Your Money Matters


April 2011 Issue


The Crisis In Japan And The Global Economy


Here are some commentaries from different sources on the effects of the crisis in Japan on the global economy.


Mackenzie Financial: Noran Raschkowan – Chief North American Investment Strategist

“In the near term, the disaster in Japan will push Japanese stocks lower and the Yen higher. The reduction in global growth will see cyclical stocks weaken and defensive stocks rally. However, this shouldn’t alter the strong underlying fundamentals of the global economy and 6+ months from now, the rebuilding process in Japan should act to stimulate its economic growth, as well as growth in China and South East Asia as exports from these economies to Japan rise. In addition, it is worth noting that manufacturers in North America and Europe may benefit as substitutes for lost Japanese manufacturing capacity.”

The Globe and Mail – Toronto – The Canadian Press

“Recent tragic events in Japan have added to growing concerns about the strength of the recovery, but should not push either the Canadian or global economies back into recession, according to a major Canadian bank. The CIBC World Markets report said it will take time before information is available to make a complete and accurate assessment of the implications of the events in Japan, including the crisis at its Fukushima Dai-ichi nuclear plant following the massive earthquake and devastating tsunami. However, the report notes that the global economy was already facing increased uncertainty on a number of fronts even before the disaster in Japan. After riding some strong tailwinds late last year, the global economy finds itself buffeted by new and, in some cases, completely unforeseen developments. While the risk of outright recession would still appear to be quite low, those developments have led to a scaling back of earlier optimism and an increase, for now at least, in risk aversion."

Fidelity Investments – Performance Analysis & Investment Communication Japan FIL Investments Japan

Despite the devastating effects of the earthquake and subsequent tsunami, most manufacturing companies appear to have little direct exposure to the heavily affected Tohoku region. As a result, there seems to have been little damage to Japan’s production base. Of greater concern are the repercussions of disruptions to infrastructure, transport and power generation. What we can say is that economic and corporate fundamentals in Japan have improved significantly since previous disasters, such as the Great Hanshin earthquake in 1995. Compared to the recent past, market valuations are far more supportive. In the first day of trading following the tragic events of this past month, the Japanese stock market (as measured by to TOPIX) fell by 7.5% (quoted in local currency). This marked the largest one-day decline since October 2008. Financials (insurance, other finance, securities), oil and coal, and power utilities led the decline. Key exporting sectors also sustained heavy losses. In contrast, the construction sector, perceived as likely to benefit from demand for rebuilding, rose by more than 6.4%. Some defensive segments, such as pharmaceuticals and foods, also fared better than the market average. In comparison with previous disasters, authorities in Japan have responded quickly to mitigate the adverse economic and financial effects of the earthquake by injecting a record 15 trillion yen into money markets and doubled the size of its asset purchase program to 10 trillion yen, providing a total of 40 trillion yen in a bid to stabilize the financial system. These steps went beyond the expectations of most economists and commentators.

AGF Market Insight

The Japanese market has suffered significantly since the quake struck, and the weakness has accelerated as the risk that a nuclear disaster could be a result. Further losses may be realized as the market deals with a very high level of uncertainty. Combine these events with the ongoing events in the Middle East and the European credit issues; markets have good reason to be increasingly skittish. However, although further losses are a possibility, we believe there is a strong potential that they may be short lived for several reasons:

1. Policy response is likely to be quick and meaningful – Japan has gone through many years of slow to negative economic growth and has dealt with the impact of a large earthquake in its recent past (Kobe 1995) and will respond with stimulative efforts. The Bank of Japan has already said that it would provide increased short-term liquidity to markets and that it would expand its asset purchase program to help shore up investor sentiment.
    

2. Valuation multiples in Japan are at low levels which should help support the downside.
    

3. Markets tend to recover reasonably quickly after these one-time catastrophic events.

The Japanese markets have become less important to the performance of the global markets as its weightings have dropped from 30% of the World Index to its current weighting of 10%.

The full impact of the overall economy remains uncertain, but given the widespread destruction in Japan, a slowdown in economic activity is inevitable. Persistent disruption in power and electric supply will likely remain a challenge for the manufacturing sector, at least until alternative production plans are developed. Food, retail and service businesses are vulnerable to a slowdown in demand consumption. On the other hand, industries like construction, construction materials and metal products may benefit from the inevitable growth in reconstruction. The short-term sell-off in exporters (technology and automobiles) may be an attractive long-term entry point for investors, as these companies are leveraged to improving growth prospects I Europe, Asia and the US., rather than just the domestic economy.

Theresa Wever and the Money Concepts Team.

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