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Likewise, the impact on Canada at this early stage is also uncertain. For comparative purposes, the massive Kobe earthquake in January 1995 didn’t make a noticeable dent in that year’s GDP figures for Japan. In fact, in Q1 of that year, real GDP rose 3.4% annualized. For all of 1995, Japan’s economy grew 1.8%, which was about average for that decade. Today’s quake could be worse (and hit Tokyo harder) than the one that struck Kobe, which, at that point, was the worst in Japan in a half century. The 1995 quake had little noticeable effect on oil prices, though they were just $18/bbl at the time instead of $100. We have cut our estimates for Q1 Japanese growth, but expect the rebuilding effort to add strongly in Q2 and Q3. Still, this tragedy could undermine Japan’s already tenuous fiscal situation, and heighten global investor concerns about public debts in Europe and the U.S., making Canada a relatively more attractive place to invest.

• Exports: Over the past 12 months, Japan has taken 2.4% of Canada’s exports. Sales to that country were up almost 33% y/y in January, more than double overall export growth. In B.C., the bulk of the province’s exports go to the U.S. (45%). Japan takes the #2 spot but its share is only 14%. Note that in 1995, Canada’s exports to Japan jumped 24%, compared with a 16% gain for exports to all countries, suggesting some positive impact due to reconstruction efforts after the Kobe quake.
• Potential disruption of important trade flows from Japan to North America: In 2010, the U.S. imported $47.2 billion of motor vehicles, $32 billion of motor vehicle parts and $11 billion of aerospace products. [This compares with $63 billion, $44 billion and $12 billion in 2007]. So this could potentially benefit Detroit-Three automakers and other North American-based makers of transportation equipment, and have a positive impact on Ontario’s automobile sector.
• Commodity prices: After China and the U.S., Japan is the world’s third biggest consumer of commodities. Japan’s daily oil consumption in 2009 was 4.4 million barrels and this has to be covered virtually in full by imports. The demand for oil could be lower, at least temporarily, because of the earthquake. As well, a flight-to-safety will likely exert a negative impact on the prices of many commodities, which had already been under downward pressure just prior to the earthquake. Over the medium term, however, reconstruction will increase the demand for a wide range of raw materials.
• Canadian dollar: Down, at least temporarily, as Japan repatriates its funds from abroad.
• Interest rates: Down, owing to an initial slowdown in global growth as well as the potential for some safe haven flow to bonds.
• Stock markets: Asian and European stock markets were down earlier today. There has been a much more muted impact on North American bourses. Property and casualty companies were down sharply. None of Canada’s largest insurance companies are in the property and casualty business. Some, however, have equity exposure to the Nikkei.
• In addition, as the cost estimates of the disaster grow, we could see P&C insurance companies dumping their holdings of stocks and bonds to raise cash to pay the mounting claims. This will take some time to show through and the heaviest selling pressure is likely to be in long-dated corporate bonds (used for actuarial matching purposes) plus dividend paying stocks. The other effect will be large volumes of money moving across the globe. We’re already seeing the Japanese yen rally against the U.S. dollar as insurance companies repatriate funds ahead of claims rolling in.
• Banks: Canadian bank exposure to Japan is negligible, according to the latest report from the BIS, while U.S. bank exposure is $305 billion. But total European bank exposure is $507 billion (France $163 billion, UK $147 billion, Swiss $90 billion, Germany $62 billion).
• The Province’s latest budget has about $600 million worth of contingencies built in, which could be used for disaster relief, if necessary. Another potential fiscal impact would be through commodity prices, but B.C. is tied more to natural gas prices which are already depressed and lumber prices could rise with the reconstruction.