Uncertainty hangs over Japan in wake of quake

Philip Salter
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THE Great Kanto earthquake struck Japan in 1923, killing over 100,000 people. In consequence, one day every September, children train for the next earthquake. Tragically, last Friday that training was once again put to use. On Monday, the Nikkei index slumped 6.18 per cent, with the prospect of further falls over the coming days.

Sentiment towards Japan has been bearish for years – in fact, it hasn’t recovered from the bursting of its property bubble twenty years ago. But as Angus Campbell of London Capital Group says, the disaster has been “incredibly bad timing”. “We have seen anaemic growth in Japan and this comes at a time when there were small glimmers of hope forming.” Campbell suggests that the reaction to the Kobe earthquake could be illustrative. Sixteen years ago Kobe struck and the Nikkei plunged by around 25 per cent over six months.

Companies involved in the nuclear industry have come in for the biggest drumming. Tokyo Electric Power, which manages the Fukushima plant, fell 24 per cent, while Toshiba, which makes nuclear reactors, is down 16 per cent. Baum is worried about the industry recovering “as the Japanese have been long term exporters of safe nuclear technology, as well as world leaders in research and development in nuclear energy.” Carmakers have also taken a tumble. Nissan and Toyota are down 9.5 per cent and 8 per cent respectively. Construction is the only area that looked bullish. Nishimatsu Construction is up 21 per cent and Kajima is up 17.9 per cent.

Lisa Baum at Cantor Index says that it is hard to know what is going to happen in the long-term, while the full extent of the disaster is still unknown. However, she believes “the drop in domestic demand, as well as the reduction in factory output, will most likely see a second successive quarter of contracting GDP and therefore a slip back into recession.”

David Jones of IG Group is optimistic in medium term though, suggesting that things might turn once the costs of clearing up after the disaster and the uncertainty surrounding the nuclear issues currently weighing heavily on markets become clearer. Jones says that with the Nikkei having dropped around fifteen per cent in the last three months, some confidence might return in the next few days. CFD investors might consider backing this mid-term optimism.

Hopefully, Japan can recover from this catastrophe as quickly as possible and its “lost economy” will find its way out of the doldrums. But realistically most investors are pessimistic about its long-term future – earthquake or no earthquake.