a case of "surely there's just a little bit more, I'm not at 'enough' yet".?

Dukey-boy - I turned to my partner while I was watching the China Olympics, and said "this is it, you know - we have to be seeing the peaking of human activity".

Maybe it goes a little more from there, maybe not, and you have to ask "off what base" if growth is claimed, from here on. But essentially, we're there.

If you're one of the old guard who thinks it goes on forever, sorry, you're in for a bit of a shock.

by Crusty | 14th Mar 11, 2:36pm 1300066570

Couldn't agree more - the whole concept of borrowing "beyond your means" was founded on the seemingly infinite notion that you would earn more money in the future to pay off that debt or at least service the interest in short-term - now that we have found that this notion is in fact finite and even worse, it works in reverse - you will earn less money in the future - therefore people have done the unthinkable and considered that they coudl earn even less in the future and have started saving!

by Crusty | 14th Mar 11, 2:37pm 1300066620

by Wolly | 14th Mar 11, 9:35am 1300048507

The main impact on NZ from this Japanese disaster ....ought to be a bloody good boot up the bum for bureaucrats and pollies both central and local, regarding the building standards and the slack approach to protecting the public from a similar event near or under wgtn.

A quick look at the WCC list of buildings at risk...where in fact it is a matter of "public at risk" is enough to wake the stupid.

Clearly in Chch we had facades of shite...walls of brick and stone destined to kill people....protected by the CCC and what may prove to be criminal negligence.

by Vera Fayed | 14th Mar 11, 10:43am 1300052613

Important, relevant and timely Wally. Maybe you should focus your energy and run with this issue. It should not be hard to pick up support and get some momentum. The very real possibility of saving thousands of folk from death or horrific injury just kilometers from where you live.....sounds like a worthwhile project to me.

by Wolly | 14th Mar 11, 1:22pm 1300062132

Consider this VF...the pollies made sure they got a Beehive that would cope with an 8.2 and they spent 100 million of taxpayer dosh on trying to strengthen Parliament.( ten times that in today's debased dollars) I would not want to be inside the Parliament building in anything above 6.

As for seeing some prompt action to improve safety for the public inside wgtn....fat chance mate.

by FCM | 14th Mar 11, 9:46am 1300049218

We perhapes we should be more worried about the large amount of land we build on at Sea level or damn near close to Sea level. If this did happen, which it could, close to our shores, AKL, CHC, Tauranga, Napier, WLG etc etc etc..would be in big trouble.

by Wolly | 14th Mar 11, 10:27am 1300051642

What you have to expect FCM is to be attacked by fools who will label you a scaremonger...and for bugger all to be learned from the Chch and Japanese events....Wgtn will continue to put lives at risk with many buildings across the city just piles of shite held up by bureaucracy and bugger all else.

Already the heritage lot are starting to scream for the rubbish in Chch to be rebuilt...go figure.

Next come the vested interests...they will push for brick and stone...for heritage to be saved...

by scarfie | 14th Mar 11, 10:48am 1300052912

The real shame Wally is that we have lost the ability to build good looking buildings and we have never had good urban design.

Those that cling to the heritage dream also don't understand why they are beautiful buildings, they just know that they are.

Unfortunately a lot of it is really only facadism, with what is essentially a shed in behind.

IMO it has been several generations of poorly trained designers that, because of the inadequate training, have gradually lost control of the industry to developers.

CHCH doesn't have to have its heritage buildings to be a beautiful city, just learn the principles and apply them. But in reality in an era of the bureucrat and developer, any alternative is likely to be tacky and immature.

by Wolly | 14th Mar 11, 11:58am 1300057138

Watch carefully scarfie as Chch wastes a chance to rebuild a 22nd century CBD that attracts people into it and provides parking, CBD accomodation, schooling, medical care, gardens and state of the art facilities with CCTV systems and policing to keep out the scum and deal with the garbage.

Likely as not they will and up with what they had.

by Donald MacRonald | 14th Mar 11, 9:49am 1300049395

Thanks for an excellent and incisive report on current ecomics in Japan, Bernard.....good news that the Japs will be borrowing big time on the global "hot money" markets....means the banks here will be scrambling for deposits and offering better dep. terms. which suits me...esp. Rabo where i've got a bundle..

now all we need is Bollie to pump up the OCR before October when a lot of my Resets kick in and i'll be happy burger eater !

by prosperopink | 14th Mar 11, 10:08am 1300050511

Rest assured, Lloyd Blankfein called an extraordinary meeting at Goldman Sachs today, top of the agenda, "How can we proffit massively from Japans misery?"

