Japanese Resilience Should Set Economy Back on Track

Mar.22.11 | About: iShares MSCI (EWJ)

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Nature can be a friend or foe. When 23,000 Mongol, Chinese and Korean warriors set out to invade Japan in 1274, the fleet of 700 to 800 vessels was no match for the typhoon that ended their assault. But when an earthquake and tsunami struck Japan ten days ago, it took a human toll yet to be counted.
Japan has faced natural disasters before. The Great Kanto earthquake of 1923 (Japan’s deadliest) demolished Tokyo and took the lives of over 100,000. And the human toll of the Kobe earthquake of 1995 reached 6,000. But Japan survived, and rebuilt.
Following the Kobe earthquake, the Nikkei 225 declined 25% before bottoming. By the end of the year, the index regained all of its post-quake losses. The Nikkei lost 10.2% last week. And while the Japanese economy will suffer through an immediate setback, rebuilding efforts will likely boost GDP later this year (the World Bank expects the economy to accelerate in the second half, and Credit Suisse (NYSE:CS) analysts see the Nikkei up 7.5% for the year).
Now, we have to be careful about drawing parallels between the Kobe and Tohoku disasters. The Tohoku quake was far more powerful, and resulted in a tsunami and the Fukushima nuclear threat, the impact of which is still undetermined (an MIT nuclear expert aptly called Fukushima “a slow-moving nightmare”). The Tohoku death toll is higher, and there are still thousands missing.
And back in 1995, Japan’s debt-to-GDP ratio was 90%...today it is 200% (the highest among G7 nations). Following the Kobe earthquake, the Bank of Japan was able to cut interest rates to stimulate the economy. That’s not an option today since rates are already basically zero (which means monetary policy measures will include liquidity facilities).
But there are positives. In 1995, Japan’s market was pricey. Today, valuations are far more attractive (the cheapest since the 1960’s, according to Citigroup (NYSE:C))
And recent events have reminded us of one of Japan’s important features: its demeanor. Among the images of devastation are pictures of victims, waiting in line quietly, patiently, without incidence, for necessities like food, water and gasoline. The Japanese people tend toward self-control and social conformity, traits that will undoubtedly serve them well now.
For all the unknowns, there are a few “knowns”: Japan’s discipline, its resilience, its grit in the face of catastrophe.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.