As investors around the globe strive to understand the impact of the earthquake and tsunami on the Japanese economy and stock market, we would like to take this opportunity to provide our analysis of the current situation and outlook.
At 2.46pm GMT on March 11 2011, an earthquake with a magnitude of 9,0 took place in the Pacific Ocean off the coast of Japan’s main island.
Shortly after the quake, a devastating tsunami hit the Tohoku region, a northern part of Japan’s main island along the Pacific coast.
As many of you may have seen from the media reports, homes and buildings were significantly damaged and there was considerable loss of life.
Some media sources have estimated that more than 10 000 people have perished. Also, hundreds of thousands of people currently live in evacuation centres. The total population in the three most severely affected prefectures — Miyagi, Iwate and Fukushima — is about 5,7-million, equivalent to about 4,5% of Japan’s total population of about 128-million.
In addition to the catastrophic damage caused by the earthquake and tsunami, the accidents at the Fukushima number one nuclear power station owned and operated by Tokyo Electric Power Company (Tepco) have added a significant new source of uncertainty and concern. The power plant is located in a northern part of Fukushima Prefecture, on the coast of the Pacific Ocean, 224km away from the Tokyo metropolitan area.
At present, residents within 20km of the plant have been ordered by the government to evacuate. Although higher-than-normal levels of radiation have been detected in Tokyo as of noon on March 16, it was not at a level that would cause harm to humans. Given that damage in Tokyo, Japan’s capital and centre of economic activity, has been limited, we do not think Japan’s overall economy has been severely affected.
With the damage at the Fukushima plant, power generation capabilities have been adversely affected and rolling power failures have been carried out in wide areas of eastern Japan since March 14. According to Tepco, the total power generating capacity of its power plants is about 65-million kilowatts.
Currently, a plant in Niigata Prefecture of approximately 8,2-million kilowatts has been operating below capacity at 3,3-million kilowatts since the Chuetsu Offshore Earthquake in 2007.
With this latest crisis, the 4,7-million kilowatt Fukushima Number One nuclear power station, the 4,4-million kilowatt Fukushima Number Two nuclear power station and some other thermal power plants are now offline.
The scheduled power outages have reduced the potential of a massive power outage during this period of reduced power supply.
They are being carried out across a wide area, including Tokyo, on a rolling basis by area with preset time schedules. If capacity in the thermal power plants can be increased and power consumption can be reduced, we believe that Japan can avoid serious impact to economic activities.
The scheduled power failures are well planned in terms of sub-groups and time schedules, and we believe companies will implement various measures to alleviate the impact, such as shifting factory operating times and increasing production in other regions.
As the situation settles, we expect to see huge demand for reconstruction of power generation facilities, communication facilities, roads, railways, port facilities, buildings and homes. We expect that reconstruction in damaged areas will proceed timeously and smoothly as there is production capacity to meet such demand and transportation from production areas to damaged areas should remain secure.
For example, the damaged areas can be reached by using the main roads from Tokyo. Additionally, although the Sendai Airport was severely damaged, there are multiple airports still operational in the Tohoku region, such as Aomori Airport and Misawa Airport in Aomori Prefecture, Akita Airport and Odate-Noshiro Airport (in Akita Prefecture), Yamagata Airport and Shonai Airport in Yamagata Prefecture, Iwate Hanamaki Airport in Iwate Prefecture and Fukushima Airport in Fukushima Prefecture.
We would like to re-emphasise that on the production front, Japan’s main industrial centres in the Tokyo Bay area, Tokai region and Osaka Bay area experienced no direct damage.
Taking all of these factors into consideration, we do not feel this tragedy is likely to have a severe economic impact on Japan.
The Japanese stock market has been very volatile since the earthquake. The Topix dropped 7,49% on March 14 and declined a further 9,47% the next day, before rebounding rebounded 6,63% on March 16.
We believe that such volatility was spurred by the severity of the catastrophe, the spectre of damage to nuclear facilities, sell-offs for cash needs and speculative motivations. Such volatile market conditions are likely to continue for the time being.
However, we believe that the market will eventually return to focus on fundamentals. We have no intention of understating the impact of the earthquake, but at the same time, we firmly believe that corporate value itself has not been so adversely affected.
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