Japan is reeling from a devastating 9.0 earthquake and an accompanying 30 foot tsunami (a Japanese term meaning harbor wave). The tsunami tossed cars and ships around like toys, flattening towns and cities in minutes. The death toll is expected to top 10,000.
And now engineers are struggling to control radiation from damaged reactors -- a slow-moving nightmare that just won't go away.
The Good
The People. The Japanese are a hardworking, extremely resilient people. No matter how much destruction, how much suffering, how many deaths, they will bounce back. Remember, this country rose from the ashes of World War II (including losing two cities to nuclear bombs) to become the second largest economy in the world (only recently has China claimed the number 2 spot).
The Corporations. Can you think of anyone who makes cars better than Toyota (TM) or Honda (HMC)? Who makes better cameras than Canon (CAJ) or Nikon? No? . . . Neither can I. Other fine Japanese products, to name just a few, include medical equipment and power systems from Hitachi (HIT) and consumer electronics from Sony (SNE) and Panasonic (PC).
The Bad
Natural Disasters: The calamitous earthquake and resulting tsunami, the deaths, the unfolding nuclear issues from damaged reactors.
Stock market losses have been over 20% since the quake. The Bank of Japan on Monday quickly responded, pouring 15 trillion yen ($183 billion) into the economy (more on Tuesday and Wednesday) to counter plunging stocks and surging credit risk.
Sovereign Debt and Surging Credit Risk: Japan has a massive national debt -- the country is the most heavily indebted in the world. Sovereign debt is expected to reach 228% of GDP this year. 5 year credit default swaps for insuring Japanese sovereign debt has risen 31 basis points to 125 bps since the quake.
The Ugly
Both Japan and the U.S. need interest rates to stay low to fund their huge debts.
Japan now needs to sell bonds to finance a recovery. But, who will buy low yielding bonds from this heavily indebted country? Its own citizens and corporations have come through in the past, but an aging population is more likely to sell than buy. Since Japan holds $886 billion in U.S. treasury bonds it is not inconceivable they will sell them to raise cash.
If Japan sells U.S. treasuries, it will put upward pressure on U.S. interest rates. The Fed may be forced to buy even more bonds in an attempt to keep interest rates low -- i.e. more QE. More QE translates into more commodity inflation, which translates into higher interest rates, which translates into, well, you get the idea - there is no escape.
Investing Ramifications
Can the good (Japanese people and corporations) overcome the bad (natural catastrophies and massive debt)? Can Japan yet again dodge the debt bullet? This issue will have to be resolved sooner or later.
No matter what happens to the Yen, Japanese corporations will continue to produce the world's best products. A weaker Yen, which seems inevitable as Japan is forced to monetize debt, will boost the exporting corporations' fortunes.
If you want to own some of the world's best companies at bargain prices, now may be the time to buy. If you don't want to pick individual companies, consider Japanese ETFs: All the big exporters are present in iShares MSCI Japan Index (EWJ) while WisdomTree Japan SmallCap Dividend (DFJ) has 300 Japanese Small Caps.
As always, do your own due diligence. In a world of earthquakes, tsunamis, malfunctioning nuclear reactors, debts, and money printing the risks are obvious. But, where else can you hide?
Disclosure: I am long EWJ.
