Implications of the Japanese Disaster

Few New Zealanders, and for that matter most people from technologically advanced nations from around the globe, will have seen images of the massive devastation in Japan caused by the Earthquake and Tsunami only a matter of days ago. The scale of this disaster is immense. Now the Japanese and the rest of the world are waiting for the word on nuclear fallout following explosions at one of their nuclear power plants.

Japan with a population of 137 million has the world’s third largest economy. It is a country desperately short of natural resources, particularly energy. It has 55 nuclear power plants that supply 30% of the country’s electricity needs. Much of its electricity demand is associated with manufacturing of goods for export. Most of us in our everyday lives use something that was either manufactured in Japan, or by a Japanese owned company.

Whilst the emotional cost of such a large loss of life will be immense, we need to consider what implications there are for investors. The economic cost is hard to quantify at this stage and some economic commentators have placed a figure of US$100 billion on the damage. This figure could well mushroom, particularly if there is a need to decontaminate large areas because of nuclear fallout.

Japan has one of the largest insurance markets in the world and a significant proportion of the damage will be insured. Initial estimates are that the insurance losses will be up to US$35 billion making this potentially the largest single insurance event to ever occur. It should not have any impact on reinsurer’s ability to pay for the Christchurch Earthquake claims.

Here are some thoughts on what may occur:

• The impact on global GDP may be around 0.2%.
• Global demand for resources including oil may increase when Japan starts rebuilding.
• There will be a swing away from Nuclear energy to gas and oil for electricity generation. The focus may be on newer technologies such as utilising tidal currents, and wind turbines.
• Large amounts of Yen will be repatriated to Japan. This will cause short term currency volatility.
• Japanese GDP will increase with the rebuilding program. Ironically, this may bring a much needed stimulus to their economy.
• Manufacturing plants in other countries will be run to higher capacity to meet manufacturing shortfalls in Japan. This will stimulate the economies of these countries.
• Prices for mainly technology based goods where Japan controls the world’s production may increase significantly, or simply not be available. The real issue is that no one knows the extent of the damage to Japan’s manufacturing base, or how much these manufacturing industries will be disrupted by power shortages. Examples of these, and Japans market share include  Protective polarizer film for LCDs 100%, Automobile CVTs 92%, Aluminium capacitors 89%, Game software 87%, Li-ion batteries for mobile phones 46% LCD TVs 44%, Electrode materials for Li-ion batteries 78% Car navigation systems 74% Small motors for automobiles 47% Mobile-phone camera modules 36%.

With the Japanese economy having gone through tough times for well over a decade, most international share fund managers do not have large exposures to Japanese shares. The impact will largely be felt through contagion throughout the world’s stock markets. We expect that initially the markets will over react. This most likely will be followed by a positive correction. Investors most likely will notice increased volatility over the short term.