In Japan, fending off the unthinkable

TOKYO -- As American investors slept last night, the latest `Black Swan' event may have fluttered into their lives. It was birthed in the city of Fukushima, 140 miles north of Tokyo, where workers for Tokyo Electric Power Co., the embattled operator of the crippled Fukushima Dai-Ichi nuclear plant, desperately tried to contain an escalating crisis.

After an explosion early this morning Tokyo time at the plant -- the third in the last four days -- the Japanese government later acknowledged that the vitally important containment vessel at reactor unit 2 -- the steel and concrete vault that is the last line of defense should the nuclear fuel rods inside the vessel melt down -- had been damaged. Radiation levels outside the plant spiked. TEPCO sent most of its workers at the vast facility home, while 50 remained behind (talk about drawing the short straw...), desperately trying to cool down the fuel rods in three reactors by spraying in seawater with fire hoses. Authorities extended an evacuation zone around the plant out to an 18-mile radius, and a grim Prime Minister Naoto Kan acknowledged this morning in a brief, nationally televised address that more radiation leakage appeared likely.

The Nikkei, Japan's main stock index, promptly collapsed, plunging 14% before recovering a bit and ending the day down 11%. For a while Tokyo regulators halted trading in the TOPIX futures market.

The utter fear that gripped the Tokyo market today was rooted in a single, deeply troubling reality: should the damaged containment vessel fail at Fukushima Dai Ichi, a full-bore, uncontained nuclear melt down was not inconceivable. The specter of a nuclear cloud, blowing whatever direction the wind might take it -- across borders or even across oceans -- suddenly seemed like a possibility. And it seemed that way, because it is. That's why the A shares market in Shanghai tanked today, too.

The worst-case scenario, it's important to say, is not at this point a likelihood, even with the damaged containment vessel. Indeed, this evening in Tokyo the government issued a statement saying that radiation levels around the plant had dropped back down after the sharp spike this morning. But the frantic effort to cool the nuclear fuel rods to prevent further melting, and the fact that there is damage to the containment vessel, gave investors a pretty good reason to panic: the possibility of nuclear disaster is there.

A full-bore nuclear event would render null and void all the standard issue analyses/guesstimates done so far about the economic impact of Japan's tsunami and earthquake (a short-term blow of 'X' amount to growth followed by "stimulus" 'Y' from all the reconstruction spending.) The economic 'fallout' from real, actual nuclear fallout would be nothing short of devastating.

Depending on how much radiation might escape, it could make large parts of the third-biggest economy on the planet uninhabitable for years. Already, worst-case scenarios had the cost of reconstruction costing $1 trillion over several years. A nuclear accident in a place like Chernobyl, in the Ukraine in 1986, is one thing. There the economic damage was limited. But the possibility of losing a chunk of Japan is quite another.

Tokyo is 140 miles south of the crippled nuclear plant, and -- investor reactions aside -- there had been little evidence of panic here. Indeed, the Japanese people are so polite and orderly that a foreign friend of mine today joked that they "must lack the panic gene." But that might have changed a bit today. Japanese press reports had convenience stores in Tokyo running low of things like onigiri (rice balls) and other prepared in advance foods. Batteries, according to the Nikkei Kezai Shimbun, are also in short supply.

In the United States, when the end appears to beckon, we buy guns and gold. In Japan, they buy batteries and rice balls. (I think I understand more about what that says about them than it does about us; the Japanese are nothing if not practical.)

News that the radiation levels had dropped below harmful levels was welcome. Whether that means an uncontained meltdown was now out of the question -- or even less likely -- was not clear. Earlier in the day, Yukio Edano, Japan's chief cabinet secretary, who is the Japanese government's public face in this crisis, had said, "At this point, we can say we are moving in the direction of stabilizing the situation in a certain, managed manner." That ringing vote of confidence prompted a few expats I know to -- in 'a certain, managed manner' -- grab the phone and make plane reservations to get the hell out of here.

I'm not among them. Yet.