What the Japan Crisis Means For the U.S. Economy

A Panic Sell-Off?

Financial markets around the world are showing classic signs of panic in response to the unfolding disaster in Japan. US stock indices are off nearly 4% over the last few days (investors exiting riskier assets), US bond prices have spiked (investors buying assets presumed to be safe), the VIX (essentially the price of insurance against price declines) has gained well over 30%.

For investment purposes, it is important to remember that the disaster in Japan is (so far) a localized event. It has a terrible impact on the region, but it is unlikely to materially affect the world economy.

Yen Exchange Rate

The largest effect on the world economy may come from repatriation of Japanese assets to pay for the recovery. Asset flows into Japan have already begun. The chart above shows the US dollar/Japanese Yen exchange rate. Japanese investors are buying Yen to bring bring the proceeds from foreign-denominated asset sales back into the country.

Minimal Impact

While the reaction of the world markets is almost certainly a gut reaction, it is possible that assets flows back to Japan could continue for a while. However, it seems unlikely that this outflow alone would significantly slow down economic growth in the US and elsewhere.

Posted by Martin Gremm (Pivot Point Advisors)

About the author

Marc Schindler, CFP®
Marc Schindler, CFP®

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