Stocks in Japan were expected to extend losses when trading resumed Monday, though the worst earthquake on record in the third-biggest economy is unlikely to dent the two-year bull market in global equities.
Early Monday in Tokyo, futures prices indicated that the Nikkei 225 Stock Average would slide about 2 percent when trading began. The domestic impact may be limited because lost production from the Tohoku region where the quake struck might not be enough to spur a recession, Bank of America Corp. said. The Bank of Japan pledged to ensure financial stability by providing liquidity.
The fastest global economic growth since 2007 and record U.S. profits that helped spur the 95 percent rally in the MSCI All-Country World Index of 45 nations should be intact, investors said. While the quake adds to concerns such as violence in Libya and Europe’s debt crisis, shares may benefit from reduced inflation expectations as damage to oil refineries curbs demand for crude.
“It’s a very bad situation, but from a market standpoint it may not be so negative,” said Patrick Legland, the Paris-based global head of research and strategy at Societe Generale SA, which oversees about $300 billion. “I expect the Japanese market to be down in the short term, but there is so much to rebuild that all in all it may be positive in terms of longer- term demand and investments.”
The Nikkei 225 tumbled 1.7 percent to 10,254.43 by the close Friday, which came 14 minutes after the 8.9-magnitude quake devastated areas of northeast Japan. Yen-denominated Nikkei 225 futures expiring in June ended last week at 10,005 in Chicago, down from the closing levels of 10,075 in Singapore and 10,170 in Osaka, Japan.
The iShares MSCI Japan exchange-traded fund dropped 1.7 percent in the U.S. on Friday. American depositary receipts of Tokyo-based Tokio Marine Holdings Inc., Japan’s largest property and casualty insurer by market value, plunged 8.2 percent, the most in two years. Tokyo-based Honda Motor Corp. and Nissan Motor Co. of Yokohama fell more than 2.2 percent.
Hitachi Ltd. of Tokyo, a maker of nuclear-power plants, slipped 2.2 percent in the U.S. Tokyo Electric Power Co., battling to prevent a meltdown of two reactors, is using sea water to cool one of the reactors and prevent damage to the chamber holding its radioactive core. Its shares fell 1.5 percent to 2,121 yen on Friday.
The Tokyo Stock Exchange has a system of price limits that curbs how much stocks can rise or fall in a single day. The restrictions are determined based on the previous day’s closing price, according to the TSE website.
Global stocks ended little changed as declines of 0.7 percent or more in China, Hong Kong and Australia were offset by a 0.7 percent advance in the Standard & Poor’s 500 Index. The MSCI All-Country gauge rose less than 0.1 percent to 336.73. U.S. shares were boosted by a 1.5 percent drop in oil spurred by speculation the temblor would curb demand in the world’s third- biggest oil-consuming country.
Investors are trying to assess whether the quake will hurt Japan’s economy enough to derail worldwide growth spurred by more than $12 trillion pumped into the financial system by governments and central banks since 2008. Global gross domestic product is forecast to expand 4.4 percent this year and 4.5 percent in 2012, according to the Washington-based International Monetary Fund.
Fastest Since 2007
Japan accounted for $5.4 trillion, or 8.7 percent, of world GDP in 2010, when the global economy expanded by 5 percent, the fastest pace since 2007, the IMF said. Japan may expand 1.5 percent this year, the fifth-worst rate among the world’s 24 developed nations, according to the IMF’s World Economic Outlook from October.
"If you’re talking at the level of the global economy, I’d say it’s very limited," said Michael Shaoul, chairman of Marketfield Asset Management, which oversees $1 billion in New York. "When you get those dramatic events, you should try not to do too much unless it’s absolutely obvious the impacts."
Equity bulls are counting on record U.S. earnings. Profit for S&P 500 companies will total $96.68 a share this year, according to the average analyst estimate in a Bloomberg survey.
A 17 percent increase in crude futures trading in New York since Feb. 18 has helped push the S&P 500 down 2.9 percent from its 32-month high of 1,343.01, data compiled by Bloomberg show. The oil contract retreated March 11 after a storage-tank fire shut Cosmo Oil Co.’s 220,000 barrel-a-day refinery in Chiba, outside Tokyo, and JX Nippon Oil & Energy Corp. closed refineries in Sendai, Kashima and Negishi.
"Japan is one of the largest economies in the world, so right now it may ease some of the global inflationary pressures because it lowers the demand for oil and materials," SocGen’s Legland said.
The earthquake is the latest shock to an economy that has the fastest-aging population in the developed world and has been mired in deflation for much of the past two decades. The Nikkei 225 has fallen 74 percent since December 1989 as land prices tumbled to about half their peak levels in the late 1980s. The country’s real GDP grew at an average 0.8 percent pace in the past 10 years, compared with 1.7 percent in the U.S.
