What Now For Investors In Japan?

Japan’s earthquake disaster leaves investors with an array of questions, some of which were addressed at a panel discussion at Columbia University.

The earthquake and tsunami that slammed into the North East of Japan this month leaves investors with an array of questions, some of which were addressed this week at a panel discussion at Columbia University’s School of Business entitled, ‘The Economic, Health, and Political Consequences of Japan’s Earthquake.’

In the short term, sectors such as luxury goods that qualify for around 17 percent of the global luxury revenue are likely to contract. At the same time, construction, design and electrical power companies, as well as the food sectors, are set to experience rising demand.

“The concern in the last few days certainly turned to radioactivity in the local food,” said David J. Brenner, Higgins Professor of Radiation Biophysics at Columbia’s College of Physicians & Surgeons.

The food crisis is especially relevant to foreign companies, who have long had trouble to compete with Japan’s excellent food reputation. “There has been substantial damage done to the Japanese brand image in the food sector,” said David Weinstein, Professor of the Japanese Economy at Columbia’s Business School.

While the next couple of weeks are going to show volatility and uncertainty in the markets, experts believe that the situation will normalize in the next two months and is unlikely to see any significant deterioration.

The nuclear accident has a fairly small impact on the population’s overall well-being, according to Brenner, but the health issues raised in recent days will still influence the future electric power mix in Japan. “I imagine it is going to be extremely hard for TEPCO (Tokyo Electric Power) to get permission to build a new nuclear power plant in Japan,” Weinstein says. While one would think this is a moment for green energy investors to tap into the market, renewable sources are going to have a hard time competing with large scale power providers such as nuclear or thermal. “This may be the time for thermal energy, not green energy,” Weinstein said.


The overall cost and impact of these events on the currency markets will be relatively small, said Weinstein, who thinks that the government is probably going to pay for the reconstruction through deficit financing. But the sums of money are relatively small compared to either Japanese GDP or the net debt of the Japanese government. The costs to the government after the Kobe earthquake in 1995 amounted to ¥ 5 trillion ($61.8 billion), or one percent of the Japanese GDP. Although Weinstein believes the cost of the earthquake and resulting tsunami is likely to be twice as high – as much as 2 percent of Japanese GDP – he thinks it is “very low compared to the Japanese net debt level which is 114 percent of Japanese GDP.”

“And it is extremely small relative to the size of Japanese foreign asset positions, which is several times Japanese GDP,” he said.

Another impact of the quake in the long run is the overall rise in household and government consumption. The impact of catastrophic events in a developed country tends to be quite muted, because destruction forces people to rebuild their homes and use their savings to do so.

“There is all kinds of opportunity. Now will the politicians take advantage of that or will they screw it up?” asks Gerald L. Curtis, Columbia’s Burgess Professor of Political Science, regarding the political framework that facilitates investment opportunities.

“That is the big question.”