Japanese companies can survive the storm

By This Is Money
Updated: 04:18 EDT, 26 April 2011

The Japanese government has just announced a £30bn emergency budget for disaster relief after last month's earthquake and tsunami, but the cost in human terms is unquantifiable.

Japan disaster: Investors so far have behaved according to the norm

Heartless as it may seem, when a natural disaster strikes an investor's reflex reaction is to wonder whether it might be a buying opportunity.

Investors so far have behaved according to the norm. There was some panic selling of shares, and the Yen rose sharply to the highest level against the US dollar since the war.

Initially TOPIX, a broad Japanese equity index, fell 17.6% in three days – the largest percentage drop over that time-frame since the market re-opened after the war, in 1945.

Policy responses ensued: an infusion of liquidity from the Bank of Japan, and intervention by the G7 countries in the currency markets to resist the rise of the Yen.

This has restored stability in the markets, and TOPIX has recovered about half of its fall, as investors seem to agree that whatever proportion of GNP growth lost this year will be recovered in 2012.

But this is still different to other natural disasters. Seismic activity is hampering efforts to contain radiation at Fukushima. Estimates of the loss of capital stock are twice that suffered at the time of the Kobe earthquake.

Interruptions to production are causing supply chain complications in Japan and abroad, including here in the UK, and power shortages are likely to be a risk during the summer months when usage is particularly high.

Earth tremors are a regular event in Japan and the population is well organised to cope with them.

But pyschological fears over the destructive potential of nuclear energy take this disaster onto a different level and could delay the recovery.

On the positive side, the disaster may bring the Japanese people together and may even act as a catalyst for the reform of economic policy, which many observers believe is long overdue. It might lead to more anger among the electorate about political incompetence, which would be a welcome change.

So should small investors consider channeling money into Japan? The answer is: only if they previously thought it was a good idea.

The catastrophe has made shares in some Japanese companies cheaper but it has not fundamentally changed their dynamics.

Corporate Japan remains a powerhouse in many areas. There are household names in cars and electronic goods and many other seemingly anonymous companies which are global leaders.

These multinationals dominate their industries, are focused on global growth, particularly outside the developed nations, and should largely sidestep the worst of the domestic situation.

There is also, perhaps, a growing list of reasons for longer-term optimism.

While the rate of change in Japan is often glacial, many observers see a dramatic shift in the ways companies are managed, including a greater emphasis on profits.

Two of Japan's largest firms, Nippon Steel and Sumitomo Metal, are merging to create the world's second largest steelmaker.

This coincides with a government bill to encourage take-overs and boost global competitiveness, while the trend towards management buyouts seems to be increasing.

In part, that reflects a change in ownership. In 1990 stakeholders, such as banks or suppliers, held 75% of Japanese shares, while conventional investors accounted for just 25% of the shareholder base.

Now those ratios have been reversed and managers must answer to investors, rather than pandering to the vested interests of industrial or bank stakeholders.

Foreign investors now own around 30% of the market, and domestic pension funds are taking a more activist stance than before, belying Japan's reputation for avoiding conflict at all costs.

In the last two decades Japan has suffered banking and property crises and lost share of global trade, which are becoming increasingly familiar woes to westerners.

Nevertheless many leading global companies are based there, and the opportunity remains to buy them at prices which are not expensive relative to their foreign peers.

Global data from EPFR shows that investors are increasing their exposure to Japan. British investors have a wide range of funds available to them but I suggest looking at those run by Neptune, Morant Wright or Jupiter.

For those who would prefer a relatively riskaverse global strategy which currently emphasises Japan, Ruffer Investment Company, an investment trust, is worth a look