Sent: 15-03-2011 10:39:02
In this issue:
Return to full article list
HomeFree weekly newsletterSelf Managed Super Fund ArticlesContact usLogin
Ten Observations Arising from Japan
The Japanese earthquake and tsunami will probably have as great an impact on Japanese society as the second world war. The impact of the events at the weekend will be on our minds as analysts for several years but below are ten immediate thoughts about the commercial impact.
- There are no people. In the aftermath of cyclone Katrina and the Christchurch earthquake, for example, we were moved by people distraught at having lost their homes. The pictures this weekend from Japan were different. There was enormous physical destruction but few people. Communities have been eliminated. Fundamental decisions will be needed about the locations of towns in the future and how Japanese society needs to be organized to cope with its peculiar vulnerability.
- The consensus is in the tails. Over the past few years, investors have been buffeted by outlier events that have so dominated markets that tail events are becoming the consensus. Japan's earthquake will probably reinforce perceptions that fear should underpin any approach to financial markets.
- Japan will overcome the physical adversity. Japanese governments and policymakers have been much criticized for their tardy responses to economic conditions for nearly two decades. In their favour, the sources of their problems and the solutions were subject to some conjecture. The earthquake damage is likely to confront the government in a way that only compares with the rebuilding task after the second world war. There will be little debate about what needs to be done. The government and the Bank of Japan have already moved to make funding available.
- Extrapolating the damage may be unwise. The pictures of destruction appearing on our television screens suggest a return to anything approaching normality will be decades in coming. These pictures are coming from the most severely affected prefectures and regions. Reports suggest that even the city of Sendai is largely intact despite being very near the areas of greatest destruction. The damaged areas account for only 7-8% of the country's output. Japan's major manufacturing areas have not been directly affected.
- There could be a rapprochement with China. China offered and Japan accepted assistance. This was unusual and might signify a thaw in relations. There are some silver linings in this especially bleak cloud. This may be one.
- Uranium is clean but only up to a point. In the normal course of events, nuclear power is cleaner than other forms of energy. The Fukishima explosions have highlighted how, at other times, nuclear power is a far more scary energy alternative. At a minimum, the positive consensus surrounding nuclear power and development of uranium mines will be reappraised. In the short term, greater recourse to natural gas and other fuel sources could be expected.
- Funding the reconstruction will pose problems for others. While Japanese debt has risen to 200% of GDP, nearly all has been held internally, removing the pressures faced by countries like the USA and Australia that must rely on foreigners having enough confidence to support a rising debt issuance. Self funding its debt has relied on Japanese households saving for their retirements. Now, many of those households will have to use their savings to restore their physical environs. The government may have to compete to fund reconstruction but the US may be the loser. The Japanese have also been funding the U.S. deficit. They might contribute less in the future.
- Japan's future economic growth will be stronger. In the short term, plant closures and the loss of life will result in a contraction in output. As reconstruction gets underway, however, spending on physical infrastructure, housing, commercial properties, transport equipment and consumer durables will increase leading to stronger growth outcomes than would have otherwise been achieved.
- The mammoth rebuilding effort will require more raw materials. Mining and metal refining companies will benefit since more metal and industrial raw materials will be used in the next five years than would have been used if there had been no earthquake. Initially, non-Japanese producers of these materials may benefit most but, in the longer term, Japanese fabricators will probably meet the additional demand and recover some of their lost market share.
- Global supply chains will suffer disruption. Many major Japanese corporations such as Toshiba, Panasonic, Toyota and Nissan, among others, have already cut production even where they have not been directly affected. Exports will be lost. Inadequate supplies of products such as LCD screens and computer memory chips could see loss of Japanese market share but, more significantly, could result in rising prices or shortages in places apparently unconnected to Japanese industry as other manufacturers lose their input sources.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.