The benchmark index for Japanese stocks lost 3 percent last year as the yen at its strongest annual average level against the dollar since at least 1971 dimmed the outlook for export earnings. The country depends on demand from China and the U.S., the destination for 35 percent of Japanese shipments.
Japan avoided an economic contraction following the 1995 Kobe earthquake that killed more than 6,000 people because factories from outside the affected region were able to offset lost production, according to a March 11 research note from Masayuki Kichikawa and Setsuko Yamashita, economists at Bank of America in Tokyo. Extra supply capacity may limit the quake’s drag on GDP to as little as 0.2 percentage points, they wrote.
“If you look at the history of earthquakes, they rarely cause permanent downturns in an economy and often the rebuilding efforts give rise to renewed economic activity,” said Komal Sri-Kumar, who helps manage $116 billion as chief global strategist at TCW Group Inc. in Los Angeles. “My expectation is that we’re talking about one or two quarters of downturn in Japan and no long-term impact. If the market goes down significantly, it’s an opportunity to buy.”
The ruling Democratic Party of Japan has few options to offset any growth that is lost to the quake. The Ministry of Finance projected in January that government debt will increase 5.8 percent to a record 997.7 trillion yen ($12.2 trillion) in the year starting April 1.
Bank of Japan interest rates are near zero and the country’s borrowing costs are the lowest in the developed world. Government bonds maturing in 10 years yield 1.27 percent, while the yen has depreciated against 12 of the 16 most-traded currencies this year, dropping 4.8 percent versus the euro and 0.9 percent against the dollar.
Japan’s economy shrank more than the government initially estimated in the fourth quarter because of a downward revision to capital investment and consumer spending. Moody’s Investors Service lowered its outlook on Japan’s Aa2 debt rating last month on concern about the government’s ability to tackle the world’s biggest public-debt burden.
“The big problem in Japan is that the government has been trying to stimulate the economy for so long that it doesn’t have a lot of gunpowder left,” said Tim Hartzell, who oversees $300 million as chief investment officer for Houston-based Sequent Asset Management, which invests in Japanese stocks through exchange-traded funds. “Japan hasn’t had any economic growth for years, and there’s no domestic demand.”
Wood, steel and construction companies may benefit from rebuilding in Japan, said Peter Sorrentino, who helps oversee $14.4 billion at Huntington Asset Advisors in Cincinnati.
Weyerhaeuser Co., a Federal Way, Washington-based owner of timberland, rallied 6.2 percent to $24.38 in the U.S. on Friday for the biggest rally since July 12. Seattle-based Plum Creek Timber Co. rose 2.4 percent, the most since Dec. 1, to $41.52.
American depositary receipts of Pohang, South Korea-based steelmaker Posco advanced 2.1 percent. Komatsu Ltd.’s ADRs climbed 0.3 percent to $30.75 after the shares fell 2.3 percent in Japan. It is the world’s second-largest maker of construction equipment. Peoria, Illinois-based Caterpillar Inc., Komatsu’s competitor, added 1.7 percent to $100.02.
“It was very specific infrastructure-type companies that people suddenly said, ‘Wait a minute, these guys will benefit,’” Sorrentino said.
Fukuda Corp., Ueki Corp., and PS Mitsubishi Construction Co., all of which are construction companies based in Japan, surged in the final minutes of trading on Friday as the quake drove the Nikkei 225 down 1.7 percent.
Fukuda rose 30 percent, the most among 1,666 stocks in the Topix, to 213 yen. The Niigata City-based construction company jumped 52 percent in the two days following a magnitude 6.4 quake in October 2004 and rallied 20 percent in a single session after a 6.8-magnitude temblor in July 2007, according to data compiled by Bloomberg and Wolfram Alpha LLC.
Ueki, a general contractor in Kashiwazaki, soared 23 percent to 165 yen for the second-largest gain in the Topix. PS Mitsubishi, a Tokyo-based maker of concrete, jumped 18 percent to 298 yen.
The Nikkei 225 has lost 5.6 percent since its 2011 peak on Feb. 21. The index’s gain since the bottom in global stocks 24 months ago is 45 percent, versus a 95 percent advance in the MSCI All-Country World Index, data compiled by Bloomberg show.
“People may move away from risk assets and fly to bonds in the short term,” said Tomomi Yamashita, an analyst at Shinkin Asset Management Co., which oversees about $6 billion, on Friday. “This doesn’t mean Japan’s economy itself will break down. With earthquakes, things go back to normal after a few months. So investors’ risk aversion will probably only last for a short while.”
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