In 1923, when a strong earthquake destroyed most of Tokyo, Japan suffered a crippling economic downturn that may have hastened the onset of military rule. Yet financial markets around the world barely shrugged.
Ninety years on, Japanese cash plays a crucial role in global bond and stock markets. Despite two decades of stagnant growth on home turf, Japan is the second-largest foreign owner of US government securities, with nearly $900 billion of America's public debt. This time it could be the rest of the world that takes a financial hit while the Japanese economy booms.
To understand how this could happen it is necessary to follow the Japanese money. Savings by individuals and money held by Japanese insurers and financial institutions amounts to trillions of dollars in cash, much of which makes its way on to world securities markets. When natural disasters happen in Japan, individuals and companies need this cash to rebuild, and insurance companies need it for payouts.
Earthquake insurance is hard to get for most households in Japan, so much of the cost - estimated at $100 billion - will have to come from a mountain of ordinary savings held in Japanese financial institutions, much of it invested overseas. For anything that is insured, possibly amounting to between $10 billion and $15 billion - the situation is complicated. Japanese insurers will also have to sell overseas assets, but they will be spared the full cost because they have reinsured a lot of their risk with overseas insurance firms, who in turn have reinsured it with other insurers. This insurance trail is a global labyrinth. Japan's risk, it turns out, is the world's risk.
Sure enough, as US markets opened on Friday, the sell-off of Japanese-held treasuries began. Bond prices fell and yields rose, although analysts say the selling was offset by buying from investors fleeing debt problems in the eurozone and unrest in the Middle East.
The yen was also sold off immediately after the earthquake - before investors realised that billions of dollars held by Japanese insurers and investors would have to be repatriated. Within a few hours the selling reversed itself, and the yen strengthened sharply. Japan's central bank says it will inject 15 trillion yen into the economy to stabilise markets, but that didn't stop the Nikkei index slumping 16% so far this week - the biggest two-day fall since the 1987 global stock market crash.
All of this was predictable. In 1991 I wrote a book, Sixty Seconds That Will Change the World, about the consequences of a major earthquake in the Tokyo area, and discovered that the rest of the world would come off far worse than Japan. US treasuries would have to be sold to meet insurance claims and pay for rebuilding, resulting in falling bond prices and rising interest rates. The yen would then rise as these overseas savings were repatriated.
A model produced by the Tokai Bank in 1989 found that Japan, after experiencing severe short-term negative growth, would bounce back as the cash flowed home and the rebuilding began. It was the rest of the world, starved of this investment and hit with rising interest rates, which went into recession.
Qualitatively, the financial markets are already reacting exactly as predicted. But there are differences in quantitative terms. The Tokai model was based on a major earthquake much closer to Japan's industrial heartland, and a rebuilding cost of about $1 trillion at 1990 values. And Japan was then a much more significant global creditor than it is today. Twenty years ago it was the world's largest creditor nation and the top buyer of US bonds. Now it's lost that position to China.
Perhaps the biggest difference is the Tokyo government's fiscal position, awash in debt that amounts to two years' worth of GDP. It can ill-afford the generous injections it is making to stabilise markets and the spending that will be needed to restore infrastructure.
If the model plays out as predicted, the sell-off in bonds will continue, and the yen could rise further. The immediate effect on the Japanese economy will likely be to turn an expected 0.3% growth this quarter into negative growth, perhaps sending Japan back into recession. But within a year the rebuilding effort will deliver strong GDP growth. Production of everything from cars to concrete will have to be ramped up to satisfy the expected demand.
The views expressed by the author are personal