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The Economic Effect of the Japanese Disasters PDF Print E-mail
Written by Kalson Jang   
Monday, 21 March 2011 21:29

By now I’m sure everyone has heard about the terrible disasters that struck Japan and I’m sure I speak for everyone when I say that our thoughts and prayers go out to everyone affected.  From what I read most recently, it appears that some of the damaged nuclear reactors in Fukushima have had power restored to them with core temperatures under control, while the remaining reactors will have power restored to them in the near future.  In the meantime, it also appears that efforts to cool the reactors with water have been working well and I hope that they will have everything under control soon.  I think the men and women who have stayed behind to handle this situation are heroes and I tip my hat off to them for their courage and bravery.

Here in Canada, we are far away from what is happening in Japan, but we will still experience some of the economic effects of this disaster.  For the record, I would like to point out that none of my clients had any money invested in Japan before or after the disaster.  That being said, that does not mean that other financial markets are immune to being affected by what is happening in Japan.

From an industrial standpoint, the disasters in Japan affected the area north of Tokyo which is away from the industrial heartland of Japan which is to the south of Tokyo.  Japan’s key global industries and international trade infrastructure remain operational and the affected area only accounts for 6% of Japan’s GDP.

With that being said, I do not anticipate that the disasters in Japan will have any significant effect on the global economy.  Although the Japanese economy is the third largest in the world, it only accounts for 9% of Global GDP.  If the Japanese economy were to go down by 6% (the equivalent of US $346 billion), that would only lower global GDP by 0.54%, barely half a percentage point.  The probability of Japan’s economy losing that much money is also very small because Japanese shares have been trading at very low prices (14x P/E) and as a result do not have very far to go down.  Furthermore, the Bank of Japan will be very quick to act and will increase short-term liquidity to help keep economic growth on the right path.

Earlier today, it was announced that the Fukushima nuclear facility will be decommissioned as soon as the reactors are brought under control.  As a result, there is and will continue to be a shortage in power in Japan that will have to be made up by importing a significant amount of gas, oil and coal for power generation for the foreseeable future.

After things in Japan start returning to normal and recovery efforts start getting underway, there will be a massive amount of money being spent to repair the damage caused by the earthquake and tsunami.  This could end up costing a few hundred billion dollars and Japan will have to print more money and borrow from other countries in order to fund these repairs.

Although the disasters in Japan are terribly tragic and have had a negative effect on the world financial markets, I feel that the negative effects will be very short lived and things will become very positive once recovery efforts start getting underway.  As a result, this makes now a good time to buy as less sophisticated investors sell their investments based on their “fear” instead of analyzing the financial implications carefully and buying while everyone else is selling!

Kalson Jang
Phone: 416-775-8777
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Website: www.dynamicwealth.ca