Radiation Hazard Forces Japanese Indoors as CDS Jumps

Reports of fires, explosions, and the release of hazardous materials into the air have become a daily feature of Japan-related news, and the situation appears to be getting worse as radiation levels at the Fukushima plant approaches levels that could severely jeopardize the health of the enginneers and technicians working to contain the situation.   

The CDS market is also nervous with Japan`s 5-year CDS yielding 116 bp, following a rise of some 23% over yesterday. Even China, in spite of its distance from the center of the crisis, is seeing its yield rise at 79 bps coinciding with a 7% daily rise. The other focal point is Bahrain, predictably, with its 5-year CDS being quoted at 350+ bps. Interestingly, TEPCO`s CDS have collapsed today with yields on similar maturity rising to 369 bps, corresponding to a jump of 191% in one day.

By contrast Japan`s stock market rallied rising by almost 6% today. It is reported that stock market performance has a very close correlation with radiation readings, indicating that traders are in panic  mode to a large extent. Today`s rise is probably a reaction rally inspired in part by the BoJ`s decision to inject another $43 billion into system, bringing the total to almost $400 billion, while doubling the size of the asset-purchase program first announced in Q3 last year. Comments by Nomura and UBS that stocks are oversold may have helped, too.

We are inclined to believe that Japans` economic difficulties are far from being over, with the tsunami and this latest nuclear nightmare further complicating an already desperate situation with respect to long-term GDP growth potential. Consumers locking themselves up in their homes for fear of radiation contamination can hardly be conducive to restarting a deflation-prone economy, and the acute need for new borrowing in this environment of private sector lethargy is sure to force CDS yields higher. It is unclear for how long the JPY can appreciate in this environment, since the only outlet for Japanese companies seems to be external demand, and even American criticism of currency manipulation will not be very loud as sympathy for Japan`s suffering remains the dominant feeling around the world.