Japan’s economy facing aftershocks

Frank Packard, Japan Representative, Triple A Partners

When the Big Quake struck on Friday afternoon, March 11, I was in the office in Tokyo. After 30 seconds of wild gyrating we knew it was going to be a big one. After another minute of non-stop shaking and grinding, my office mates and I fled down the stairs and on to the streets. Nearly every office nearby had emptied in a similar fashion, and so the streets and the park across the street all became quite crowded.

We waited for 20 minutes, returned to the office, and then about 20 minutes later an aftershock that seemed as large and as long as the first one hit us. We repeated the cycle once more: flee, wait in the park, and go back to the office. Within less than hour a third quake came. Most of the office staff and I decided to leave for the day.

The next morning all these services returned to normal operation, yet the earthquakes continued for the next three days, and now we feel grateful that we “only” have two or three a day. However grateful we may feel for less frequent quakes from nature, the effects of man-made decisions are going to be deep and long-lasting. The electric grid is a sad representation of the factionalism and regionalism that can sometimes appear in this country. Japan, one of the richest countries on earth, never established a unified national electric power grid. I cannot think of any other modern country that has allowed such a situation to arise.

The panic of fleeing foreigners has been a bit overdone, and often the reporting of the media has been cartoonish. Fox News identified “Shibuya Eggman” as a central Tokyo nuclear power plant that happens to be at risk of having a meltdown. This venue happens to be a reasonably well-known concert hall.

Moving from the personal to the larger business picture, in the near-term Japan has definitely been knocked by the disasters that happened this month, but the country has not been rolled over. If anything, Japan is showing some of its best attributes of perseverance and inner strength. Many people overseas are concerned about how these events will influence the behavior of investors in Japan. A common misconception is that there is only one ‘Japan’. I believe there are many ‘Japans’ and some parts will do better than others.

There have been concerns about Japanese investors bringing back overseas funds in order to deploy them in the reconstruction efforts. Perhaps that contributed to the rise in the yen versus the dollar immediately after the earthquake. No doubt we shall see some extreme fluctuations in the value of the yen in the next few weeks.

Every international and local financial firm seems to be operating normally. Some firms, such as OGI Capital Partners, an asset management firm, have such robust business continuity plans that they were able to move one of its fund management teams over the first weekend to a back-up site in Osaka, from where they have been operating smoothly.

The financial markets in Japan give every indication of being fully operational with lots of local liquidity. There has been a wide dispersion of stock market moves, from large gains in share prices in the construction industry, to large drops in Tokyo Electric and nuclear power-related companies.

In terms of asset management and concerns about redemptions from funds, most hedge funds permit dealing no more frequently than on monthly notice. I would be surprised to see hasty redemptions as long as managers continue to do what they said they would do, namely, offer transparent reporting, normal liquidity, and adherence to the mandated investment strategies.

Toru Ibayashi, Head UBS Wealth Management Reserach, Japan

It will likely take years to calculate the immense damage caused by the quake (the most severe in Japan’s history) and the devastating tsunami that struck only an hour later.

In addition to the human toll of these tragic events, analysts are now pondering the effect the crisis will have on Japan’s overall economic growth and the prospects for a previously expected recovery. They are also scrambling to assess the gut-wrenching volatility seen in the stock market.

Although the situation remains in flux, especially regarding the difficulties in Fukushima, we do not believe the crisis will lead to further downside for the Japanese economy.

Moreover, although the stockmarket looks certain to remain hampered by this crisis for some time, we believe there are companies that have seen their share prices unduly beaten down in recent days (especially those with an focus on international markets), and we advise considering the relatively strong prospects for these companies over the rest of this year.

For the last two decades, Japan has been suffering from deflationary pressure caused by excess production capacity and weak demand. However, we believe these events will finally adjust Japan’s supply-demand balance. The reconstruction of the afflicted area is expected to begin in earnest during the second half of this year, and this should help lift the Japanese economy from its deflationary cycle in the medium term.

The equity market situation is just as challenging. However, as with the overall economy, there are reasons to believe that optimism can still exist among such tragic circumstances. The shares that international investors tend to own are often issued by companies with significant international business exposure. In other words, they tend to include Japan’s best companies, many of which are expanding their sales in emerging markets.

Given that we expect these companies’ business operations in Asia and other emerging markets will not be affected by the quake in the long run, we believe investors should view the slide in Japan’s equity market as an opportunity to invest in the nation’s leading companies.