Great Hanshin earthquake of 1995 in Japan, history lessons for forex markets

Thursday, 17 March 2011 16:54

For clues as to what effects to expect in forex rates from the consequences of the March 11th earthquake in Japan, I look at historical data from 1995, the year of the Great Hanshin earthquake. Great Hanshin earthquake occurred on Tuesday, January 17, 1995, at 05:46 JST (16 January at 20:46 UTC). There are at least two topics to explore. We look for quantitative effects of repatriation of funds into Japan to fund the recovery efforts on the exchange rate of the Japanese Yen to the US Dollar. Another possible concern is the carry trade implications.

Historical LIBOR data show that the 1-month interest rates for AUD in January 1995 were between 7.5 and 8%, while for JPY, they were around 2.3%. This type of interest differential makes carry trade attractive. The carry trade unwinding, which may be initially triggered by the repatriation of assets into JPY (flight to "safety" of a low-yielding currency), results in selling of profitable assets. This is similar to what was seen in 2008 and we are seeing it now. Therefore it's interesting to go back to 1995 to see if there were any effects.

Great Hanshin (Kobe) earthquake effect on the value of JPY futures contract JY95M traded on CME, day data Great Hanshin (Kobe) earthquake effect on the value of AUD futures contract AD95M traded on CME, day data

Fig. 1 Effect of Great Hanshin (Kobe) earthquake on the value of the Japanese yen futures contract JY95M and the Australian dollar contract AD95M, traded on CME. End of day data. Time of the earthquake is shown as a red dot on the horizontal axis. The horizontal axis is labeled in the MM-YY format.

Plotted in the charts below are day bar data for JY95M and AD95M. JY95M was a futures Japanese Yen contract that traded on CME, having its date of expiry in June 1995. AD95M was a similar Australian Dollar contract. Both contracts had some regular volume when the disaster struk, but the volume was much higher for the yen.

The first unexpected and disturbing conclusion is that the currency movements, following the disaster, are spread out in time. Not much happened on the day of the disaster (close at 1.0274) and during the subsequent month. The local peak for the yen happened on April 19, 1995, with the daily high at 1.2404 and close at 1.2411. There is more than 20% increase three months after the catastrophe.

The AUD response seems less dramatic. On the day of the disaster, AD95M closed at 0.7520. A month later, at 0.7324, and two months later, at 0.7303. One could question whether these movements had anything to do with the earthquake.

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