Disaster in Japan: A difficult Tuesday | The Economist

Free Exchange:

For the moment, markets look quite concerned. The Nikkei has lost 19% of its value since Friday. European indexes are off nearly 4% today. American markets are opening down over 2%. The dollar is strengthening against most currencies (though not the yen, reportedly because Japanese citizens are repatriating funds to handle crisis expenses). Yields on Treasuries are falling like a stone amid a general flight to safety. And commodity prices are down sharply across the board. Oil is off over 3% today, despitetroubling developments in Bahrain.

In other words, the world sees a non-trivial global demand shock underway. Japan's humanitarian and economic catastrophe is developing into a minor global economic crisis.

It's far too early to say how serious this global crisis could be. Much of it will depend on what happens in Japan and how quickly confidence can be restored. Some of it will depend on the policy response. If markets continue to get gloomier over the next month and expectations drop, central banks must be ready to step in (as they were reluctant to do last summer). Certainly, events in Japan and the Middle East indicate that unnecessary short-term fiscal and monetary tightening in Europe and America is very risky and should be avoided.