Analysts grapple with Japan, Mid-East

As the cascading effects of ongoing geopolitical strife in the Mid East and the two-pronged trail of destruction in Japan continue to unfurl, financial pundits scramble to gauge the extent of their impact on the global economy and Canada’s portion of woes.

“From a Canadian perspective there clearly will be an impact I terms of those who’re specifically implicated in what’s happened in Japan,” said Paul Taylor, chief investment officer, BMO Harris Private Banking, during a recent conference call.

Globally, certain sectors will emerge as winners as a result of Japan’s tragedy, namely financials, uranium producers and technology.

The impact on Canada, he assured, is expected to be quite limited. “While there is trade that takes place between Canada and Japan, it is definitely a very much secondary,” he said.

Canadian banks remain largely unaffected, whereas there is some direct impact on Canadian insurers. “For instance, we’ve seen Manulife and Sun Life come under some pressure,” he pointed out. “Manulife does have some P&C exposure [worth] $150 million, that’d be a direct hit on earnings because of their role in Japan.”

Given that the recent meltdown will put nuclear energy under greater scrutiny, there are fears of a lasting impact on Canada’s uranium producers. “Energy will be sourced from a variety of different sources [including] natural gas, oil, wind, and nuclear and solar,” said Taylor.

The process of rebuilding—roads, bridges, power plants, ports and private homes—will make winners out of engineering and construction firms, he said.

Another person admittedly losing sleep over Japan’s loss is Chicago-based Jack Ablin, chief investment officer, Harris Private Bank. Ablin said a worst case scenario, although less likely, may be at hand if the current nuclear power plant “malfunction descends into a total meltdown, leaking substantial radioactivity over a broader slab of the Japanese landscape.”

This could result in households and businesses getting “displaced and potentially relocated to already overcrowded territories,” said Ablin. “Unsaid levels of radiation in Tokyo shutter businesses and push segments of the workforce out of the country.”

This could potentially lead to “some domestic outages in Canada and the U.S.” as the flow of “component parts that are derived from Japan is disrupted,” said Ablin.

According to a report from Barclays Capital Economic Reseach, the economic cost of Japan’s earthquake and tsunami is estimated to be between ¥12 trillion and ¥17trillion. This validates experts’ fear that Japan will continue to grapple with the strain and it may be months before the country’s economic growth takes hold.

The crisis has also cast a dark shadow on the Japanese currency, sending it to post-war record highs, forcing major industrialized nations to join in a coordinated effort to weaken it.

The New York Federal Reserve Bank confirmed today that it has intervened in currency markets for the first time in more than a decade. The last time the U.S. government intervened in currency markets was the fall of 2000 when it sold dollars and bought euros to bolster the fledgling European currency.

The Bank of Japan has already indicated that it will take appropriate measures to prevent significant yen appreciation.

The sheer complexity of the damages makes it difficult to grasp the overall impact of the crisis. As a net exporter, however, Japan’s loss goes far beyond life and property as manufacturing capacity will probably be moved to competitors like South Korea and Taiwan.

However, from a Canadian perspective, Japan is only one of a cocktail of different factors that are making industry participants nervous.

The strength of the stimulus-fuelled recovery of the U.S. economy—and its much desired transition into expansion—makes experts north of the border hope for a sustainable organic recovery.

“One where the private sector is responsible for driving growth,” says Taylor. “Latest payroll data would indicate that while job growth [south of the border] is below levels we would hope for, or expect at this stage of economic recovery, we’ve healed significantly from where [things] were 18 or 24 months ago in terms of the psyche of corporate America.”

Geopolitical upheavals in the Middle East and North Africa and regime change in those geographies, although a world away from Canada, remain fearsome factors for their potential to darken the Canadian door.

Taylor is not concerned about the impact of individual countries on the global oil market as he points out “Libya with 1.6 million barrels a day of oil production is not meaningful in the larger scheme of things.” He, however, concedes that “a major uprising in Saudi Arabia would significantly impact the demand/supply balance in the oil and gas market.”