Earthquake in Japan, not much portfolio damage. Tens of thousands of quakes rumble the Izu chain of ...
Earthquake in Japan, not much portfolio damage. Tens of thousands of quakes rumble the Izu chain of islands every year. But news of the biggest to hit Japan since the one that devastated the city of Kobe on 17 January 1995 rattled early risers last Friday. Commuter laptops and satellite phones sizzled as traders struggled to get details before they got to the office.
In the event, the damage was minimal compared to the 6,000 dead at Kobe. The latest quake's epicentre was 10 miles underground and in a relatively rural area. The aftershocks came as expected, but nothing to match the geological disaster six years ago.
A few trains were cancelled, some airports were shut for checks. The defence ministry sent a lone F-15 fighter plane to check out the damage, from a presumably safe distance of 30,000 feet up. On the ground, the most immediate concern was the fate of the Formula One racing track, due to host the penultimate race of the season over the weekend.
The jolt may even have knocked some sense into Japanese lawmakers, who have been engaged in a series of unseemly physical clashes inside and outside their chamber in the last few weeks. The public, increasingly cynical about politics, just wants the ruling LDP coalition and the squabbling opposition to pass some much needed legislation, including key economic reforms. For foreign investors tired of waiting for the Japanese market to fulfil its promise, the latest earthquake was an excuse to sell. The debate about whether Japan is finally instituting economic and corporate reforms has been swirling around for months.
Much of the analysis seems to get embroiled in extreme detail of statistics, accounting methods and cultural considerations. Standing back, there is no doubt that reform is taking place among many individual companies, and there is a groundswell of corporate change.
The web of cross shareholdings (hardly unique to Japan) is finally unwinding, and return on equity among the companies concerned shows an immediate improvement. The GAAP standard (the Generally Accepted Accounting Principles) has been adopted, making global comparisons easier. The influence of foreign investors, who, after all their reservations, still commit to Japan, has been growing. The Renault/Nissan, Salomon Smith Barney/Nikko Securities and Cable &Wireless/IDC deals are all in different industries but they are working well.
Old Japan, represented by the traditionally run companies, will not collapse at once. But it is being increasingly pushed by New Japan, the strata of small companies typically run more dynamically by younger Japanese with a global interest. While their elders are cautious savers, the new generation are risk-taking spenders. In any other context, they might constitute a hazard but they are exactly what Japan needs right now.
The market is still sceptical about Japan, because reforms have not occurred at a speedier pace. But there is merit in doing things once, in a way which takes everyone with you, rather than rushing through changes which then provoke dissent. While there were other more attractive options for investors, Japan has lost out. But as doubts grow about the US and Europe, it looks increasingly solid. It will take more than an earthquake to shake this market.
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