The tragic events of the Japanese earthquake will no doubt have traumatised us all. In much the same way as the Tsunami in Asia on the 26th December 2004 led to an immense impact, the seemingly heartless capitalistic world needed its answers.
Similarly the onslaught of questions in relation to global economics post the Japanese earthquake has been peculiar to answer.
Japan's stockmarket responded by falling 7% after the first full day of trading. The FTSE wasn’t impacted as markets sat and observed, but undoubtedly concerns in Japan mounted as a record 4.88bn shares were traded.(1) Its natural to financially panic in these scenarios as data arrives from all corners, of which it is impossible to gauge the knock on impact. Confusion equals run, and run investors did.
The insurance industry will be heavily hit with the cost to them more than doubling to $35bn as the estimated impact rose to $150bn. Lloyds of London were affected particularly badly. On the day, U.S stocks remained slightly up.
The cost of rebuilding can be seen as positive or negative. It will take years to complete, but Japan always rebuilds bigger and better. Much of the larger taller buildings were unaffected showing their strength. Rebuilding will help drive the economy in some respects, but there will be downsides.
The Kobe earthquake in 1995 cost 2% of the Japanese economy so it's easy to draw comparisons, particularly as Japanese futures have started to price in the impact of radioactivity.(2) The Tohoku region is a large food producer, so Japan will have to import more food for the time being.
It is reported that Japan accounts for 20% of world semiconductor production and 40% of flash memory, used in anything from smart phones to tablets or computers so the supply issue could affect global markets.(3) Known for its IT, Japan's Shin-Etsu Chemical makes over half of Japan’s 300mm silicon wafers in the area affected.(4) Toyota and Nissan also both have large plants in the area which account for 5% of their total global production.
With electricity output severely reduced and rolling blackouts, the loss of production would justify some re-pricing of the profitability and share price of the market, but not at over 20% which was the knee jerk reaction Tuesday 15th 'enjoyed'.(5) Much of the concern relates to the damaged nuclear power stations: Currently 11 of Japan’s 54 nuclear plants are offline and this has cut Tokyo Electric Power’s output by 25%.(4) The media quickly drew comparisons to Chernobyl 25 years ago, but this is unjustified, as Japanese nuclear reactors have a very different operating structure. Nuclear power experts have reported that a nuclear explosion is unlikely, as is a chemical explosion within the cores of the four reactors. Markets have priced this incident in. The hope is that the flooding of nuclear reactors with seawater will control the situation.
Markets have been a little edgy since the middle east issues and it’s possible this has been seen as a breather.
Invesco, who run one of the more successful Japanese funds, see short term negative consequences but believe that the long term recovery remains in place.
They also point out wisely that the area around Sendai in the Tohoku region has limited production facilities so is less impacted. The Tohoku region accounts for around 8% of the Japanese GDP (economy), half that of the Kobe area and whilst industrial production fell into negative in February 1995, a month after that earthquake, it was positive again by March.(6) Japanese authorities responded by introducing $183bn of liquidity to markets and, despite pressures, bond markets have stayed firm. The Yen also responded on the basis that Japanese companies and authorities would respond by repatriating assets from abroad to Japan so short term speculation has occurred. Invesco also point out that it’s the recovery in overseas markets that will be the driver of the Japanese economy. In the meantime auto, heavy machinery and electronics firms appear those affected most.
Over reaction or the reverse? Kobe's costs were estimated at 5-10 trillion Yen, whereas some of the estimates of this earthquake are closer to 15-20 trillion Yen.
It is in these markets and conditions that courage and skill in investment advice is most tested.
For a factsheet of the best Japanese funds call Peter on 0845 230 9876, e-mail info@wwfp.net or take a look at our website.
The value of shares and investments can go down as well as up Source (1) IFA Online (2) Octopus (3) Standard Life (4) Jupiter (5) Google Finance (6) Invesco
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