Downside risks of Japan’s disasters have increased, says Moody’s

The downside risks from the earthquake, tsunami, and nuclear crisis have increased over the past week for Japan's economy, sovereign credit, banking, insurance, and non-financial corporate sectors, Moody's Investors Service said in a special report.
The report also examines the effects of the situation on a host of sectors, including assessments of the supply chain impacts, such as for the US auto sector, and US and Asian electronics sector.
Despite the higher risks, Moody's said its base-case assumptions remain broadly unchanged from a week ago: Japan's growth will resume in 2H2011; investor confidence will continue with regard to government bonds; the banking system will be resilient; and the worst-affected sectors will be insurance and utilities, with others experiencing a limited impact.
The key assumption underlining this base case is a speedy containment of the nuclear problem.
"We are now more negative in our assessment of the damage. The crisis has raised the risks facing both Tokyo Electric Power (A1 on review for possible downgrade) — as the owner of the Fukushima Dai-ichi power plant at the center of the crisis — and Japan's overall utilities sector," said Brian Cahill, Moody’s Managing Director.
"For many other industries, disruptions to power, begun by the earthquake and now exacerbated by the nuclear crisis, will cause an interruption to production which is more severe than we had anticipated. Information on this aspect remains limited, but is almost entirely negative," added Shinsuke Tanimoto, a Senior Vice President with the rating agency’s Corporate Finance Group in Tokyo Tanimoto.
"If the Japanese government falters in its efforts to contain the spread of radiation from Fukushima, a large drop in consumer confidence could ensue, with negative repercussions for the country's economy," said Thomas Byrne, a Senior Vice President with the Sovereign Risk Group in Singapore.
"If coupled with power shortages that create an extended delay of a resumption of production to pre-disaster levels, the country's full-year gross domestic product could contract," added Byrne. "However, the Japanese government has the fiscal wherewithal and creditworthiness to deal with a disaster that could cost twice as much as the Kobe earthquake of 1995."
"We estimate that the impact of the earthquake and related incidents is well within the Japanese banking system's capacity to absorb,” explained Minoru Kubota, Managing Director for the Financial Institutions Group in Tokyo. “This belief is based on a combination of the unprecedented liquidity provision committed by the Bank of Japan; strong bank capital buffers, which have benefited from a Yen4 trillion increase since 2009; and our expectation of public and private investment in the clean-up and reconstruction."
"Insurers, both in Japan and around the world, will sustain heavy losses, and this will in turn result in negative credit implications for domestic and foreign insurers, but especially for the property and casualty sector in Japan and reinsurers globally,” said Kenji Kawada, a Moody’s senior analyst in Tokyo. “However, we believe the impact for life insurers will be more manageable."
Finally, the Tokyo Corporate Finance Group's Tanimoto, commented, "The nuclear crisis at Fukushima will prompt a reevaluation of the country's dependence on nuclear power for nearly a third of its energy needs."
"Regulatory, political, and financial risk are all much higher in the utility sector in Japan than they were just ten days ago," he adds.