Managers warn of Japan GDP hit but impact less than Kobe

Fund managers warn Japan could take a short term hit to GDP following last week's earthquake and tsunami, but they are less concerned about the longer-term impact on the country’s fragile economic recovery.

The catastrophic events on Friday hit Japan's stockmarket with the Nikkei 225 falling 6.2% on its first day of trading in the aftermath, despite the Bank of Japan announcing a cash injection of $183bn to bolster the economy.

Fund managers and economists have spent the weekend trying to weigh up the implications of the disaster on Japan's economy which is struggling to recovery to pre-financial crisis levels.

The Japanese economy grew 3.9% last year, its fastest performance in two decades. But output is still well below levels set before the global financial crisis and GDP actually contracted 0.3% in the last quarter compared with the previous three months.

Steve Seneque, head of Japanese equities at Fidelity International, says: "The near-term disruption to economic activity is bound to be significant and we are likely to see an immediate drop in GDP.

"Many industries will face severe supply-chain difficulties due to limited production and transportation in the affected areas."

He says Tokyo Electric Power is operating rolling power cuts from today, which is expected to have a major impact on railway operations, traffic signals, ATMs and other key public services.

"Although the external environment is likely to remain supportive, the disruption to domestic economic activity will inevitably delay Japan's recovery."

Hugh Young, Aberdeen's group head of equities and manager of the £2.3bn Asia Pacific fund, says the companies affected in the firm's holdings include large manufacturers, like Honda and Canon. These companies have regional plants and local supply industries disrupted by the events.

"Toyota is suspending production at all domestic factories through Wednesday. Chemical company Shin-Etsu has temporarily lost three plants. Convenience store operator Seven & I has reported about 5% of its stores are out of action.

"More tellingly, many companies do not know themselves how they are affected because of outages and communications failure."

He adds: "If there are any gainers, cynically opportunistic though that may sound, they are likely to lie among resource companies such as Rio Tinto and BHP.

"Japan will need thermal coal and iron ore to boost non-nuclear power alternatives. With China slowing, the demand here and for other commodities needed for reconstruction may be timely."

However, Stephen Harker, manager of the £946m SG Japan CoreAlpha fund, says the economic damage from the earthquake "will be minimal", due to the location of offshore Tohoku.

He says unlike the 1995 Kobe earthquake, which likely triggered the Leeson/Baring scandal and saw markets tumble, there is no excess leverage and no corporate distress this time round.

"We suspect that the market would have been just as weak in 1995 had there not been a 'Kobe shokku'.

"Our thinking is that the best strategy might be to allow the dust to settle before taking any action."

He says he does not plan to make any portfolio changes and remains "100% committed to the market and to the yen".

Michael Woodmartin, fund manager for Japanese equities at Henderson Global, agrees the shock to the worldwide stock markets will not be as damaging as previous Japanese earthquakes.

"Inevitably there will be micro-economic disruptions, as there were after Kobe and even Chuetsu. However, many firms reportedly diversified supply chains in the wake of Kobe, so the impact should be lower."

Shogo Maeda, head of Japanese equities at Schroders, adds: "We do not believe there has been serious overall damage to the business sustainability of many Japanese companies.

"As more information becomes available from the companies with regard to the damage caused, we think the market will become more stable."