THE YEN surged against the dollar but oil prices and stock markets fell after the Japanese earthquake as investors scrambled to gauge its impact on the world’s third largest economy and the broader global recovery.

The earthquake struck just before the close of Japanese markets, taking 1 per cent off the Nikkei 225 and leaving the index down 1.7 per cent on the day.

Futures contracts indicated that investors were pricing in a further 2 per cent opening fall for Monday.

Analysts said stocks tended to react negatively to natural shocks but often recover after a few days.

“Natural disasters can actually be positive for growth because governments spend to repair the damage.

“The problem with this analysis is that Japan’s fiscal mess makes this a little more difficult to attack with an open purse but they’ll certainly do everything they can,” said Rob Carnell, chief international economist at ING.

After the Kobe earthquake in 1995, the Nikkei fell about 8 per cent in the following five days, then recovered 5 per cent in the next two weeks.

The yen initially dropped against the dollar but soon swung higher as investors considered the likely flow of insurance payouts to Japan and from companies repatriating funds, as happened after the Kobe earthquake.

However, analysts at Nomura played down the impact of any payments to Japan given the size of the currency markets, where more than $4,000 billion is traded daily.

“Our assessment is we’re not going to see large-scale repatriations to Japan, so those flows are not necessarily going to generate big moves in dollar-yen,” said Jens Nordvig, the bank’s head of G10 currency strategy.

The dollar dropped to Y81.8 in late European trade – its lowest in nearly a fortnight – from Y82.8 as the quake struck.

The Japanese earthquake comes at a sensitive time as markets grapple with the implications of unrest in Libya and the Middle East on oil prices, inflation and growth, as well as the euro zone debt crisis. – (Copyright The Financial Times Limited 2011)