Earthquakes, Tsunamis, Radiation
Posted on March 29, 2011
Filed Under Mutual Funds, Personal Investing, The Economic Scene(This was originally posted 3/18/11; a software glitch requires that this be re-posted.) The heart-wrenching and volatile situation in Japan has rattled the world’s stock markets. Daily headlines right now seem to exert greater influence on stock prices than the underlying fundamentals. Wild swings have become the norm, at least in the short term.
In the days immediately following the quake, from last Friday, March 11th through Tuesday the 15th, mutual funds which specialize in Japanese stocks plummeted nearly 12% on average. While those funds obviously will be the most affected, everything financial is inter-connected, and few funds can claim to be fully isolated from Japan’s turmoil.
We don’t know what will happen to the damaged nuclear reactors and therefore we don’t know what the long term effects will be. We do know that the Japanese people are strong and smart, and the consensus is that no country is better prepared to deal with this type of disaster than Japan.
Here is a summary of what I’ve been reading and hearing.
In general, the economic impact of major disasters tends to be sizable for a quarter or two after the event and mostly concentrated in the region of the disaster. After about two quarters, however, growth is boosted by the reconstruction effort. However, in this case, due to the damage inflicted upon the electric grid, the impact on economic growth could be greater.
Although the physical destruction largely occurred away from Japan’s industrial core, the near-term impact on Japanese growth is likely to be negative and potentially quite large and government finances will be stretched. However, by the end of this year, the reconstruction effort is likely to get under way and provide a substantial boost to growth.
Japan has not been an engine of global or Asian growth for some time. This means the impact of much lower Japanese growth on the world economy probably will be limited and small.
Given the disruptions in Japanese manufacturing activity, the impact on global supply chains could also be significant. This is especially important in industries such as autos, telecommunications, and consumer electronics. Nevertheless, the global impact of this event may not be all negative because lower Japanese growth could also lower world energy demand and prices, albeit temporarily.
Disruptions in Japanese automotive and steel production may result in a boost in the demand for these products from other sources, including the rest of Asia, the United States, and Europe.
Right now the yen is appreciating against the dollar as Japanese investors sold foreign denominated assets for yen to fund the recovery. However, a rising yen is not something the Japanese government would like to see, since its imports become more expensive. Therefore, the Bank of Japan has already pumped (or pledged) about $250 billion worth of liquidity into the Japanese economy as a measure to both keep the yen lower and to forestall economic panic. And today, March 18th, comes word that the G7 nations have agreed to coordinated actions to counteract the strengthening yen.
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Mark Chambre