Japanese stocks may be a post-earthquake bargain
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Martin Hutchinson
Japanese stocks may be a post-earthquake bargain. The market lost about $700 billion in value in three days, exceeding likely damages. While the S&P 500 Index is 83 percent above its 2009 low, the Nikkei has recovered only 22 percent. With an economic bounce from reconstruction, and exports powering multinationals, this could be a buying opportunity.
True, the notion that Japan could benefit from this natural disaster contravenes economist Claude Frederic Bastiat’s broken window fallacy. This is the idea that while shattering all the windows in a village employs its glaziers, it doesn’t increase the town’s wealth, since its citizens pay for window repairs rather than spending the money elsewhere.
And that theory provides ample reason to avoid, say, Japanese government bonds or even the yen. Economists are estimating out-of-pocket reconstruction costs from the earthquake at around $180 billion (compared to $123 billion for the 1995 Kobe earthquake), though that could rise depending on the extent of damage emanating from the Fukushima Daiichi nuclear power plant. That’s a bill Japan’s already-stretched government coffers can ill afford to pay.
But Japanese equities are a different proposition. True, there will be some big losers, such as insurers who will bear big loss claims. And it’s hard to see companies highly leveraged to the Japanese consumer doing well when its customers are both lacking confidence and spending their income repairing lost fortunes. The nuclear power giant Tokyo Electric Power <9501.T> has lost several power stations and will have huge cleanup and compensation costs.
But much of Japan’s stock market value resides in its exporters and multinationals, which mostly suffer only temporary losses in production while sales outside of Japan are relatively unaffected by the disaster at home. Provided the Bank of Japan acts to prevent the yen from rising, as it did after the Kobe quake, that would benefit industrial titans including Toyota, Honda, Nissan, Sony, Canon and Mitsubishi. Efforts to rebuild would help construction companies such as Kajima and homebuilders like Sekisui.
In recent years, Japanese equities have failed to keep pace with the U.S. and other stock markets. And the nation’s troubled finances, combined with a difficult demographic outlook, seemed to offer good reason for underperformance. Unfortunately, it may take a natural disaster to shake investors out of their torpor.