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Typhoon Shanshan is expected to strengthen into a super storm later this week, bringing heavy rain and gusty winds to western and eastern Japan and disrupting public transportation, the Japan Meteorological Agency warned on Sunday.

The agency said the storm, the sixth typhoon to form around Japan this month, could bring strong winds and severe weather when it makes landfall on Tuesday, with sustained winds expected to reach 102 miles per hour (162 kilometers per hour) and maximum gusts of up to 135 miles per hour (216 kilometers per hour).

It also said rough seas would develop in the East China Sea on Tuesday and would intensify. Officials urged people to be alert to strong winds, landslides, flooding in low-lying areas, overflowing rivers and huge waves.

East Japan Railway Co. announced on Saturday that Shinkansen train operations on Tuesday and Wednesday this week may be significantly delayed or canceled due to the approaching typhoon.

The Japan Meteorological Association predicts that the typhoon may pass through the Hokuriku region between Wednesday afternoon and Thursday morning, and the Hokuriku region is currently approaching the harvest season. If the region encounters strong winds, crops will face damage, such as fruits being blown off by strong winds and rice being displaced.

This also means that there may be a short-term increase in food prices in Japan. Currently, Japan is facing the dilemma of soaring rice prices. The price of its main rice has hit an 11-year high, and the market is waiting for the replenishment of new harvest rice to stabilize the price.

In addition to possible agricultural losses, the typhoon itself will also cause disasters such as storms and floods. In the worst case scenario, Shanshan will cause flooding, submerging large areas of Japan's western and southern coastlines.

Economic losses from hedging

According to Chuck Watson, a disaster modeler at Enki Research, Shanshan is likely to make landfall in Japan's Shikoku region and then pass through southern Honshu, a path that is expected to cause $6 billion to $10 billion in damage.

However, the typhoon's path forecast is still changing. If the typhoon continues to move and affects Japan's Osaka-Kobe area, the losses may rise to US$12 billion to US$20 billion.

Typhoon Shanshan is one of the evidences of the frequent occurrence of global climate disasters in recent years, which has also promoted the development of a new market, namely catastrophe bonds.

Swiss Re's latest analysis shows that catastrophe bond issuance in the first half of 2024 will far exceed $12 billion, which is expected to exceed the $15.6 billion issued in the whole of 2023. The catastrophe bond market grew by 7.4% in the six months ending in June. The first half of 2024 is also the most active six months in history for catastrophe bond issuance.

However, current catastrophe bonds are mainly focused on insurance against US hurricanes. Swiss Re estimates that more than 70% of outstanding catastrophe bonds are affected by US hurricanes.

As a financial tool that effectively helps insurance companies hedge disaster risks, catastrophe bonds are attracting capital. As of June 30 this year, the average investment return of catastrophe bonds was around 15%, including a 10% risk premium and a money market interest rate of about 5%. Swiss Re pointed out that this is significantly higher than similar credit products.