Japan's Stock Market Plunges as Export Disruption Threatens Global Supply Chain

Japan's stock market fell the most in two years yesterday (Monday) in the aftermath of Friday's devastating earthquake, the biggest in Japanese history. Rolling blackouts and factory damage threatened exports for some of the country's biggest companies, many of which play a key role in industries' global supply chain.

The Nikkei 225 stock index closed down 6.2% yesterday at 9,620.49, after falling 1.7% Friday.

"The market is pricing in a better understanding of the enormity and complexity of the two natural disasters that struck Japan," Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., told Bloomberg News. "The immediate impact will be felt through lower global aggregate demand, disrupted supply chains and funds flows into Japan."

Tokyo Electric Power Company (TEPCO) fell the most on the index with a 24% decline. TEPCO suffered two explosions at the Fukushima nuclear plant in Northern Japan and worked yesterday to cool down reactors to prevent further meltdowns.

Insurance companies and automobile manufacturers also slumped. Tokio Marine Holdings Inc. (PINK ADR: TKOMY), Japan's largest property and casualty insurer, fell 12%, and Toyota Motor Corp. (NYSE ADR: TM), Honda Motor Co. Ltd. (NYSE ADR: HMC) and Nissan Motor Co. Ltd. (PINK ADR: NSANY) all fell more than 6%.

At the other end of the spectrum were construction companies, expected to profit when Japan starts rebuilding efforts. Kajima Corp. (PINK ADR: KAJMY) was up 22%, Taisei Corp. (PINK ADR: TISCY) 20% and Obayashi Corp. (PINK: OBYCF) and Shimizu Corp. both gained 11%.

Money Morning's Chief Investment Strategist Keith Fitz-Gerald went on FoxBusiness' "Bulls & Bears" program Friday to analyze the quake's economic damage. He said this kind of disaster is not a foreign concept to the world's third largest economy.

"Japan is built for this," said Fitz-Gerald. "It's got a long history of dealing with earthquakes. The markets are probably going to shake this off in relatively short order, and if you look back to 1995 the markets in fact did return to normal, or as normal as you can get, about six months after the Kobe quake which was so very deadly back then."

The Japanese market fell 8% in the week following the Kobe earthquake in 1995, and tumbled by about a quarter in the months after. But Japan's market was already in decline at the time, as shares were significantly overpriced and extremely vulnerable.

The Bank of Japan (BOJ) poured a record $183.17 billion (15 trillion yen) into money markets yesterday and doubled the size of its asset-purchase program to ease liquidity worries. It will make another $83 billion (6.8 trillion yen) available over the next couple days.

The central bank boosted its purchases of riskier assets, including corporate debt, exchange-traded funds and real-estate investment trusts, by $43 billion (3.5 trillion yen), and planned to buy an additional $18 billion (1.5 trillion yen) of government debt. The move doubled the BOJ's asset-purchase facility to $122 billion (10 trillion yen).

"What we were most concerned about was the possibility that increases in anxiety and risk-aversion moves would negatively affect the real economy, so we judged it appropriate to mainly boost purchases of risk assets," Bank of Japan Gov. Masaaki Shirakawa said yesterday.

The bank is offering same-day funds that do not require a settlement period.

"The short-term market is a starting point of all financial and economic activities, so the bank judged that it's important to relieve any concerns regarding liquidity," said Gov. Shirakawa.

The bank is concerned about the effects on businesses' sentiment. Many key companies in Japan's manufacturing and electronic industries have had to temporarily shut factories. Sony Corp. (NYSE ADR: SNE) shut six electronic-component factories and Toyota closed operations at all 12 of its Japanese plants so employees could check on families. About eight automakers announced production suspensions due to the earthquake.

"When we talk about natural disasters, we tend to see an initial sharp drop in production... then you tend to have a V-shaped rebound," Michala Marcussen, head of global economics at Societe Generale, told Reuters. "But initially everyone underestimates the damage."

Now all eyes are on Japan's exports to see how disruptive factory closures and temporary power outages will be on certain industries. Even companies that escaped physical damage in the quake will have limited production due to TEPCO's rolling blackouts.

Japanese Prime Minister Naoto Kan announced on Sunday that he approved the power outages to prevent a massive blackout. Economy, Trade and Industry Minister Banri Kaieda said in a news conference that the area's power demand is 41 million kilowatts per day, but TEPCO currently only has the ability to supply 31 million kilowatts.

These are the first ever controlled blackouts for Japan and are expected to run until the end of April. The nine affected regions were divided into five areas, each slated to have power cut off for three hours at a time.

Japan's government also urged businesses to reduce their use of air conditioners, lighting and hot water.

Japan's manufacturing is a key part of the global supply chain. Many factories make components for other company's goods. Japan supplies one fifth of the world's semiconductors, makes automobile engines needed in assembly plants around the world, and is one of the leading producers of LCD displays.

Some companies outside the rolling blackout region had to shut down factories because they didn't receive shipments from other plants. Mazda Motor Corp. suspended production at four plants in western Japan because of parts shortages.

One product facing significant delays is Toyota's Prius hybrid. Japan is the only country that makes engines for the car, and a plant that makes parts for the alternative energy vehicle was damaged in the disaster.

Many semiconductor companies had to keep factories closed due to power outages. Renesas Electronics Corp., the world's largest maker of microcontrollers, was still assessing damage to its facilities in northern Japan. Microcontrollers are used in cars and many kinds of office and industrial equipment.

Len Jelinek, an analyst with IHS iSuppli, said customers of Renesas could feel the biggest impact. Automakers tend to have one or two suppliers for their microcontrollers and keep limited inventory.

Most of the flash memory component makers were located far from the quake and were unlikely to be affected. This was good news for companies like Apple Inc. (Nasdaq: AAPL) that use the chips in the iPad and iPhone.

The auto industry disruption stands to hurt China, which overtook the United States in 2009 as Japan's biggest export market.

Japan exported $18.1 billion of auto products to China in 2010. Some analysts think automakers with operations in China might be encouraged to localize supply chains depending on the quake's disruption to Japan's exports.

Some of Japan's other neighbors could feel quake effects as Japanese businesses reduce foreign investment to rebuild at home. Japan is one of the biggest investors in Vietnam, with the government and companies pouring billions into infrastructure development.

Peter Pham, head of sales and trading at VinaSecurities based in Ho Chi Minh city, told The Financial Times "there is concern that there could be a lot of repatriation back into Japan to support infrastructure development." Pham also said Vietnam's stock market could see less activity since many Vietnamese fund managers have been raising money in Japan.

But Money Morning's Fitz-Gerald stressed that many of the economic effects are likely to be short-term due to Japan's strength.

"If anything I think that we're going to see significant growth because people are going to recognize that this is a vital part of living there and doing business there," Fitz-Gerald said. "It's a short-term hiccup. Japan is a resilient, resilient, resilient country."

Japan is doing all it can to communicate the depths of the devastation, the efforts and progress being made, and the international assistance that it is receiving. For instance, NHK World/Radio Japan is devoting its daily broadcasts on the international shortwave band entirely to news on the disaster. Typically, the world-band radio broadcasts to North America, Europe, Southeast Asia and Central Africa are a mix of news, music, commentary and culture. This policy change will remain in effect in the days to come, NHK news anchors have said on the broadcasts.

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