Cumberland Advisors Dispatch on Japan

This is late to the blog, but I had trouble posting them up earlier.  Cumberland Advisors sends out free, occasional but always timely e-mails.  I highly recommend signing up for them.  In posting them below I have butchered the text formatting, and I apologize to the fine folks at Cumberland Advisors for that.  What follows is an excellent comparison of the current quake situation with Japan to one similar that occured in 1995.  My highlighting below.

Cumberland Advisors

2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236

614 Landis Avenue, Vineland, NJ 08360-8007
1-800-257-7013  http://www.cumber.com

                                             Tohuko vs. Kobe


Economic Impact of Japan’s Earthquake: Some Comparisons by Bill Witherell, Chief Global Economist.  This commentary was written by Bill Witherell, Cumberland’s Chief Global Economist.  He joined Cumberland after years of experience at the OECD in Paris.  His bio is found on Cumberland’s home page, www.cumber.com.  He can be reached at Bill.Witherell@cumber.com.  

 March 13, 2011

It is too soon to develop good estimates of the likely economic and financial effects of last Friday’s massive earthquake and subsequent devastating tsunami, particularly with the situation in the damaged nuclear plants still unresolved. However, a comparison with the effects of the major earthquake that struck Kobe, Japan on January 17, 1995, may provide some useful reference points.

That earthquake, known in the US as the “Kobe Earthquake” and officially in Japan as “The Great Hanshin-Awaji Earthquake Disaster,” measured 6.8 in magnitude, compared with 8.9 for the Tohoku earthquake. The magnitude scale used by the US Geological Service is not linear. Friends in Japan have indicated that the energy released by last Friday’s quake was some 200 times that released by the Kobe quake. Unlike the Kobe quake, the Tohoku quake was centered offshore, generating the tsunami. 

The Kobe quake struck at Japan’s industrial heartland. The affected regions accounted for 12.4% of Japan’s GDP in 1995.  The five prefectures most affected by the Tohoku quake are not as industrialized as the Kobe quake region.  They account for about 7.8% of GDP.

Following the Kobe quake, industrial production dropped in the month of January but then advanced by 2.2% in February and 1% in March. The effect on Japan’s GDP was imperceptible.  That was despite the estimated $120 billion in damages (at today’s exchange rate), which then equaled 2.5% of Japan’s GDP. 

It has often been the case that the effect of a natural disaster on a nation’s economic growth turns out to be less than initially expected.  In 1995, the Japanese economy had considerable spare capacity that could be used to offset the reduced production from the area affected by the quake.  That situation is also present today in Japan.  While the Japanese economy expanded at a 3.9% clip last year, better than many other advanced economies, it remains well below full-capacity production levels.

Another positive factor is the announcement by Governor Masaski Shirakawa of the Bank of Japan that he is ready to unleash “massive” liquidity to assure the stability of Japan’s financial system and to meet the credit needs of the affected region.  Monday morning, the Bank of Japan followed through with an $85-billion injection into the markets. Also, Prime Minister Kan has indicated the government is preparing a major fiscal package.  While increased government outlays will add to the country’s excessive debt, this longer-term consideration will not deter the government from taking action needed to meet this crisis.

In view of the above considerations and the Kobe precedent, some analysts are already predicting that the effects of the Tohoku earthquake on Japan’s economy will be minor and mostly transitory. We hope this will prove to be the case, but based on the limited information we have to date, we think there is a certain risk the Japanese economy will be hit harder and take longer to adjust than was the case in 1995.

The Japanese equity market was hit immediately in 1995 by the Kobe quake, with the Nikkei 225 benchmark index plunging 8% in the following week.  The market continued to trend downward through June, with the decline reaching 24.4% by the end of June. Of course, other factors were at play, including heightened US-Japan trade tensions, but it is interesting to note that the apparent effect on equity investor attitudes was considerably more adverse than the macroeconomic developments would imply. The Nikkei 225 regained its pre-quake level by mid-December 1995.

The Tohoku quake, tsunami, and still unfolding nuclear crisis are clearly having a traumatic effect on Japan, the worst crisis Japan has suffered since World War II.  We do not expect investor and consumer confidence to recover rapidly. The Nikkei 225 dropped 1.7% in the 14 minutes the market remained open after the quake last Friday. Monday morning the market opened down an additional 5%. Eventually this market will likely offer a buying opportunity, but it is far too soon to judge when that will be the case.

Bill Witherell, Chief Global Economist, email:  bill.witherell@cumber.com.

Resources:
To sign-up for Market Commentaries from Cumberland Advisors: http://www.cumber.com/signup.aspx
For Cumberland Advisors Investment Portfolio Styles: http://www.cumber.com/styles.aspx?file=styles_index.asp
For personal correspondence: david.kotok@cumber.com

*********

Copyright 2011, Cumberland Advisors. All rights reserved.

The preceding was provided by Cumberland Advisors, Home Office: One Sarasota Tower, 2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236; New Jersey Office: 614 Landis Ave, Vineland, NJ 08360. 1-800-257-7013. This report has been derived from information considered reliable, but it cannot be guaranteed as to accuracy or completeness.

For a list of all equity sales/purchases for the past year, please contact Therese Pantalione at 1-800-257-7013, ext. 315. This report is currently about 600 pages in length. It is not our intention to state or imply in any manner that past results and profitability are an indication of future performance. This does not constitute an offer to sell or the solicitation or recommendation of an offer to buy or sell any securities directly or indirectly herein.

Cumberland Advisors supervises about $1.5 billion in separate account assets for individuals, institutions, retirement plans, government entities, and cash-management portfolios. Cumberland manages portfolios for clients in 47 states, the District of Columbia and in countries outside the U.S. Cumberland Advisors is an SEC registered investment adviser. For further information about Cumberland Advisors, please visit our website at www.cumber.com.

Please feel free to forward this Commentary (with proper attribution) to others who may be interested.

Archived Commentaries: http://www.cumber.com/comments/archiveindex.htm

To discontinue receiving Cumberland Commentaries, please go to http://www.cumber.com/listserv/remove.asp

______________________________________________________________________________________________________________________________________

Reminder: E-mail sent through the Internet is not secure. It is important that you do not forward full account numbers, tax identification numbers or confidential personal information via email unless it is password protected. Your e-mail message is not private in that it is subject to review by the firm, its officers, agents, employees, and by federal or state regulatory authorities including but not limited to the Securities and Exchange Commission.


To unsubscribe from the COMMENTS list, click the following link:
http://listserv.cumber.com/SCRIPTS/WA-CUMBER.exe?SUBED1=COMMENTS&A=1

Share

Tags:

Leave a Reply