Twenty years ago I was a Tokyoite – a gaijin (expatriate) living in a delightful little neighborhood called Shimouma and working for an American investment bank in the buzzing financial district of Otemachi, where our 10th floor office had a view over the Imperial Palace and where on a clear winter morning you could see all the way out to Mount Fuji’s snow-covered elegance framed against a backdrop of deep azure. Having personally experienced life in Japan, with all its oddities, charms, and vividly-remembered moments of fleeting beauty, I have to say that the images and video clips that have flooded the media since last Friday are for me indescribably searing, haunting and painful. As the world frets about potential economic loss, one must remember that this is first and foremost a humanitarian crisis. Markets will recover, portfolios will move on, but tens of thousands of lives have been brutally impacted and that recovery will be a far longer, more emotionally devastating process.
Nonetheless, we do have to take stock of what these events mean for the larger picture of the world economy and global investment markets, and that is the purpose of this Market Comment.
The world was a volatile, nervous place before the events of last Friday. Since that first 8.9-magnitude earthquake struck off the northeastern coast of Japan, devastating miles upon miles of territory and claiming the lives of thousands, that nervousness has metastasized into something more like full-blown panic (though we do not think that extreme panic will be long-lived). On Monday Japanese securities markets bravely opened for business and, predictably, bore the brunt of a massive sell-off. The Nikkei 225 was down over 6% - dramatic to be sure, but nothing close to the 20% the Dow Jones Industrial Average lost on Black Monday in 1987. There was a discipline to Monday’s trading patterns in Japan – the collective market trying to discern opportunity in the fog of chaos. But Tuesday was a different story. After developments significantly worsened at the troubled Fukushima nuclear plant, about 170 miles north of Tokyo, the market went into a tailspin and added nearly 11% to Monday’s loss. The Nikkei has lost almost 20% since the disaster began. A stock index that just grazed 40,000 at the peak of the Japanese asset bubble in 1989 is now worth 8,605.
Japan is the world’s third largest economy (having just been eclipsed by China for the number two spot last year). It is also one of the richest economies on a per-capita basis (far more so, obviously, than up- and-coming powers like China or India), a major exporter of high-value added finished goods and one of the largest foreign holders of US Treasury securities. It is also the most indebted nation in the developed world, with a debt-to-GDP ratio just under 200% (that ratio in basket case Greece, by contrast, is less than 80%). In fact there has been very little good news to tell about Japan’s socio-economic story for quite some time. The population is the oldest in the developed world and in decline, chronic deflation has produced years of either recession or anemic growth, and the political system is dysfunctional even by the very low standards of national governments just about anywhere these days. If any country did not need the crippling body blow of a category-five natural disaster, that would be Japan.