Why Investors Stopped Worrying About Japan


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For all the talk about animal spirits, the stock market can be a cold-blooded beast.


Take Japan. The situation there following the earthquake/tsunami/nuclear disaster hasn’t improved much, and in a lot of ways it’s gotten worse. Last night, the Japanese government raised its nuclear disaster rating to the highest level on the international scale.

But global investors, especially in the U.S., have moved from fretting about Japan to deciding that there’s really not too much to worry about. While the Nikkei 225 slid 1.7% last night, the U.S. market is looking more resilient. The Dow Jones Industrial Average has managed to regain the level reached ahead of the Japanese disaster. Similar rebounds have occurred in Europe and elsewhere in Asia.

Japan’s market continues to grapple with all the challenges – the Nikkei 225 is still well off its pre-quake level. But investors outside Japan see opportunity. Global investors (again, mostly American) poured $2.3 billion into Japanese ETFs in March, with most of that coming after the earthquake.

There’s plenty to worry about in the big, bad world right now, but the Teflon U.S. market seems to be mostly ignoring the problems in Japan. Even Tuesday’s mild downdraft seemed more associated with Alcoa’s disappointing earnings and falling oil prices than Japan.

Here are five reasons investors are (mostly) ignoring Japan.

It’s a temporary disruption. This may sound obvious today, nearly one month after the earthquake, but it didn’t feel very apparent in the day following the disaster. The Nikkei 225 plunged and global markets followed suit. Some whiffs of the “flash crash” – the day last May when the Dow suffered its biggest, fastest decline ever – were in the air.

Unlike most earthquakes, the Japanese disaster had a complicated addition: The aforementioned nuclear power crisis. That X factor played a big role in driving near-term selling pressure, primarily because nobody knew how to quantify the danger. The nuclear situation remains murky, at best, but investors now believe that it will be contained to the area around the plant and not affect Tokyo.

With the nuclear situation not getting appreciably worse, investor attention has turned back to Japan’s history of resilience. The Kobe earthquake in 1995, while not as huge and damaging as the recent one, is the main example experts turn to since the areas damaged had roughly the same share of national gross domestic product: about 4%.

Also, even as powerful aftershocks rock Japan, investors increasingly believe that dominant global players such as Toyota, Sony and Panasonic will remain formidable.

The yen has weakened. In the days immediately following the quake, the yen rallied sharply against the dollar. On March 16, the yen soared to a post-World War II record of 76.32 against the dollar amid widespread belief that Japan would require massive repatriations to pay for reconstruction and recovery.

The strength of the yen, however, threatened Japan’s export-driven economy, prompting worries about a one-two punch that would complicate reconstruction and recovery. A higher yen makes Japanese exports less competitive in the global marketplace. That’s one reason exporting countries tend to prefer a weaker currency.

Given the importance of keeping the yen from getting too strong, the G7 made a rare coordinated intervention in the currency markets after the quake, tamping down the Japanese currency’s strength. The yen has remained relatively weak since then and now trades at about 85 yen against the dollar.

The U.S. recovery trumps Japan’s problems. Japan is a big economy and it remains highly intertwined in the U.S. economy. For instance, while there’s lots of buzz about China, India and Korea, Japan dominates the Asia-U.S. airplane travel market.

Still, the tail doesn’t wag the dog. The U.S. economy is far bigger, and it has a far greater reach into the global economy. And, with the notable exception of the housing market, the U.S. economy’s nascent recovery is starting to gather some steam.

A number of companies, especially in the technology and automotive sector, have said that supply disruptions related to the Japanese earthquake will negatively affect business in the first half of this year. But there’s no sense of permanency to these cuts.

For instance, last week Deutsche Bank trimmed its 2011 U.S. car sales estimates. At the same time, it took those reductions and added them to 2012 U.S. car sales estimates.

In Asia, the focus is really on China. China has recently passed Japan as the globe’s second-biggest economy. Even so, Japan, by virtue of being big for so long, remains a wealthier country than China and a key retail outlet for makers of fancy stuff – think Coach, Tiffany’s and Bulgari.

All the same, the growth tale in Asia is really China, with a little India and a bit less South Korea tossed in the mix. Japan has not done much in the last 20 years to amp up its own economic position.

Sixteen years ago, when Japan’s economic position was far more dominant, markets took the 1995 Kobe earthquake in stride. That year, the Dow began its remarkable run from Dow 4000 to Dow 10000 in 1999.

Oil, European Central Bank and Fed are bigger threats. With the Japan situation viewed as contained, from an investor perspective, folks have started turning to other issues.

In the past week, spiking oil prices have raised concerns that the global recovery could get choked off by rising fuel prices. Last Thursday, the European Central Bank raised rates up from emergency low levels for the first time since the financial crisis. Fed officials are bickering about when they should make their own move.

It is, in some ways, remarkable, but investor chatter has turned away from Japan in the past couple of weeks. There are, to be sure, Japan-specific issues. Toyota, Sony, Honda, Hitachi and other Japanese companies remain well off highs reached earlier in the year. While the supply disruptions are better understood, the extent of future electricity shortages are harder to figure, which may be capping these stocks for some time.

Dave Kansas blogs at The Wall Street Journal’s MarketBeat .

Read more: Why Investors Stopped Worrying About Japan – SmartMoney.com http://www.smartmoney.com/investing/economy/why-investors-stopped-worrying-about-japan-1302628922569/#ixzz1KCLlIt7n

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