Mark Dampier: Japan's economic recovery will be swift
Saturday 26 March 2011
There is no doubt the Japanese earthquake and tsunami was a human tragedy of immense proportions. We can only imagine the anguish caused as families were completely destroyed, survivors left without homes and entire towns wiped out. Given this was Japan's biggest earthquake in living memory it is testament to Japanese building standards that the damage and loss of life wasn't greater, especially in Tokyo. As the economic heartbeat of Japan significant damage there would have had more far-reaching consequences. In Tohoku too, the region most afflicted by tsunami damage, one of the Japanese managers I know pointed out most modern buildings remained intact, though there is clearly much to do in terms of getting the area back on track.
Whilst undoubtedly a great tragedy, I think it is unlikely to be a complete economic disaster. The direct earthquake damage itself is thankfully relatively minor with the vast majority of buildings surviving intact despite the terrifying ground shaking – plus some substantial aftershocks in the subsequent days. Simon Somerville of Jupiter Japan Income was in Tokyo at the time and described to me vividly how buildings swayed in the most frightening way but remained standing. The tsunami damage meanwhile was confined to a largely agricultural area, although one of the biggest facilities for silicon wafers was hit. This may cause problems in the supply chains for mobile devices. Other components or materials in various industries will no doubt be affected somewhere down the line.
A more pressing issue is the problems faced at the Fukushima Daiichi power plant. The focus has rightly been on the potential for a significant radiation leak, the risk of which has now thankfully subsided it seems. What we do know, though, is that these reactors won't be restarted, which leaves eastern Japan with an electricity shortfall. This is not helped by the fact electricity in Japan is supplied at two different frequencies, 50 hertz in eastern Japan and 60 in the west, so power can't simply be switched from one area to another (think of it as having different gauge widths on railway lines). As a result there are rolling blackouts, though fewer than people first feared because the Japanese have stoically turned off just about everything possible in order to save energy. Nonetheless, it all adds up to higher energy costs from imports, particularly given global demand for oil is already tight with the problems in Libya. This could hamper growth and put the brakes on Japan's economic recovery.
However, some economists have argued that in time we will see a sharp recovery in economic activity, though the dismal science of economics does seem a strange one if you can actually be better off if you lose something and have to replace it. The Japanese are astonishingly resourceful, though, and after the Kobe earthquake in 1995 Japan was back at full production within three months. This may take longer, particularly in relation to the nuclear power plant problems, but the fact of the matter is that before the earthquake struck the Japan stock market was good value. After a 20 per cent fall it is cheaper still, though there has already been some recovery. After 20 years of falling stock markets Japan has few friends in the investment world, but when Japanese companies on average trading at their book cost (the net value of their assets), I would suggest there is plenty of value to be had.
Excellent funds for exposure to Japan include GLG Japan CoreAlpha, Invesco Perpetual Japan and Jupiter Japan Income. For those who believe the yen is overvalued and will fall, the GLG fund also has a currency hedged share class and Neptune Japan Opportunities fund is currently fully hedged against a fall in the yen. That said, forecasting currency markets is even harder than stock markets, and the yen has fooled more people for longer than any other investment I can remember.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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