The unprecedented natural disaster in Japan brought with it huge societal and financial costs. At this time, we are holding to our small position in Japanese equities and will delay making other portfolio changes until there is more resolution on the situation in that country. The following is a few of our talking points that we will expand on in the next few days:
- Nuclear disaster is unlikely, but most of their reactors will be likely unusable after attempts to prevent meltdown necessitated flooding them with sea water. The replacement costs will be tremendous. Due to lack of natural resources, Japan is one of the most energy import-dependent countries in the world.
- The Bank of Japan's injection of liquidity in the markets was a savvy move, as was its decision to keep the intervention relatively modest. That will give them some dry powder in the likelihood things get worse.
- The biggest risk to the country is a sustained production shutdown, which would put the Japanese economy in desperate straits. It could also potentially add to systemic risk by slowing down the global recovery.
- Japan has experienced negative population growth in the last few years, and currently has one of the oldest labor forces in the world. They will likely have to import labor – an extraordinary occurrence for such a closed society – to rebuild their infrastructure. This may be the catalyst for re-forming a country that has struggled with economic woes for over two decades.
Japan is second only to Zimbabwe in debt-to-GDP ratio. Even so, Moody's and S&P have said that they don't foresee a ratings change for the country on the horizon. The ability to sell Japanese Government Bonds (JGBs) will be a great "tell" in gauging investor willingness to finance the rebuilding.
