Yoshikami: Devastation and Hope in Japan

The Japanese earthquake has caused terrible human suffering and our thoughts are with the Japanese people and all those affected by this incredible nightmare.

There is no way to underscore the depth of the tragedy we see playing out before us as the potential of a nuclear nightmare of unprecedented proportionsunfolds before our eyes. And while it pales in comparison to the human toll, the Japanese economy is also surely facing a period of great challenge.

Japan is the third-largest economy in the world and it's economy grew at a 3.9% rate in 2010, its best performance in two decades. Still, the impact of last week’s earthquake, tsunami, and the unfolding nuclear crisis cannot be understated. Barclays Capital estimates that the damage from the earthquake and tsunami is likely to cost some 15 trillion yen (US$184 billion), or about 3 percent of the country's GDP.

We think that this figure is probably on the low side. Additionally, the damaged Fukushima Daiichi Nuclear Power Plant along the coast of Japan will likely result in a tremendous headwind for Japan GDP.

Fukushima nuclear power plant shown on March 15, 2011 following earthquake and tsunami, Japan, Tokyo Electric Power Co.
Fukushima nuclear power plant shown on March 15, 2011 following earthquake and tsunami, Japan, Tokyo Electric Power Co.

The impact of the nuclear disaster will certainly be destructive to economic recovery and growth.

Unlike the 1986 Chernobyl nuclear accident which occurred in an isolated region in Ukraine, Tokyo is a key global financial center; this nuclear disaster will likely have a significant economic impact on business activity.

Multinational corporations in Japan are already pulling staff from Tokyo on fears that nuclear radiation will eventually reach the capital city. Many businesses in Tokyo have remained shut; the streets are empty. The economic consequences of the earthquake, tsunami, and radiation disaster have already commenced. Companies from Toyota to Sony will no doubt be greatly impacted by current events.

As a response to the crisis, the Bank of Japan injected more than US$280 billion into the financial system in an effort to stabilize the markets. Likewise, we expect the Japanese government to further increase debt levels in order to fund infrastructure repair. And the G7 has stated in clear terms that they will intervene as needed to help stabilize the Yen . Action is being taken to helpthe Japanese economy.

Based on the information we know today, we believe that the fall in Japan’s Nikkei index of nearly 15% this week is likely overstated. Yes, growth in Japan will be impacted but this is not the end of Japan. We believe that investors are overreacting and are pricing in the complete destruction of the Japanese economy. The areas most affected by the earthquake account for around 8% of Japan’s GDP. While the specter of fear will remain and impact economic growth, this is a far cry from complete economic Armageddon.

CNBC - Disaster in Japan - Japan Earthquake and Tsunami
CNBC - Disaster in Japan - Japan Earthquake and Tsunami

It is conceivable that this earthquake and the resulting drama might actually stimulate the economy enough to pull Japan out of the deflationary spiral they have struggled with for decades. One might compare current conditions to that of World War II in the United States when war time economic activity helped kick-start a recovery ending the Great Depression.

In keeping with this theme, we believe that economic growth will likely take a more V-shaped trajectory in the second half of this year in Japan as reconstruction efforts accelerate. This happened after the Kobe quake and we believe its reasonable to project this might occur again.

While time are difficult, current conditions in Japan are not insurmountable. Emotions run high in times of stress, but that does not necessarily make fears a reality. A more balanced view is needed. It's our view that a calm perspective suggests that there is a fragment of hope for Japan that should not be overlooked.

We hope for peace and resolution for those impacted in Japan by this terrible tragedy. As for the markets, opportunity exists in times of crisis. It is important to recognize that profit oftentimes comes in moments of great uncertainty as long as the risk taken is within reasonable levels.

Watch carefully for developments in Japan; you might be surprised to find out that the future is not nearly as bleak as some might suggest.

Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.