Can an Earthquake in Japan rattle the Dollar in the US?

The short answer is we will be destined to see. While some economists argue that the rebuilding after the earthquake and tsunami that toppled Japanese cities and towns will provide jobs, international trade, and will increase production and construction, other economists argue that having the third largest economy in the world grind to a near halt can only produce negative effects that will emerge only over time. Perhaps both are correct. To view  this terrible tragedy solely on an economic front may seem callous so soon, but the facts are proving to be the tsunami and earthquake coupled with now three nuclear power reactor explosions will impact the entire globe with regards to humanity, ecology, and yes, worldwide economics.
Below are some of the financial facts that we have seen come about in recent days:

  • Damage and Insurance losses are being measured in Billions of Dollars and Trillions of Yen
  • The Central Bank of Japan has injected 20 Trillion Yen so far and has plans afoot to purchase an additional 2 Trillion Yen worth of Japanese Bonds in the short term
  • The Nikkei is down about 20% as of this writing
  • DOW and world markets have closed down consistently since the Japanese tragedy
  • World Currencies have fluctuated strongly – Yen is up and Dollar is down
  • Gold has seen downward pressure as holders are forced to sell

As always hindsight will prove to be more accurate than guessing at the outcome of the current devastations, and just as sure as hindsight is better than a crystal ball, some will stand to profit handsomely simply for being at the right place at the right time. This writing is less about profiting from the situation, and much more about not being financially crippled by the possible coming events. What should we look for, what can we expect? These are questions being asked, and some of the answers are simple cause and effect, for instance:

  • Japan as of recently has been the 3rd largest buyer of U.S. Treasuries – Expect Japan to cut back or curtail their U.S. Bond purchases as they will be rebuilding their cities and economy – not ours.
  • Toyota, Honda, and several silicon / computer technology companies have suspended operations and production and energy production in Japan is a current limiting factor of Japanese production. Look for 2011 GDP of Japan to fall significantly.
  • As Japan and its corporations and investors do rebuild they will require capital. Some of this capital will be loaned, some of it will be injected by the Central Bank of Japan (read inflation), and some of the funds will be from savings – the cashing in of American Bonds and Securities.

Days and weeks before the Japanese earthquake and tsunami, Bill Gross of PIMCO had been quietly selling off ALL of his U.S. Bond holdings. All $28 + BILLION worth.  Mr. Gross finds the current bond situation as dangerous as — well too dangerous. He cites the current Quantitative Easing plan as a prime factor. Once the Fed ends its current purchase of $600 Billion in treasuries this June he feels there won’t be buyers and bonds will take the hit. Now it looks like Japan will be much less of a player in the upcoming months / years. If Japan doesn’t buy our bonds, and Bill isn’t buying our bonds, then that leaves Mr. Bernanke and Mr. Geithner to buy our own bonds with borrowed money we don’t have and can’t pay back. Are you starting to feel the tremors yet?