This morning’s earthquake in Japan was the strongest in more than 100 years. The last time Japan experienced a quake even close to the 8.9 magnitude was in 1995 when a 7.3 quake hit the coastal city of Kobe. As we have seen in the price action in the foreign exchange market, risk aversion and repatriation flows has driven the Yen sharply higher against all of the major currencies. Although the clean up and rebuilding efforts will cost a hefty penny and the quake could temporarily paralyze the Japanese economy, the Yen could see further gains just as it did in 1995 when risk aversion and repatriation dominated the flow in the currency.
The following charts courtesy shows how the JPY rose to an all-time high against the dollar 3 months after the quake. Japanese stocks, which had already been in a downtrend continued to fall. If the same type of price action occurs this time around, USD/JPY could fall to a fresh record low.