IN 1923, when a strong earthquake destroyed most of Tokyo, Japan suffered a crippling economic downturn that may have hastened the onset of military rule. Yet financial markets around the world barely shrugged.

Ninety years on, Japanese cash plays a crucial role in global bond and stock markets. Despite two decades of stagnant growth on home turf, Japan is the second largest foreign owner of US government securities, with nearly $900bn of America’s public debt. This time it could be the rest of the world that takes a financial hit while the Japanese economy booms.

To understand how this could happen it is necessary to follow the Japanese money.

Savings by individuals and money held by Japanese insurers and financial institutions amounts to trillions of dollars in cash, much of which makes its way on to world securities markets.

When natural disasters happen in Japan, individuals and companies need this cash to rebuild, and insurance companies need it for payouts.

Earthquake insurance is hard to get for most households in Japan, so much of the cost — estimated at $100bn — will have to come from a mountain of ordinary savings held in Japanese financial institutions, much of it invested overseas. For anything that is insured, possibly amounting to between $10bn and $15bn — the situation is complicated. Japanese insurers will also have to sell overseas assets, but they will be spared the full cost because they have reinsured a lot of their risk with overseas insurance firms, who in turn have reinsured it with other insurers. This insurance trail is a global labyrinth. Japan’s risk, it turns out, is the world’s risk.

Sure enough, as US markets opened on Friday last, the sell-off of Japanese-held treasuries began. Bond prices fell and yields rose, although analysts say the selling was offset by buying from investors fleeing debt problems in the eurozone and unrest in the Middle East.

The yen was also sold off immediately after the earthquake — before investors realised that billions of dollars held by Japanese insurers and investors would have to be repatriated.

Within a few hours the selling reversed itself, and the yen strengthened sharply. Japan’s central bank says it will inject 15 trillion yen into the economy to stabilise markets, but that didn’t stop the Nikkei index slumping 16 per cent so far this week — the biggest two-day fall since the 1987 global stock market crash.

— The Guardian, London