Physically, Japan was probably better prepared for last week’s earthquake and tsunami than almost any other country, though the human toll has been horrific and the nuclear consequences scary. Yet, economically, Japan could hardly have been in a worse position.
First, the disaster has pushed up the value of an already overvalued yen, either because investors and insurers are bringing money home or because others are betting that they will. Exporters dealing with power cuts and flooded factories will also have to contend with less competitive prices for their products.
Second, the Bank of Japan’s ability to help the economy is limited. New Zealand’s central bank cut interest rates by 50 basis points after the Christchurch earthquake but Japan’s interest rates are already at zero. The BoJ could (and indeed might) increase its asset purchases and intervene to stop the yen strengthening too much, though the last time it tried the latter it did not work for long.