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Markets Won’t Know Full Scope of Japan Disaster for Weeks, Says AEI Expert

Fin - Daily Ticker - US

As the nuclear crisis and devastation in Japan continue to worsen, global stock markets are plunging.

Japan's main index, the Nikkei 225, has dropped a shocking 16% in two trading days since the earthquake; this is the largest two-day drop since the 1987 crash.

The main driver of this collapse, says Michael Auslin, director of Japan studies at the American Enterprise Institute, is the ongoing nuclear crisis and the market's gradual understanding of the scope of the tsunami's damage.

Although Japan's major industrial regions did not get hit by the disaster, Auslin says, many local economies in the north have been completely destroyed.

The government will be required to provide massive stimulus to restore basic services and fund rebuilding in these areas, Auslin says, and this is stimulus that Japan's overstretched government can ill afford.

Japan's government is already carrying a huge debt burden and running enormous deficits. Although the spending might provide some short-term stimulus to the economy, the disaster is likely to make Japan's deteriorating financial position far worse.

The immediate crisis, of course, continues to be the devastating human toll of the disaster amid the ongoing efforts to stabilize the Fukushima nuclear reactors.  In the short term, says Auslin, there's likely more bad news on the way.

See Also: The Latest on Japan's Nuclear Crisis