Fukushima and beyond …

Japan: Fukushima and beyond….

A realistic assessment of the effects of the natural and man made catastrophes in Japan – earthquake , tsunami and the Fukushima nuclear disaster – is still difficult but will be attempted, based on the current level Information – just a few days days after that fatal March 11, 2011.
Tohoku , the north-eastern part of Japan is destroyed to the greatest possible extent.
First estimates determine the economic damages at 2% of GDP in Japan, which is similar to the earthquake in Kobe 1995. However, then the affected area generated 14% of Japans GDP while the currently affected region only accounts for 2.5% of the gross domestic product.

Despite this difference, the earthquake in Kobe can be used as an indication of the possible impacts of the current catastrophe on the Japanese economy . In 1995 industrial production as well as private consumption showed only a short lived slump. The immediate fiscal actions of the Japanese government functioned like a huge fiscal stimulus package – the so called Kobe effect . At the end of that year the economical growth in Japan was 2%.
The difference today is the nuclear fallout from Fukushima. Luckily the area of Greater Tokyo , which accounts for a third of Japanese GDP , did not have to be evacuated and seems only indirectly affected. Earthquake prone Tokyo has for decades been waiting for the “Big One “ – which had not come on March 11 yet . Too far away from the capital city, the quake revealed nevertheless its vulnerability. Traffic chaos, panic buying and a break down of public life – softened by the fatalistic endurance of the ill informed population – suggest what an earthquake , even one with a weaker magnitude than 9.0 , closer to Tokyo could do ..

According to the Earthquake Research Institute of the University of Tokyo the current Tohoku Quake could have actually increased the probability of a “Big One “ in Tokyo to somewhere between 40 and 70 % over the next thirty years.

Again, the nuclear catastrophe in Japan is difficult to evaluate at this point in time, partly due to a lack of comparative numbers . Analogies to the nuclear accident that occurred on 26 April 1986 at the Chernobyl Nuclear Power Plant in the Ukrainian SSR lack in adequate geographical, social and economical comparisons.
The focus of the nuclear catastrophe in Japan is on human and economical damages – its impact on the global economy are likely to remain limited.

Iwate, Miyagi and Fukushima prefecture do not show a high economical correlation neither with the world nor Japan . Moreover economical risks are being reduced by the awaited immediate rebuilding of the region due to fiscal, political and extraordinary governmental measures to improve liquidity. The Bank of Japan already injected over 146 billion US Dollars to underline its determinedness to act.

Nevertheless, an impact on the world economy could arise from the Japanese needing and generating more liquidity for the rebuilding process. The needed funds could partly come from a repatriation of foreign investments by Japanese investors .
This could have negative effects on the US and the European bond market. Up until now the engagement of Japan (governmental and private) amounts to 700 billion US Dollars in US-Bonds and 800 billion Euros in European bonds.

The current high appreciation of the Yen is due to this repatriation and the anticipation on further repatriation . Current joint interventions of the Bank of Japan and the G 7 central banks, seem to have some effect though . A foreseeable weakening of the Yen in medium terms , combined with a continued zero percent interest policy of the Bank of Japan, could bring back the days of heavy carry trading with the Yen. Tokyo maintains the threat of more G 7 intervention.
By the same token , it can be expected that Europe and the US will continue with their policy of quantitative easing. Even a widening is possible. Hence, the periphery crises of the Euro as well as the high oil price seem to be of greater interest and importance for the European markets than the events in Japan, e.g. the increase of the lending capacity of the European emergency chute EFSF (European Financial Stability Facility) from 250 to 440 billion Euros.
Initially , the Japanese stock market had sold off heavily on concerns about an
escalation of nuclear contamination. With valuations being now more
attractive in Japan, several opportunistic investors are re-entering the market – often in a currency hedged way.
The devastating earthquake in Japan is likely to dampen the country’s economic growth in the second and third quarters. Reconstruction could bring growth above the previously forecast level toward the end of the year. The economic damage appears to be limited as the quake did not hit major business centers.
In short, this may be an opportunity to enter the Japanese equity markets for long-term oriented investors. Since government expenditures will be significantly higher than expected, Japan’s credit metrics will most likely deteriorate. Until now, Japanese government and agency bonds show a poor risk/return profile and do not appear to be of interest.

The aftermath of Fukushima may therefore primarily be affecting the role and use of nuclear energy in Japan, its neighbors in Asia and the rest of the world. Despite some thoughtful suspensions of nuclear projects in China and India, South Korea on the other hand seems to be poised to become of the world leaders in the construction of nuclear power plants. Like France , which produces with its some 70 nuclear plants almost 80 % of its energy – which far exceeds the 30 % which Japan manages to extract from its 54 nuclear plants of which Fukushima was one of the oldest and mismanaged – it remains an outspoken supporter of nuclear power usage.

Economically speaking the Japanese economy, which had grown by 3,9 % in 2010 , may get away with a reduced growth of 1 % ( down from an 1,5 % estimate by the government ) in 2011. The estimated rebuilding cost of some 350 billion USD could be once again primarily be financed by the patient Japanese citizen, whose record saving rate of 35 % in the nineties , has recently melted down to a meager 3% of GDP. Nevertheless, as long as he remains loyal to his country , even an increase of the 220 % GDP debt seems to be manageable.

It remains to be seen whether Fukushima is the turning point it could be …

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