Japan Earthquake: How Does It Affect You

Our hearts and best wishes go out to the victims of the catastrophic earthquake in Japan late last week. This quake, the strongest in Japan’s history, ranked 8.9 on the Richter scale, spawned a massive tsunami, and is said to have claimed 10,000 lives. Now the natural disasters have triggered explosions at nuclear reactors.

This tragedy has far-reaching effects, from forcing the U.S. to reevaluate its energy policies to actually altering the spin of our planet. Aside from what this means on a human level, you may wonder what effects natural disasters like these have on global and national economies and your personal investments. We’ll break down what this earthquake means for you, even if you’re halfway across the globe—and how you can help.

1. What This Means For The Global Economy.
In the short term, global natural disasters nearly always hurt the economy in the countries where they take place. Stock markets around the world often follow suit, since all of our economies are interconnected. Japan’s Nikkei stock market index was down more than 6% at the end of the day Monday, and the S&P 500 had its lowest close in a month on Thursday.But, those same natural disasters can have unexpectedly positive ripple effects as people and money come in to help the restoration effort (which often boosts the local economy). For example, just under two weeks after Hurricane Katrina struck the Gulf Coast, the Dow Jones was up 1.3%. Similarly, after the earthquake-tsunami in Indonesia in 2005, the Aberdeen Indonesia Fund, which reflects the state of the Indonesian economy, tripled in value by the fourth month after the tragedy.

In this case, the damage to Japanese infrastructure may hurt production of some products like cars and electronics, but that probably won’t have incredibly far-reaching and long-lasting international implications. So, although the short-term economic dip may be disconcerting, it shouldn’t last forever. Hold tight with your investments, since global disasters generally won’t have very long-lasting effects on your portfolio.

2. Do You Need Natural Disaster Insurance?
These events are a sad reminder that natural catastrophes do happen. This earthquake is already one of the most expensive catastrophes in history, with insured property losses as high as almost $35 billion—making this natural disaster second in cost only to Hurricane Katrina. Earthquake insurance is relatively uncommon in Japan (considering its tectonically tumultuous history), at about 14% to 17% nationwide. In the United States, most homeowners and renters insurance plans don’t cover catastrophes like earthquakes and floods, so coverage for home repairs and a place to stay has to be bought separately. And it can be costly.

If it comes down to a choice between regular homeowners/renters insurance and special catastrophe insurance, go with the former because it’s more all-encompassing. If you live in a high-risk area like California for earthquakes or the Northwest for floods, natural disaster insurance might make sense, but it’s up to you in the end. Policy price will vary by whether you rent or own, where you live, and how much coverage you want, but policies often cost a few hundred dollars per year for renters, and can cost more than $1,000 per year for homeowners. Buying in is costly, but not insuring yourself is the same as self-insuring—you’re choosing to accept the financial risk.

3. How To Help Earthquake Victims In Japan.
Your donation helps those in dire need, supports a global effort, and has the positive side effect of playing a small part in helping boost the global and national economy. Of course, you should always make sure that you donate to reputable organizations. Our favorites are: