What to Buy in Rebuilding Japan

   Japan has been hit by a triple calamity – monster quake, killer tsunamis’ and nuclear disaster– that only a Hollywood disaster film director could imagine. The damages wrought by this catastrophe in terms of human life and suffering as well as economic damage will be remembered as one of the worst in history. From our standpoint on the ground in Tokyo, it was (and is) hard to be an objective observer given the ongoing Fukushima nuclear crisis, daily earthquake aftershocks, checking radiation levels, gas lines and empty shelves in neighborhood convenience stores and supermarkets. But Japanfs stock and financial markets, being the amoral animals they are, have largely or completely discounted the worst in losing 12.6% or 1,305 points on the Nikkei 225 from a mid-session high on Friday March 11, 2011 to a mid-session low on Friday March 18, 2011; the caveat being that the Fukushima nuclear crisis does not deteriorate into a level 7 Chernobyl-like nuclear disaster.

• Historically, monster quakes (in 1855, 1923 and 1995) have marked or coincided with major turning points in Japan, catalizing Japan’s government and its people to a new level of economic development and growth. We are hoping this tragedy will mark a similar turning point.
• The Nikkei 225 has bounced from March 15 lows mainly on short-coving, but markets do not move on hope alone for long. Investors will need to see specific actions to rebuild the devastated Tohoku region, evidence that production in the electronics, automobile and other industries is returning to and exceeding levels prior to the disaster and that Japan’s economy is overcoming the 1~3 percentage point hit to output as well as strong yen pressures and high crude oil prices without digging itself into seriously deeper government debt hole.
• The biggest beneficiaries of the inevitable rebuilding demand are prefabricated housing makers (Nissei Build Kogyo) and construction companies specializing in the road, port facility, railways and dam public infrastructure that has been destroyed. What has not been discussed or discounted yet however is housing loan defaults by those displaced by the catastrophe, and related bank bad loan write-downs. Conversely, Japan’s three casualty majors are well-reserved for losses that are expected to be only 3% of policy premiums.

-Continue reading here: The Japan Investor