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We had many clients and friends asking for our thoughts on the affects of the disaster in Japan which is why we are including this short commentary in this month’s newsletter.

The Tragedy in Japan…

By Mike Minter, CFP®

Short term any severe natural disaster or attack is always going to affect markets. When trying to decide if you want to change your portfolio based on these events, you may want to look longer term as chances are you will be executing orders after a significant move has already been made as larger institutions always get their orders in first.

Longer term, as far as Japan goes, it might not be a nation you want to bet against. They are a tight, disciplined and hard working nation full of savers. Even with the horrific events that took place, there were little if no reports of looting with other coverage showing them patiently waiting in single file lines for food and water. You never want to see a country go through what Japan just experienced, but if there is a nation that can rally around each other and bounce back, this is certainly one of them.

If you want a track record, look at what they have done since the devastation that took place in Hiroshima and Nagasaki during World War II. They had a Gross National Product in 1950 of $10 Billion that ended up growing to $300 Billion by 1973 and became the second largest economy in the world. They dominated auto production and virtually drove the American domestic television industry out of business. By late December 1989, their stock market soared to an all time inter day high of 38,957. A couple years before hitting this peak, many in this country saw Japan as a threat as their companies began buying many assets and real estate in the US. The problem was Japanese companies were also accumulating massive amounts of debt which eventually blew up on them. Since late 1989, their stock market and economy have gone through over two decades of painful deflation that evaporated over 80% of the value of their stock market closing on March 9th, 2010 at 7,055. Currently, the Nikkei is trading in the 9,000 range and under book value (The US trades at two times book value). This may not be the low from here as the radiation issue could potentially get worse but you have to wonder how much lower it can go.

Overall, it is still too early to know the full impact of all of this. For the rest of this year, you can probably expect Japans production and global growth to be hampered. Considering our country, Japan and just about all of Europe is trying to grow their economies out of the government debt traps they have created, any slowdown is not going to be looked at favorably. What is also troubling is Japan owns over roughly $800 Billion in US Treasuries that many speculate will repatriate back to Japan for rebuilding efforts. As this happens, without getting into the specifics, things get even more complex as currencies will be affected and possibly interest rates. The G-7 is already intervening as they do not want to see the yen appreciate too significantly as it will make Japanese exports more expensive which is the last thing Japan needs right now.

Obviously, the events that occurred in Japan were tough to watch and we hope the worst is behind them.

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