As Bill Hicks would say. "The disaster dollar....huge!'

Disgusting attitudes on here. I wonder when its your turn to have a disaster will you be ruminating with indecent haste on how it it's going to affect the economy and whats in it for you.

by rp | 14th Mar 11, 11:28am 1300055283

...totally agree prosperopink. I went to Japan day in Auckland yesterday. They had programs for the day printed before their earthquake - printed in the programs, the kind Japanese, were using the day as a fundraiser for the victims of the Christchurch earthquake....too hasty here about how we can all make money of them...they haven't even cleaned up the bodies

by Gummy Bear Hero | 14th Mar 11, 10:11am 1300050686

Well , knock me down with a feather ! .......... A catastrophe occurs , and Bernard Hickey is able to see through the tsunami and rubble , to a clearer vision of the economic ramifications !

........ Good on yer , mate , welcome to the side of light ! ........

Realistic Optimists 1 : Gloomsterisationalisers 0

Gummy Bears to that man .

by Bernard Hickey | 14th Mar 11, 10:34am 1300052086

Was that a compliment Gummy?

Ready to call framer so as to print off and stick on the wall if it is...

cheers

Bernard

by Gummy Bear Hero | 14th Mar 11, 10:12pm 1300093968

Most of us have toddled off to beddy-byes , Bernard . Give us a hoi , if you get the Top 10 out soon . Been an eventful day , Slow-hand Hickey blasted the Duke out of his saddle , and the Gummy-Kid paid a compliment to the big guy .

....... Meebee Ken Ring is right , and the moon is making us barking mad ......... He should know !

Pip pip , old bean .

by Andrewj | 14th Mar 11, 10:20am 1300051229

http://www.telegraph.co.uk/finance/economics/8379163/Total-German-trium…

How long will democracies accept being made the scapegoat for what is in part a Franco-German-Benelux banking debacle?

by Andrew in Finland | 14th Mar 11, 11:35am 1300055750

Andrewj

Seems pretty unfair but on the other hand do you mean i can only keep my BMW if i pay for it?

Meanwhile here in Finland i noticed some bubble wrapped beef going for about NZD118 a kilo at the local cheapo supermarket. Chicken fortunately is still only €2.25 a kilo

by Andrewj | 14th Mar 11, 12:25pm 1300058737

Andrew in F

Buy the beef. We now have a our marketing problems solved and expect to be able to push the retail price of beef to 150 euros a kg, its because of our clean green image, its looking oh so rosey down on the farm but just in case keep buy the beef.

The Japanese have a lot of US bonds do you think they will need to sell some?

by kjbxtc | 14th Mar 11, 10:28am 1300051715

good call from solid energy re pike river,like their chances wolly?

by Wolly | 14th Mar 11, 10:39am 1300052394

Not until post November kbxctj....!

Open caste on the Westcoast would have support over there. Seems the only way to recover the men and get the best coal in the world to market and generate many real jobs and rejuvinate the Coast and counter the economic downward spiral...... Likely as not the returns would be wasted by a future idiot Labour govt worming its way to the pig trough in 2017 on the back of pork handouts.

by powerdownkiwi | 14th Mar 11, 10:42am 1300052526

the interesting thing was the parallel call from Act.

Says a lot.

by steven | 14th Mar 11, 11:20am 1300054858

Im sure there is some organisational work going on in the background to ensure there is a common mesage coming out...

Its also interesting that ppl go to the west coast, I assume for whatthe west coast is....yet then try and import industrialisation to keep them there......seems nutty to me.

Interesting that hide so lightly dismisses the marches against destroying our environment all to make sure our "wealth" improves.....quite clearly there are some who only class wealth in dollars, where others such as myself for one, class my overall wealth to include part of NZ beauty and environment to live in, ie quality of life == dollars...

"Yeah, Rodney Hide is correct. We need to get on with it and we need to do it in a way that will safeguard the environment and at the same time get economic development."

So destroy the environment....which means its um safeguarded? huh? I dunno the mind boggles on this one.......the west caost is the west coast because its unspolied.....all this would do would make the west coast into another cesspit....dont we have enough cesspits yet? havent we learned? obviously not. I know instead of spoiling the west coast, the ppl move out to where the jobs are.....leave it unspoiled.

