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Japan disaster - impact on investments

Investment | Shares

By Justin Modray, published 16 March 2011.
Helpful? 22

To what extent should you be concerned about the disaster in Japan affecting your investments?

Losing money on investments hurts, but it pales into insignificance compared to the loss of life and suffering resulting from the earthquake in Japan.

Nevertheless, it's natural to be concerned about the impact these troubled times might have on your investments, so let's try and cover what's going on and the issues to consider.

What's happened so far?

  • Friday 11 March - A severe earthquake hits Japan , pushing the Japanese stockmarket (Nikkei 225 Index) down around 2% the same day.
  • Monday 12 March - Nikkei falls a further 6% as markets react to the full extent of the disaster.
  • Tuesday 13 March - Concerns over radiation leaks from the Fukushima nuclear power plant push the Nikkei down a further 10%.
  • Wednesday - 14 March - Nikkei rises over 5% as the Japanese Government continues to pump money into markets, radiation concerns recede slightly and some investors buy stocks in the hope of grabbing a bargain.

How has this affected other markets?

Most global stockmarkets have fallen - probably due to concerns that the problems in Japan will hit demand for imports (hitting foreign exporters) and some investors withdrawing cash from stockmarkets and diving for safety.

Soft commodities have also fallen over concerns on the extent Japanese demand for food will fall short term (Japan imports around 60% of what it eats) - grain prices are down 5-10%.

The oil price has fallen slightly while gold and government bonds (e.g. US Treasuries and UK Gilts) have risen a percent or two thanks to rising demand from safe haven investors.

What next?

The biggest question mark - and likely driver of market volatility - is the extent of radiation leaks from the Fukushima nuclear power plant. In a worst case scenario severe leaks could have a catastrophic impact, both environmentally and on markets. On a more positive note, if the situation doesn't deteriorate then markets might move up a little as they breathe a sigh of relief.

Either way, Japan faces major problems. It's a big exporter and the earthquake will inevitably hit production, hence profits shorter term. The cost of rebuilding damaged areas is likely to largely fall on the Japanese Government, which already has the highest debt to GDP ratio in the world at 200% (UK is c60%). It has managed to afford such high levels of debt by successfully selling bonds domestically (cheap borrowing). Whether there'll be domestic appetite for further bond issues remains to be seen. And, of course, all this comes at a time when the Japanese economy is already fragile.

Stockmarkets elsewhere will probably calm down if the nuclear situation doesn't deteriorate. Falling short term exports to Japan will hurt some companies (China and the US are the two largest exporters into Japan), but this shouldn't make a significant difference to markets. And in time some economies, especially Far Eastern, may end up benefitting from supplying materials, goods and services as Japan rebuilds damaged areas.

Commodities prices will probably calm down, or at least react more to news from other parts of the world (e.g. Middle Eastern turmoil and climate).

If, in the aftermath, negative sentiment towards nuclear power grows then it's arguable the price of oil and gas could rise if fossil fuel power stations are built in favour of nuclear. However, fossil fuels have their own issues and detractors so I think it's too early to make such calls. And, let's face it, despite disasters in the past the use of nuclear power continues to grow - in my view it's is here to stay.

Conclusion

Very short term investment prospects hinge more or less solely on the extent that radiation leaks at Fukushima either subside or worsen. Beyond that I think the outlook for the Japanese economy is very grim. Markets elsewhere should eventually calm down , but expect more unpredictable turbulence for another week or two yet.

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Readers' Comments (1) - To post a comment please register or login .


Comment by pvcdoc at 6:39pm on 18 Mar 2011:

Not only is Japan running a high debt relative to GDP, it's demographics are especially poor. According to statistics from their National Institute of Population and Social Security Research, the japanese population is expected to fall from the current 128 million to around 100 million by 2050. At the same time the proportion of people aged over 65 years will rise from 22.5% now to 35.7% in 2050. By comparison, about 16% of the UK population is over 65 years at present.

As these older citizens retire they will begin to drawdown their savings, reducing their appetite for saving in Japanese bonds. Who will then buy Japanese debt? International investors will want a much higher yield than domestic savers are happy to accept. The cost of re-financing Japanese government debt will rocket just as there are fewer young tax-payers able to pay the interest on the bonds.

The long-term outlook for Japanese government finances is not good.