It’s undeniable that the events unfolding in Japan in the aftermath of the recent earthquake and tsunami are a tragedy affecting millions of people. It is less clear what the impact will be from a financial and economic perspective. Given the devastation in Japan, what might be the possible implications for the overall markets and how might they impact your specific investments?
Short Term Disruptions
The crisis facing Japan will likely create short-term economic disruptions in several areas including manufacturing, supply chain production, infrastructure and multiple utilities and services. It seems that manufacturing and services will be disrupted for some time as the country focuses on supplying basic necessities and infrastructure: clean water, food, shelter, clothing, electricity. The question will be if that shift in production and output will have a significant impact on Japan’s GDP and possibly stall future growth.
Industries Better Positioned to Rebound
Economic researchers, however, point out that some industries in the country, such as technology, are in better position to recover versus their situation following the Kobe earthquake in 1995. Many technology, computer and semiconductor companies are more prepared with improved factory construction, greater geographic diversification and better supply chain alternatives to weather the crisis.
Increase in Money Supply
From what has been reported, the Bank of Japan has significantly increased its money supply to shore up the currency and the financial system. It also appears that the Tokyo stock market is functioning with little to no disruptions. In the long-term, infrastructure and construction could be on the uptick, as rebuilding and recovery gets underway in the country.
Extending to the global outlook, many US and international companies have operations, suppliers and customers tied to Japan which could be impacted both near and longer-term. Many industries, including those in energy, technology, consumer goods, insurance, auto manufacturers, shipping, consumer goods, manufacturers and suppliers, could be adversely affected. However, the economies of other nations and regions may grow as manufacturing and production gets shifted away from Japan.
It will take time, but Japan will rebuild. Keep in mind that out of every crisis comes opportunity. Some economists think the rebuilding efforts could start a long awaited expansion of the Japanese economy. In the meantime, individual investors should check their international stock and bond holdings to better understand their exposure to Japan.
A Reminder to Diversify
Times like this are a reminder of the overall need to diversify, to maintain a global asset allocation, and to establish a risk/return profile that is appropriate to one’s own goals and objectives. It’s also essential to remember that one’s portfolio is a long term investment and the effects of events such as this natural disaster should be viewed in that context.