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Then we have the other liberaterian nutters exploiting the situation by claiming that if we had open cast mined then the ppl would be alive so its DOCs/Govn regulation fault loonies banging on the same old same old drum. By the same token if we hadnt mined at all, they would be alive.....ppl decided by themselves that the wealth was worth going for within the limitations they were allowed to work to.....that was their choice.

regards

by Bernard Hickey | 14th Mar 11, 10:33am 1300052015

FYI more detail here from Asahi on how the Japanese car making industry is affected. It also points out that all the major ports are closed and shipments of cars to America are being delayed.

http://www.asahi.com/english/TKY201103120400.html

cheers

Bernard

by Donald MacRonald | 14th Mar 11, 10:45am 1300052750

If you combine the Jap disaster with Libya, ChCh and the financial crash it's as if a nexus of a perfect storm is approaching as the Fates and the Furies display that they're sick of us humans and our dealings !

Good to see the boss on here giving us updates...but what's that Wolly guy on ?

by kjbxtc | 14th Mar 11, 10:53am 1300053228

we are all dispensable,no toyotas?get a korean,indian,chinese,european.coal will come back,long live the coast!!

by Didge | 14th Mar 11, 10:55am 1300053345

just ignore The Puke

by Donald MacRonald | 14th Mar 11, 11:06am 1300053971

Gareth Morgan's Galapagos hotel destroyed by tsunami

UPDATED MONDAY 6am: Giant turtles in the pool as water surge caused by Japan quake totals fund manager's hotel.

by FX rat | 14th Mar 11, 11:16am 1300054569

Let's talk this through Bernard - BoJ has a mountain to climb. This is quite unlike the Kobe quake. This is a triple disaster Quake, Tsunami and nuclear/power supply at a time when the Japanese economy is facing ageing paralysis.over the mid (5-10 year) term.

The Japanese goverment will have to throw all their tools at this one. If they significantly increase both quantitative easing and government spending - which they will have to do - then I would think the JPY will have to weaken - and over time that weakening could become a rout as GDP falls, debt levels rise(even further!), demographics and relocation of production make the demise of the yen the only rational outcome.

Friday's hike was short termers riding some emeregency yen repatriation - but it can't last! the wiriting is on the wall for the yen.

by FX rat | 14th Mar 11, 11:16am 1300054583

Friday's hike was short termers riding some emeregency yen repatriation - but it can't last! the wiriting is on the wall for the yen.

by KW John | 14th Mar 11, 12:13pm 1300058032

Bastiat's 'Broken Window Fallacy'.

And around we go again....

by Boatman | 14th Mar 11, 12:41pm 1300059678

BERNARD , I think you have overlooked something in this Japanese earthquake .

Asian frugal habits mean that the average Japanese saves , often in foreign currencies . Their government have saved in the Europen and US Bond and treasuries .

Their Insurance Companies will be holding foreign Sovereign Bonds in Eurpoe , the US and elsewhere .

Expect some severe shocks on the foreign currency markets in the next few months , as the Japanese Insurers , Central Goverment , local government ( Prefectures) , and Mrs Watanabe draws down their foreign exchange holdings, and exit the carry trade .

REMEMBER YOU FIRST SAW THIS PREDICTION ON INTEREST .CO.NZ

by FX rat | 14th Mar 11, 3:04pm 1300068269

Hi Boatman

What you say SOUNDS logical but it is far too simplistic. Yes Mrs Watanabe and the insurers will need to spend yen locally in Japan - but it doesn't follow that they will just repatriate their foreign savings. Those watching from the Goldman type towers will see that it is better to borrow Yen they require- in efffect shorting the yen and riding it to the bottom of the hill.

as an aside - Bastiat's broken window theory is only relevant to point out how much better all the disaster recovery yen could have been spent - at this time in Japan and with its demographic horizon.

by Boatman | 14th Mar 11, 3:26pm 1300069599

@ FX Rat ... I see your reasoning , and I have looked at it rather simplistically, but the size and enormity of the cost of rebuilding , means the Japanese will almost become inward-focussing as they did between 1946 and 1950 .

The next issue is ... will Japan be able to borrow at realisitc rates in order to re-build?

It becomes an opportunity cost for the Japanese , if they are earning 2% in NZ Goverment Bonds or 1% in US Treasuries , and borrowing costs go to 2,5% in Japan ( A spread of over 100%), the money is better converted to Yen to rebuild the family house.

Any rational person with savings offshore will repatriate those savings in such a crisis.

The Japanese are quite mistrustful of current US Federeal reserve which also does not help matters.

