Japan – Strategy Consequences of the Great Quake & Aftermath
Despite brilliant and modern engineering, the devastation from Japan’s Great Quake & Tsunami of 11th March is unprecedented. There is no doubt the social impact is immense, and financial and economic ramifications will unfold for many months. This summary revisits the possible impact for Diversified’s operative model investment strategies, and some likely investment consequences. Loss of Output to the Japanese economy will be material – notably the halt in the Tsunami inundated area, and disruption to infrastructure. A deep technical recession is expected in the next Quarter. Reconstruction will kick in over the following Quarter pushing up the growth rate. The net effect is expected to take about 1% off Japan’s projected GDP expansion for the coming year (reducing it to perhaps +0.2%). i.e. Natural disasters rarely change an economy’s growth trajectory, over the medium term.
Outside the directly inundated area, Japan’s engineering was impressive at limiting damage from this Great Quake (8.9 on modified Richter scale). Japanese companies’ corporate earnings are unlikely to be significantly diminished by this natural disaster. Diversified gauges the troubled Fukuhama BWR reactors will avoid a reactor core ‘melt-down’ (i.e. a locally significant incident, but no major nuclear accident), but rendered inoperable. It is reported The Tokyo Electric Power Company (Tepco) has about 12 GW of Nuclear generation capacity and 31 GW of thermal capacity which had 40% unused capacity. i.e. Electricity supply should be restored as fast as the grid damage can be reconstructed.
The immediate impact on the Yen is a likely rise as funds are repatriated by Japanese insurance companies. Medium-term, the Bank of Japan is injecting huge money into the banking system and financial markets, and will not wish a strong Yen. It may interfere in currency markets to maintain a lower Yen. Patriotic Japanese are also likely to repatriate funds, abandoning carry-trade gains. Debtors like NZ, and high OCR providers like A$, may be deprecated. Do not hedge to NZ$. Japan’s trouble will have very minor impact on the world economy. Japan had only been contributing about 2% to global growth. Possible very marginal softening of global aggregate growth projections – perhaps in the order of 4.5%, instead of 4.7%, over the coming year.
Institutional funds globally were systemically underweight Japanese growth assets (by either of market capitalization or GDP weighted measure), going into this natural disaster. The sell-off since the Great Quake has suppressed Japanese share valuations to more extreme levels. Japanese corporate balance sheets are in good strength (about 32% of Mkt Cap) to withstand temporary adversity. Japanese shares may represent an investment opportunity now, or in coming months.
Conclusion:
Diversified’s thoughts go out to the Japanese people for their losses. Economically, we find no basis to adjust our strategies formulated with a one-year to 18-month tactical horizon. Possible specific opportunities in Japanese shares are delegated as the domain of the global generalists selected in our repertoire of mangers included in model strategies.
Norman W. Stacey,
Investment Analyst
