The Future of the Japanese Economy

The Future of the Japanese Economy

Tom Orecchio, CFA, CFP® 24 March 2011 

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.

Tom Orecchio is a principal and wealth manager with Modera Wealth Management, LLC (“Modera”).  Nothing contained in this blog should be construed as personalized investment, financial planning or other advice, and there is no guarantee that the views and opinions expressed herein will come to pass.  Investing in the stock and bond markets involves gains and losses and may not be suitable for all investors.  Information presented herein is subject to change without notice and should not be construed as a solicitation to buy or sell any security or engage in any particular investment strategy. Modera is an SEC registered investment adviser.  For more information about Modera, including our registration status, fees and services, please refer to the Investment Adviser Public Disclosure Web site at www.adviserinfo.sec.gov or visit our Web site at www.ModeraWealth.com or contact us at (201) 768-4600 to obtain a copy of our Disclosure Brochure.