Japan: After the earthquake

Kaifukuryoku is Japanese for resilience and this word perfectly captures the Japanese people’s ability to overcome hardship and disaster this year. Their ability to make a steady recovery from the Tohoku earthquake and tsunami that hit the nation on March 11 is a case in point.

The 9.0 magnitude earthquake, which was the worst in Japan’s recorded history, triggered powerful tsunami that reached heights of 40.5 meters and traveled up to 10 km inland. Worse still, the tremors and flooding damaged nuclear power plants, which threatened to melt down in the aftermath,

Fatalities from disaster were estimated to be over 10,000, surpassing the death toll of approximately 6,434 from the 1995 Kobe earthquake.

Despite this string of ill fortune, Japan quickly worked around the clock to fix supply chain disruptions. Today the country has almost fully recovered from the damage to factories.

“Most of the damage from the earthquake and the tsunami and power plant disruptions wasn’t as great as originally expected,” says Michael Longthorne, senior managing director at Mizuho Securities USA. “Japanese companies proved to be pretty skillful at re-starting those supply chains.”

Official estimates of the destruction have been estimated to be between ¥16 trillion and ¥20 trillion (US$210 billion to US$330 billion). Though that’s a large amount, its manageable given the size of the Japanese economy, says Longthorne.

While the reconstruction helped boost some businesses, like construction, the additional government spending ultimately added to Japan’s debt-to-GDP ratio, which reached approximately 230%. In August, Moody’s Credit Rating Agency downgraded Japan’s debt to Aa3.

Surging yen is the real problem

In the aftermath of the earthquake and the tsunami, the yen reached record highs. Despite intervention by G7 economies, the currency continued to soar, further hurting Japanese businesses. Currently, the yen remains at a record high level; in October, one U.S. dollar would only buy ¥76.

“The bigger problem for Japanese companies, I think, is the yen strengthening against the euro recently. The defining characteristic of the global market right now is the problem in Europe, so that’s causing the euro to weaken. As the euro weakens that’s causing the yen to strengthen because there’s only so many currencies in the world system,” says Longthorne.

With the yen strengthening against the euro, Japanese businesses continue to struggle with narrower margins. Worse, the higher yen versus the euro has made European imports cheaper.

But its not only currency that’s hurting Japanese business; the slowdown in Europe has also been a headwind to growth. In 2011, profits of multinationals such as Fujifilm that have exposure to Europe were negatively impacted.

Toughing it out in 2012

Since the earthquake and tsunami, Yoshihiko Noda has been elected as the new prime minister. While some believe this may usher in economic growth, Longthorne is not convinced. He believes the leadership change will not have much impact and growth in 2012 will likely hover around the 2% level. Further, Noda’s enthusiasm to join the Trans-Pacific Partnership Agreement, which some believe will help Japan’s export economy, is more of a symbolic gesture that will not likely have significant impact, he says.

But not everyone shares his bearish sentiment. In August 2011, the CPP Investment Board (CPPIB) in a joint venture with Global Logistics Properties made its first direct investment into Japan. The venture will see each partner investing $250 million over a three year period to develop storage and distribution centres in Japan.

“Notwithstanding Japan’s challenges it is still the third largest economy in the world and is directly participating in the growth and evolution of Asia,” says a spokesperson at CPPIB. “ Japan has strong ties with emerging markets in Asia including China, which together account for nearly half of the Japanese total export volume. We believe that over the long term, strong economic growth in Asia will benefit the Japanese economy.

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