Disasters in the country caused temporary turbulence but won't shake its monetary system and economic resilience.
Japan's tragic earthquake triggered a devastating tsunami and radiation leak, causing severe damage to the country and its people. The triple disaster also sent global share prices tumbling. Japanese banks were among the hardest hit stocks.
Naturally, investors are deeply worried how big and how long the negative impact on the banking industry will be. From my observation, the Japanese disasters are unlikely to bring about a new financial tremor.
Japan is the third largest center of foreign exchange trading in the world, with an average daily trading volume of $312 billion. Many US and European banks operating in Japan evacuated their employees and shifted the trading business to Hong Kong or Singapore after the quake and the tsunami.
In a sharp contrast to the Western banks, Bank of China's Tokyo branch, at the request of the local financial regulator, did not stop its business in Japan in the face of aftershocks and the fear of nuclear radiation. Because banking business volumes have seen a significant and sudden increase during the emergency period, our staff, including local residents and expatriate employees from China, had to work longer hours, often spending hours in traffic every day to get to the office. Over weekends they have been visiting corporate customers, in order to continue providing them with financial services.
The behavior of our bank's staff members not only demonstrated a good work ethic and team spirit, but also showed their strong faith in the Japanese economy and the financial system.
It seems that this temporary blow to the Japanese economy, despite varying estimates of the eventual loss to GDP, will not change the fundamentals of economic growth. The Japanese economy grew by 3.9 percent last year, its best performance in two decades. The need to rebuild the devastated areas will create a huge potential for further development, even attracting funds from outside Japan, including private equity, foreign bank loans and sovereign wealth funds, into the country.
Basically, Japanese enterprises are still in a quite stable financial position, and have strong capabilities to continue developing and innovating across many areas. Most notably, Japan is widely known as a player in new technologies in energy conservation as well as environmental protection. Therefore, the rebuilding phase in Japan emphasizes a "green recovery", and the reconstructed infrastructure should be more advanced, smart and energy-saving.
In terms of Japan's supply chain risks across the globe, many Japanese plants remain closed. But this will be a short-term disruption lasting weeks or months (because of the power cuts and bottlenecks in railway and port systems) rather than a permanent damage to production facilities. It will be mitigated by a gradual resumption in operations. Also, many Japanese firms have redundancies in their supply chains, so they can switch production to other facilities and compensate for the closures.
The Japanese banking industry, still recovering from the global financial crisis, will see reduced profits after the triple disaster if it makes more loan impairments. Nonetheless, it remains healthy and stable.
Unlike many Asian countries and regions, Japanese banks have not seen excessive lending resulting from stimulus measures adopted during the depths of the global financial crisis, and instead have steadily lowered their loan-to-deposit ratios.
Also, according to the Bank of International Settlements, Japanese banks' consolidated external claims reached $2,710 billion at the end of last September. In other words, they are well positioned to sell foreign assets to raise cash if necessary. Given that the international banking sector has little exposure to Japanese banks, it is likely that the negative impact on the international banking system will be limited.
Traditionally, many market analysts have a poor record of analyzing the economic and financial impacts of shock events or disasters, leading to overreactions in equity and foreign exchange markets. This time is no exception. With Japanese stock markets having tumbled to very low valuations, there are undoubtedly buying opportunities for value-seeking investors.
As for the foreign exchange market, the G7 central banks have undertaken a joint intervention aimed at helping Japan halt the revaluation of the yen. As a result, the market has cooled, and investors can now return to making "carry trades", in which the buying of riskier, higher-yielding assets (such as equities, commodities and property) is funded by selling low-yielding yen. The weakening yen can help Japan recover faster.
In reality, Japan's gross public debt is about twice its GDP, and more government spending will be needed to shore up reconstruction. This causes much concern that a tremendous debt bubble could burst. Nevertheless, considering the quite high percentage of savings in Japan, along with the fact that banks and insurers hold 95 percent of the debt domestically, the risks should be manageable.
The Japanese insurance industry faces material losses even though no detailed figures have been disclosed. Non-life insurers' losses are estimated to be larger than that of life insurers. But there is little possibility that such insurers could go bankrupt, because they have dispersed risks globally through re-insuring business and the Japanese government must protect them.
The tragedy has cast a shadow over Japan's new growth strategy for the next 20 years, approved last June and due to be implemented from this month. The resilience of the Japanese economy, however, will enable the country to cope with what has happened.
From the Chinese perspective this will no doubt create new opportunities for the two countries to expand cooperation in a win-win situation.
There is no need to panic over a financial meltdown in Japan. The Japanese financial system will surely continue to play its vital role in the country's growth.
(from China Daily)
April 6,2011
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