Initial Report on the Noto Peninsula Earthquake, Japan

Masayuki Aoki (Mr), Chief Strategist, Mitsubishi UFJ Trust Banking Corp.

?

1. Initial assessment

A large-scale earthquake with a maximum seismic intensity of 7 (7.6 Richter Scale) occurred in the Noto region of Ishikawa Prefecture just after 4 p.m. on January 1st. A tsunami warning has been issued for the entire Sea of Japan region, and aftershocks continue to occur. The impact on economic activity is expected to become clearer over the coming weeks. In addition to the unavoidable immediate impact on the fishing and tourism industries, the affected areas are also home to factories for electronic components and automobile manufacturers. It appears that some factories will need to undergo equipment inspections, and we are still waiting to determine the extent of the impact and the time required for recovery.

Regarding the impact on the stock market, while it is difficult to predict future performance, we would note that historically, when an earthquakes of similar, 7 intensity occurred, the Nikkei Index has fallen ?by less than 5% (excluding the Great East Japan Earthquake).

?

2. Stock market impact

The US stock market has been weak since the beginning of 2024, led by tech names following analysts downgrading their outlook for leading smartphone companies. In addition, the minutes of the December FOMC (Federal Open Market Committee) meeting were more hawkish than suggested by Fed Chairman Jerome Powell's post meeting press conference. However, for a number of reasons including corporate performance and the strength of US job market, we believe the outlook for the US market is generally positive.

As for Japanese stocks, the market is expected to recover as the extent of the impact of the earthquake is determined and expectations for future recovery are realised. However, before identifying the economic extent of the impact, it goes without saying that the first priority should be to respond to the crisis by providing support and relief to the affected areas.

Although the situation is extremely difficult, with road disruptions, the government has invoked the Same-Day Disaster Relief Act and has set up an emergency disaster response headquarters. While we await clarity, in previous disaster situations the Bank of Japan has responded with financial relief measures.

?

2. Bank of Japan Response

The Bank of Japan's monetary policy is likely to have the greater impact. The Bank of Japan naturally takes into account the economic situation of each region when making policy decisions.

Regional economic reports (Sakura Reports) are released once a quarter regarding economic conditions in each region, and the next release will be on the 11th January.? Since the release of the Sakura Report, economic conditions in areas hit by large-scale earthquakes have been revised downward across the board, and this time they are expected to be revised downward as well, mainly in the Hokuriku region.

In December, Governor Ueda indicated that if an optimistic view was expressed at the Bank of Japan branch managers' meeting held at the same time as the release of the Sakura report, there was a non-zero possibility that monetary policy normalization would be brought forward. However, in response to this incident, it is almost certain that monetary policy will be left unchanged in January.

January 4, 2024

(Source) Blomberg, Bank of Japan complied by Mitsibishi UFJ Trust Banking Corp.

?