Focus 1 - Perspective April 2011
Splitting the facts from fiction in Japan
by Simon Finch, Japan Equity Fund.
The harrowing scenes of the ten metre tsunami surging across the north-east Japan countryside and the Tohoku region sent shockwaves across the world, reminiscent of the 2004 Aceh disaster. Our thoughts and well wishes are with all those impacted as a consequence of the events of 11 March 2011.
We have all seen the news reports of the event, so we will not go into the initial details here. Sadly, in a rush to be heard, reporting of the crisis in Japan was hugely sensationalist, and facts and fiction were blurred into one. As soon as the threat of radiation escaping from the nuclear plant was suggested, many journalists essentially assumed the disaster was now singularly the Fukushima plant, forgetting the thousands dead, missing or homeless in the north-east. Sales of “Bluff your way in Nuclear Physics” must have been soaring, with some commentators becoming nuclear experts overnight. And sentiment is never far from its most extreme when the red-top tabloids are proclaiming that Armageddon is near, causing panic across the region. This frankly irresponsible reporting led to widespread alarm in and around Tokyo, with people hoarding supplies, including iodine tablets to offset the effects of radiation, when it was those in the tsunami’s destruction zone that really needed the help.
In fact, if you believed everything you read, you would not be surprised to see molten lava gushing from the peak of Mount Fuji, which last erupted in 1707-08. Fear then spread rapidly eastwards across the Pacific Ocean, with Californians queuing to buy iodine tablets at $400 a box, and a Taiwanese restaurant offering diners a Geiger-counter to measure the radioactive properties of their sushi.
All this noise creates hysteria and volatility in people’s behaviour, which to some extent was replicated in the movements in the equity and currency markets in the trading days after the earthquake. With the earthquake striking on Friday 11 March 2011, just ten minutes prior to the market close, there was very little immediate impact to the Japanese equity markets. In fact, strategists were quick to highlight over the weekend that the Tohoku region contributed just 6.2% to GDP, much less significant than the Kansai area that suffered a debilitating earthquake in 1995 near the city of Kobe. These low initial estimates resulted in little reaction from global markets, and it was only as the nuclear situation was dramatised in the mainstream media that sentiment turned strongly negative, particularly towards Japanese markets.
Radiation fears resulted in the Japanese Topix Index falling nearly 21% in less than two days, with the market experiencing record trading volumes. TEPCO’s stock price was down, as one might expect, by 66%, as fears over the ability of the company to recover from the succession of disasters as well as avoid nationalisation drove the price lower. Many other companies also lost huge market cap value in the immediate days after the quake, resulting in the domestic financial markets losing more than $600bn. Initial selling was rational, with the biggest losers being those companies with production facilities located in the affected areas, and the gainers being the construction and alternative energy stocks. However, trading quickly turned erratic and stocks with no seemingly plausible connection to any of the three events were down by double digits percentage points on the day. The mainstream media had forced the hand of many nervous investors with their talk of nuclear meltdown and the news pictures at Tokyo airports showing more than 160,000 ex-pats fleeing Japan pushed markets even lower. The speed at which attention switched from Japan to Libya should indicate the reality of the situation, which should reduce the volatility in markets going forward.
Whilst the apocalyptic scenarios were being fretted upon, we were carefully analysing our portfolio to assess the areas at risk on the medium to longer-term basis. The proposed energy blackouts will lower production volumes in the coming months without doubt. However, we believe that if any nation should bounce back quickly and strongly it will be Japan. Readers should also remember that Japan has increasingly been off-shoring capacity in recent years, moving production to China through joint ventures as well as using Thailand, Indonesia and Vietnam as regions to produce goods at lower costs. Therefore, utilisation will not be as negatively impacted as initial calculations had estimated.
The yen has been going from strength to strength in recent years and yet Japanese companies have been posting record profits during this time, even the exporters. Overseas production lines have reduced costs, as well as being able to use the strong yen to acquire materials more cheaply. Also, Japanese companies have been moving towards a more US/European corporate structure, leading to increased productivity per employee – a key factor considering the historical trend of reducing productivity thanks to the “job for life” situation previously suffered by Japanese corporates. The yen has seen a new high of 76.25 against the US$, however, rapid intervention from the G7 community finally eased this strength, with the yen retreating back to trend.
The result of the near-nuclear disaster will have repercussions globally for governments and companies, as well as the general population, and generations to come. With smoke billowing from the reactors and people wandering around in ridiculously large protective clothing, many are claiming the end of nuclear power. However, Japan obtains a third of its energy from its nuclear reactors. France, meanwhile, obtains 76% of its power from nuclear, so clearly this cannot be the end-game for nuclear power. China, with 27 reactors currently under construction and plans for at least 50 more nuclear power stations by 2020, will not do an about turn on this if they wish to meet their CO2 emissions targets, as nuclear energy is realistically the only way to succeed.
The Japanese people are incredibly resourceful and resilient. Their culture of unity will bring them together in this time, which may ultimately prove to be the rebirth of a country that has been in suspended animation for the past two decades. The stock market has already shown glimpses of this strength since 11 March 2011. Foreign investors were record buyers of Japanese equities just two weeks after the earthquake, with a net buying figure of close to $12bn for the week. Global investors had been dipping their toes into the Japanese equity market from November 2010 on the back of improved earnings figures and a reduction in the perceived premium attributed to Japanese companies. Investors continue to ask, “Is now the time to invest in Japan?” However, we would argue that the question could be rephrased to “Japan - if not now, when?”
Other articles from the April 2011 edition of Perspectives:
- WELCOME: Peter Bourne looks back on what has been a volatile quarter for the global economy
- OUTLOOK: Looking deeper reveals strong foundations – By Tristan Hanson
- FOCUS 1: Splitting the facts from fiction in Japan – by Simon Finch
- FOCUS 2: Soft Commodities and Long-run Cycles by Hugh Peyman
- NEWS: Further success for Ashburton’s Funds and our involvement in Jersey’s elite rugby programme
Click here to download the April 2011 edition of Perspective as a pdf document.