ECONOMIC SPOTLIGHT - TOKYO EARTHQUAKE AFTERSHOCKS
The possibility that a major earthquake
will strike Tokyo, causing corporate and financial ruin, haunts
the worst nightmares of many insurers and bankers polled by
Reuters.
    The Japanese capital is shaken by hundreds of small tremors
every year, but last week's biq quake in western Japan, which
measured 6.9 on the open-ended Richter scale, was a timely
reminder that the big one could come at any time.
    Another on Tuesday registering a preliminary 6.5 on the
scale struck the Sea of Japan coast northwest of Tokyo.
    A widely accepted theory by the late seismologist Kawasumi
Hiroshi states that major quakes occur in cycles averaging 69
years. Tokyo was last laid flat in 1923 by a tremor reading
7.8, raising the spectre of another within five years.
    Seismic experts at Shizuoka, one of three areas near Tokyo
considered quake-prone, say they expect a major earthquake
within the next few years.
    Added to such fears is the fact that no developed nation
has suffered a major quake since the far-reaching changes in
the last two decades which have bound the global economy into a
complex, fragile, interdependent financial network.
    "We are reaching a dangerous time. Insurance companies are
starting to worry about how to cover the large losses," said
Hatsuho Narita, a manager at the British Insurance Group.
    "It's a theme that has worried a lot of people. It's
difficult to put a figure on it, but the impact on all world
markets would be considerable," Brian Waterhouse, a banking
expert at brokerage James Capel in Tokyo, told Reuters.
    What would happen?
    Consider that Tokyo and its six surrounding prefectures
account for up to 40 pct of Japanese gross national product, or
some six pct of world GNP.
    Some economists believe that in the immediate aftermath of
a Tokyo quake, the yen would rise against sterling because of
the large amount of reinsurance which would fall due in London.
But it would plunge against other currencies.
    This would worsen the dramatic loss of value in land and
assets in the Tokyo area. Banks would be left holding hundreds
of billions of dollars in worthless mortgages and loans.
    Bankers estimate that 50 to 70 pct of city and regional
banks' loan exposure is to smaller business, which would most
likely lose all in a quake. Up to nine pct of their exposure is
in housing and consumer loans, they said.
    Many smaller banks and some larger ones would go to the
wall, bankers polled by Reuters said.
    The government, aware that insurance claims would be huge,
has set a payout ceiling of 10 mln yen per private house. In
Tokyo, 100 mln yen buys only a very modest residence.
    In addition, the insurance industry has formed the Japan
Earthquake Reinsurance Co to cover housing to a total of 10
billion dlrs, 80 pct of it government-guaranteed.
    However, insurers said the industrial sector, which has no
government backing, is a more dangerous risk.
    Japanese insurers said they are finding it increasingly
difficult to find reinsurance abroad.
    "Overseas firms are now very alert to earthquake insurance
risks," said Tahashi Kumakiri, Foreign Department head at the
Japan Non-life Insurance Association.
    Due to limited world insurance capacity, the Finance
Ministry recommends a coverage limit of 15 to 30 pct of
Japanese firms' total insurable value.
    Even so, one insurer believes that local firms reinsure up
to 80 pct of their quake cover overseas, most of it through
Lloyds of London.
    Some of this reinsurance is then reinsured again,
compounding the risks should the money suddenly be called in.
    Foreign entities in Japan are allowed 100 pct quake cover
but foreign insurers now set a limit of 60 pct.
    Industrial cover is confidential but official figures show
that in fiscal 1985/86 ended March 31, Japan did about half a
billion dlrs of overseas reinsurance business in fire cover,
most of which is quake-related.
    Bankers said the destruction of underlying assets and
repatriation of huge amounts of Japanese overseas investment
would seriously affect overseas stock and bond markets.
    Japanese institutions buy a net 10 billion dlrs or so of
foreign bonds a month, much of it U.S. Treasuries, and are
purchasing more and more U.S. And European stocks. The value of
foreign holdings of Japanese securities would nosedive.
    Japan would need huge amounts of money over a long period
to rebuild, which would block out developing nation creditors
from existing capital resources, the bankers said.
    Loss of central computers would mean billions in lost
transactions, bankers noted.
    Oil traders said crude prices would plummet as imports fell
by up to half from some three mln barrels per day now.
 REUTER