It all adds up to a potentially volatile currency market , and who knows what could happen in the International Bond Markets ?

by Wolly | 14th Mar 11, 12:59pm 1300060781

"High milk prices for consumers look set to continue into the foreseeable future, with a report to the Government showing grim price predictions beyond May.".....herald

But we're different and this is not inflation caused by Bernanke's criminal behaviour at the Fed....it's normal demand growth...honest it is....oh look up there...pink pigs flying past.

by powerdownkiwi | 14th Mar 11, 1:25pm 1300062310

Wolly - you seem to have stopped thinking about the same spot Bernard H and Matt Taibbi did.

(read Griftopia - he gets the rip-off, but not the foundering ship it's happening on)

Bernard calls Japan in GDP. That's a nonsense measure, totally fails to account.

What will happen is that they will re-build. At the end of that process, they will have used a portion of the finite fossil energy still available. They'll not be back where they were, they'll be behind that point by the energy expended in the process.

Meantime milk - which uses oil at over 20:1 in calorific input/output ratios, and rides atop depleting aquifers, soil depletion, urban incursion and fossil-fuel sourced fertiliser - is indeed in rising demand, and supply. The question is: how long can it be sustained, what will override it in the squeeze (grain?) and how will it be paid for (being that energy underwrites the wealth that does the repaying.

by Wolly | 14th Mar 11, 1:52pm 1300063941

Don't worry PDK....a virus will wipe out half the world pop soon....or aliens will arrive and pipe in oil from another solar system...or the centre of the Earth will be found to be a puddle of oil....

I expect our first nuclear power station to be completed and online in the year 2051....how else will enough power be provided for the ten million Kiwi......7 million of whom will be in tower slum Auckland....driving their AEVs over the Rodney Hide bridge to nowhere each day.

by powerdownkiwi | 14th Mar 11, 6:39pm 1300081148

Wolly - what I meant was that there is no difference between what Bernanke does/did, and what property investors or just plain 'investors. do. The only difference is scale.

Someone who 'invests' in an existing house, or an existing pile of copper - expects a 'return' on that 'investment'. That's no different to the banks - there is no physical increase in anything, the house and the pile already existed. To pay a profit or a dividend, the tenant income stream (or the capital gain) has to be underwritten by something actually done - dug up, processed, made.

I appreciate that requires a 'no limits' mindset, but mindsets generally don't alter reality much.

If you're interested in viruses - try "The Coming Plague", by Laurie Garrett (fellow, Harvard School of Public Health.

I'm more of the opinion that energy scarcity will be first cab off the rank.

by Wolly | 14th Mar 11, 8:28pm 1300087695

Don't you bet on it PDK...them little buggers have mutation sussed.

by powerdownkiwi | 14th Mar 11, 9:19pm 1300090782

"watch thou for the mutant" - John Wyndham, The Chrysalids.

It;s easier over here - you just have to spot the yellow jacket.

by Matt in Auck | 14th Mar 11, 1:44pm 1300063472

I disagree with the arguments that the economic impact of the Japanese events will be light.

Let's get real here, this is still the 3rd largest economy in the world, only recently taken over by the Chinese. 2 of the 3 major economies are now incredibly weak

We live in an ever more connected world, and this will have a significantly adverse knock on effect

by Kunst | 14th Mar 11, 2:26pm 1300065972

I agree Matt.

One can fix a hole in a bucket, but when there are too many then one has to look for other solutions.

The world is changing fast - philosophical questions about our future are becoming more important then economical/ financial ones.

It becomes a matter of human survival.

In the current situation, I think the probability of other shocks exist. It is now a matter for the world to stand still for a while and reflect on our sensible, respectively senseless economic, financial and political activities.

by Andrewj | 14th Mar 11, 3:59pm 1300071598

Ouch

http://finviz.com/futures.ashx

by Wolly | 14th Mar 11, 4:18pm 1300072680

The Reserve Bank today released a consultation paper on the pre-positioning requirements that banks will be expected to comply with to fully implement the Open Bank Resolution (OBR) policy, as referred to by the Minister of Finance in his statement on 11 March 2011.

Open Bank Resolution is a long-standing policy option aimed at resolving a bank failure quickly, in such a way that the bank can be kept open for business, thus minimising stresses on the overall banking and payments system.

Reserve Bank Deputy Governor Grant Spencer said: “The OBR policy provides for continuity of core banking services to retail customers and businesses, while placing the cost of a bank failure primarily on the bank’s shareholders and creditors rather than the taxpayer.

“The global financial crisis highlighted the potentially enormous fiscal cost associated with supporting troubled banks. The government therefore needs OBR to be an operational and effective policy option for containing the cost of a bank failure, while not threatening the safety of the overall financial system.”

Good....glad I no longer own any bank shares.

by KW John | 14th Mar 11, 9:13pm 1300090402

ill formed thought ...