How Japan is spreading through global markets: Gottliebsen

Why are markets falling so sharply? We are seeing a mix of global radiation-linked misery plus the fundamental disturbance in a major source of global capital – Japan. And as markets fall speculators who have been punting with low-cost borrowed money begin to sell. In turn that triggers charting signals and you get enormous selling pressure.

To reverse it you need an ease in the radiation misery and stabilisation in the Japanese capital markets. Yesterday I focused on the yen. Today I want to look at the problems facing major Japanese institutions.

Right now life is tough among Japanese insurers and banks, which is masked by all the media attention that is on the nuclear energy threats. But once you understand what is happening in many of those organisations, the fall in global markets makes much more sense.

The insurance companies know they face unprecedented claims – the estimates are just a guess. Much of it can be sent off to re-insurance groups but if they are in Japan they face the same problems.

The assets that have been set aside to cover these claims can be in the Japanese sharemarket but are more likely to be in US loan securities. The value of these securities is falling because of the rise in the Japanese yen, which is caused by selling from Japanese institutions.

But the insurance companies must raise cash so they are taking losses, which sends the yen even higher.

Similarly, Japanese banks are going to face unprecedented pressure from people who will want their deposit money to rebuild homes and assets. This is going to change the Japan financial scene for the foreseeable future and in turn it will makes the long-term US capital markets even more dependent on China.

The Japanese government has been funding its deficits with people’s savings and big chunks of those savings are now going to be required to rebuild.

When these basic problems are mixed with the fear of radiation you have a nasty situation.

This article first appeared on Business Spectator.