03 Nov 2011 | World

After the Earthquake 

Heather Farmborough looks at the effects on Japan
and its domestic economy six months after the
earthquake and finds some encouraging signs.

Sarah Whitley, the manager of The Baillie Gifford Japan Trust PLC was in the middle of an investment meeting in Kyoto at 2.46pm on 11 March when the great eastern Japan earthquake struck.

It was not until later when the interpreter spotted an oil refinery ablaze on a newsreel that Sarah realised the severity of the situation.  It was not so much the earthquake but the ensuing tsunami that caused the worst of the devastation, with waves reaching 38m high in some places and rushing inland as far as 10km. As a result of the earthquake, Japan had moved 2.4m to the east, and the coast had fallen by up to 1m, so in some cases higher sea walls were no longer in the right position. At the 40-year-old Fukushima nuclear plant, tsunami defences were inadequate and radiation leaked. The plant will eventually be decommissioned and demolished. 

Sarah and her colleagues commenced a tour of Japan, with some frightening moments as they were hurtled along the highways at breakneck speed, squashed into a small minibus. Japan is used to coping with earthquakes, but the impact of this one, the world’s fifth largest since recorded measurement records began, was extraordinary. As Sarah commented, “no developed country expects a natural disaster which leaves 24,000 people dead.”

MOVING ON

While Japan had to come to terms with the terrible human implications of the tragedy, investors began to look at the impact on the Japanese economy, its companies and the rest of the world.  Japan is still the world’s third largest economic power and a major exporter to the rest of the world. 

First half Gross Domestic Product (GDP) figures for Japan were weak, reflecting the impact of constraints in supply chains on an unexpectedly concentrated supplier base in parts of the electronics and auto industries, and also the impact of power shortages in Tokyo and the surrounding region which accounts for roughly one-third of GDP. 

However, estimates for the second half, downgraded earlier, are now being revised upwards. Reconstruction has been rapid and impressive with the government, companies and communities swinging into action. There has also been an upsurge in volunteer work, more unusual in Japan, with buses taking people at weekends to clear up debris and older people offering to work at the faulty nuclear reactor. Sarah noted after the earthquake, an increased inclination in society to get married. “In bad times,” she commented, “people don’t want the singleton life so much.”

During the traditional Buddhist 49-day mourning period immediately after the earthquake, people held back from spending conspicuously in the shops, staying at home as the aftershocks continued. Soon afterwards though, there was a collective realisation that the self-imposed period of restraint would harm the economy, and spending picked up again. Start Today, the largest online clothing specialist, reported a 50 per cent increase on the previous year’s sales from April to June. Japanese consumers still buy only a relatively small proportion of goods online; this represents a huge opportunity for those online suppliers.

Indeed, Sarah expects much of the GDP growth to come from rapid expansion in the domestic economy, helped by wage rises in the spring and higher summer bonuses. There are opportunities in mobile telecoms as sales of android phones, made specifically for Japanese customers, are expected to rise rapidly and expand the market for mobile online services. Japan’s largest social networking site, Gree, is going from strength to strength as social networking takes off.  Rakuten, another Baillie Gifford Japan Trust shareholding, is the country’s largest online shopping website with sales growing at over 15 per cent a year, offering goods and services from clothes to holidays from over 100,000 different merchants using its own points system.

Lessons have been learnt: KDDI, the mobile telecoms company in which Japan Trust holds shares, has announced that it is considering several technological improvements to telecoms that will be useful when a disaster strikes, increasing the number of models compatible with disaster and evacuation information, for example and installing batteries that can operate for more than 24 hours at certain base stations. 

However, Japan itself is by no means out of the woods. National debt levels remain high, corruption still exists, the government’s commitment to corporate reform is questionable and it still controls quite a high proportion of businesses, particularly banks – although the government has said it will sell shareholdings to finance reconstruction. 

So is Sarah confident about investing in Japan? “In specific companies, not the economy as a whole,” she replied succinctly. She sees good opportunities, especially for disruptive companies with an efficient business model that can gain market share. Don Quijote, a store chain, in which Japan Trust invests, is a good example. Its shops are more like nightclubs – the peak hours are 10pm to 1am. Not surprisingly, as anyone with a teenage daughter can imagine, it’s a big hit. But, says Sarah, even though it sells just about everything, it’s also a company from whom the teenager’s mother would happily purchase a luxury handbag.  Japan also remains a major exporter to Asia, particularly China, but its ability to manufacture reliable and high-quality components and equipment is still greater than China’s. 

Much remains to be done, the tragedy all too fresh for many. But natural disasters can also be a turning point. The founder of Rakuten, Mr Mikitani, lost his aunt and uncle in the Kobe earthquake of 1995. Afterwards he concluded life was too short to go on being a banker. It was time to take a risk. He is now one of the richest men in Japan and runs one of the most dynamic companies in the country.

Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested. Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates.

Author: Heather Farmbrough
Heather Farmbrough worked in the city as a stockbroker and fund manager before joining the Financial Times where she was Junior Markets and Smaller Companies correspondent. She has contributed to publications including Weekend FT, and Management Today and broadcasts on Radio 4.