Tohoku earthquake: The impact on Asian financial markets and beyond

Japan was rocked by tragedy in March 2011, when a staggering earthquake measuring around 9.0 on the Richter scale occurred off the east coast of the country, triggering a tsunami that pummelled towns and villages along the shore just minutes later, reducing several to no more than rubble.

One area that was particularly affected by the megathrust quake was Fukushima, after the cooling system at a nuclear power plant failed, leading to the evacuation of residents in the surrounding region and uncertainty for the rest of the country and, indeed, the world.

The tsunami resulted in a terrible loss of human life, while many of those left behind have lost their homes and local services, in addition to their loved ones.

However, there has also been a significant knock-on effect in terms of national infrastructure, with power shortages and extensive damage leading to manufacturing on the north-east coast struggling to resume. As industry stalls, the impact has been felt across the country's financial services sector and markets, with the Markit/Japanese Materials Management Association Purchasing Managers' Index slumping by 6.5 points in March, leading to fears the country will fall into a temporary recession.

The decline is a record drop from the 52.9 that was recorded in February and March's figure of 46.4 points represents the lowest reading since April 2009.

Yet just days after the crisis, the Bank of Japan injected seven trillion yen (£52 billion) into the money markets in order to ease concerns arising from the crisis. Then, on March 18th, it offered to make a further instalment of three trillion yen. In total, the central bank's same-day operations amounted to an offering of 34 trillion yen and was aimed at soothing worries and supporting the current account deposits held by the country's financial services providers, according to Reuters.

If this seems like a lot, once it is taken into account that the devastated Tohoku region of the country plays a significant role in the economy as a whole, the Bank of Japan's actions become more understandable. According to City editor at the Daily Mail Alex Brummer, the area accounts for eight per cent of Japan's overall gross domestic product, which - at $4.9 trillion (£3.05 trillion) - is worth more than three times the UK equivalent.

Japan is seen as one of the leading financial centres in the world and certainly in Asia, which is still regarded as an emerging economy. Because of this, when the markets of Tokyo are rocked, it can be expected to have a knock-on effect across the rest of the globe. This was certainly the fear of Vikram Nehru, World Bank chief economist for the east Asia and Pacific region, who said: "Clearly given Japan's importance in east Asia, the tragic events unfolding will be felt in the region."

Commenting in the Bank's East Asia and Pacific Economic Update, he added: "At this stage, we expect the economic impact of this disaster on the east Asian region to be fairly short-lived. In the immediate future the biggest impact will be in terms of trade and finance."

Meanwhile, according to Dow Jones, Singapore's finance minister Tharman Shanmugaratnam also voiced concerns - particularly on the issue of how the tragedy could push up inflation in Asia - something that is already proving problematic for the city state and in other parts of the continent.

Speaking at a World Bank forum in March, he said there may be a need for central banks across the region to continue tightening regulations in relation to monetary policy. "We can expect dampening of economic growth and no region will be immune from the crisis, because this is not decoupled growth," he explained.

The World Bank warned that the earthquake and tsunami in Japan should serve as a "stark warning" that a vulnerability to natural disasters is one of the most significant challenges it faces. And as the economic core of the globe moves gradually towards the eastern part of the continent, the organisation claimed that it will have to take on new responsibilities.

"East Asia can continue to grow rapidly if it is willing to make the tough decisions needed to ensure macroeconomic stability in a volatile global economic environment," said Mr Nehru.

So what happens next? The World Bank has estimated that the cost of rebuilding Japan could amount to as much as $235 billion (£145 billion) and take five years. It described the damage to infrastructure and residential properties as "unprecedented".

Of course, in an increasingly global economy, there is little chance that the fallout of this will be limited to Asia.

As the Daily Mail's Mr Brummer pointed out, in periods of crisis such as this, the typical response has been to ensure that credit is easier to secure by making monetary policy looser.

"The Bank of Japan has made it clear the banking system, business and consumers will get all the cash they need to get through the crisis. That could see the yen come under selling pressure against the dollar and other currencies on foreign exchange markets," he explained. Although in other economies the burden of rebuilding could push up the cost of borrowing astronomically, Mr Brummer said that the majority of Japanese debt is held by domestic borrowers and so could help to prevent a severe budgetary shock being incurred.

However, over the short term he predicted a "staggering impact on global commerce".

But in terms of international finance, there are reasons to be positive. According to John Lipsky, first deputy managing director at the International Monetary Fund - speaking at the China Development Forum in Beijing - although the planet's attention has been concentrated on the tragedy in Japan, much of the economic and financial news of the past year can be welcomed. "Most important, global economic growth has been advancing at a much faster pace than the average annual expansion of the past 20 years," he revealed.

And so beyond the short term it would appear many commentators are agreed that international markets will not endure prolonged suffering as a result of the events of March 11th. However, it would be fair to say that it will be quite some time before Japan has ceased to feel the tremors the tragedy left in its wake.

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