Asian investors bracing for mixed impact from Japan's earthquake

11:20, March 17, 2011      

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Since the 9.0-magnitude earthquake in northern Japan last Friday, many Asian investors have been scrambling to assess the likely impact of this natural catastrophe upon Asian companies outside Japan.

While the situation in Japan is still fluid given the aftershocks and the threat of radiation leakage from the damaged Fukushima nuclear plant, research houses like Nomura Securities Research has recently released reports with thorough analysis of the likely implication of the earthquake upon other parts of Asia.

According to the report, industrial production in the prefectures worst affected by the earthquake and tsunami comes to 6.8 percent of Japan's total industrial output.

"We see the possibility of major impacts in farming, forestry, fisheries, mining, food manufacturing, ceramics, primary metal such as steel, manufacturing, electrical machinery, precision equipment, and public utilities. Considering the major disruption to infrastructure such as roads and electric power generation facilities, we think the short-term impact on economic activity could be greater than after the Kobe earthquake in 1995. Another characteristic of the affected region is the large amount of IT- related industry," said Nomura Securities Research.

While it is still too early to fully assess the full impact of the earthquake and the radiation leakage of Fukushima nuclear power plant, most research houses agreed that the earthquake should only have short-term impact upon regional bourses. Nomura Securities said, "We expect the event to have a short-term impact on the market, compounding existing concerns around the Middle East unrest, higher inflation and peripheral Europe."

In terms of sectors, while the construction sector is widely believed to perform well on expectations of demand for infrastructure reconstruction, and that the insurance sector will underperform on concerns that insurance payouts will cause earnings to deteriorate, the dynamics of some other sectors in Japan as a result of the earthquake may also have spillover effect upon related sectors in Asia, which could be either positive or negative.

It is especially pronounced in energy sector. In Japan, a total of 11 nuclear reactors were shut down off Japan's Pacific north- eastern coast after the earthquake. Nomura Securities Research said, "If we assume half of the power loss to be generated by coal- fired power plants, the additional coal imports to Japan will likely increase 50 percent of the current import amount. We believe this will put upward pressure on regional spot coal prices. "

As there are a number of Japanese semi fabs in the region being halted operation in the wake of the earthquake, Nomura Securities also see risks for the disruption of the IT supply chains such as handsets and personal computers, affecting mostly on the supply of memory chips and to a lesser extent LCD and Battery. Consequently, Asian electronics manufacturers will have to source these components elsewhere to avoid production being adversely affected.

And there is the issue of steel demand for reconstruction effort. Japan is all along a net exporter of steel, but Nomura Securities noted if more steel is used in the rebuilding effort, the market in Asia will tighten up, which could add some support to Asian steel prices later this year. Certainly it will bode well for Asian steel makers, as the record-high inventory recently has weakened steel prices, and thus depressed share prices of most steel companies in the region.

However, Citigroup Equity Research pointed out that with the radiation leakage taking place in the plant in Fukushima, the potential impact from the situation at a nuclear power plant of Fukushima will likely to make big difference between this earthquake and the Kobe earthquake, considering that there is a chance of a reactor meltdown in the plant.

Indeed, as the radiation leakage crisis in the plant escalates, the ultimate impact of the earthquake this round may potentially get even greater. Tokyo, which has so far not been badly damaged by the earthquake, is facing the threat of leaked radiation from the nuclear plant. Such scenario, should it get worse, will drive more investors to risk aversion mode, as Citigroup Equity Research noted Tokyo and the Kanto region around it accounts for nearly 40 percent of Japan Gross Domestic Product.

Source: Xinhua
 
 
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(Editor:李牧)

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