Billions pumped into Japanese banking system

Japan’s central bank pumped billions more into the financial system today to quell fears that the country’s banks could be overwhelmed by the impact of the earthquake and tsunami.

Stocks slumped for a second day as a nuclear crisis escalated.

Two cash injections totalling eight trillion yen (€69bn) came a day after the Bank of Japan fed a record 15 trillion yen (€131bn) into money markets and eased monetary policy to support the economy in the aftermath of Friday’s 9.0 magnitude quake that has killed thousands.

The injections have helped stabilise currency markets, but stock markets dived for a second day as investors unloaded assets amid escalating worries of a nuclear crisis.

The benchmark Nikkei 225 stock average slid as much as 14% after Japanese prime minister Naoto Kan warned residents within 19 miles of the damaged Fukushima Dai-ichi nuclear power plant in tsunami-ravaged north-eastern Japan to stay inside or risk getting radiation sickness.

Radiation is leaking from damaged reactors at the crippled plant in an escalation of the four-day-old catastrophe.

The Nikkei closed today down 10.6% at 8,605.15.

The Bank of Japan has moved quickly to try to keep financial markets calm. By flooding the banking system with cash, it hopes banks will continue lending money and meet the likely surge in demand for post-earthquake funds.

Analysts say Japan can tap its vast bond market to help pay for reconstruction in the coastal regions shattered by the tsunami, but it will add to strains on the national finances.

The country is saddled with massive debt that, at 200% of gross domestic product, is the biggest among developed nations.

Peter Morici, a business professor at the University of Maryland, in the US, said: “Japan will be poorer for this disaster. Rebuilding will run down Japan’s financial wealth.”

Credit Suisse economist Hiromichi Shirakawa and analysts at Barclays Capital estimated the damage at up to 15 trillion yen (€131bn) – about 3% of gross domestic product. Other experts warned the economy will shrink for two straight quarters.

That represents a painful blow for Japan, which lost its place as the world’s No 2 economy to China last year.

The Japanese economy has been ailing for two decades, barely managing to eke out weak growth between slowdowns.

Prof Morici said the nuclear crisis combined with the twin hit from the quake and tsunami could make Japan more vulnerable than it was in the past.

“The double whammy has the potential to keep the Japanese economy shut down longer and globalisation offers Japan’s export customers alternatives they might not have enjoyed a decade or two ago,” he said.

“Hyundai and Ford now are good substitutes for Toyota’s cars, and even more so, Caterpillar tractors made in China can replace Komatsu’s land movers.”

The aftermath of the disaster is being felt across the country.

Power supply has failed in the worst-affected areas. Ports are closed, steel plants have stopped producing, and several major oil refineries have shut down.

Getting manufacturing up and working again may be a bigger challenge than in the catastrophic 1995 Kobe earthquake because a larger area is affected.