The March 11 earthquake and tsunami in Japan has seen calm stock market reaction -stock markets in the developed and emerging world have actually gained 1-8% in the last month, with the Nikkei Stock Average losing over 10%. Stock indices in India were among the top gainers, raising questions about the impact of the disaster to India. As per BusinessLine, most researchers now seem to be agreed that the demand destruction caused by the disasters in Japan will trim its economic growth rate in Japan over the next 3-6 months. However, there is a strong consensus that Japan's GDP growth will rebound in Q4-2011 and H1-2012, as the resilient nation flags off its reconstruction efforts. Lower demand from Japan may, in fact, offer a brief breather from rising commodity prices over the next 3-6 months.
For India, capital outflows due to Japanese investors are not of major concern as this has seen sharp reductions in the last five years from a net investments of Rs 8,000 crore in 2005 to net putllouts in 2010. Japan accounted for just 5% of inbound FDI. India also has among the lowest trade exposures to Japan in the region, with Commerce Ministry data showing Japan accounting for under 2.4% of India's import and export trade by value in the first six months of FY-11. China, in contrast, sources about 13% of its imports from Japan and ships about 8% of its exports to it, Malaysia and Indonesia ship about 10% of their exports to Japan.
The Tsunami-quake event may prompt affluent Japanese investors to more actively diversify overseas. Given that Japan's high net worth investors account for nearly 40% of the wealth in the Asia-Pacific region (holding assets worth US$3892 billion), that's likely to have big liquidity implications. The crisis could prompt large Japanese corporations to diversify their manufacturing base overseas and unravel the complicated structure of cross-holdings in corporate Japan. If that happens, India, as one of the most promising consumer markets in the Asia Pacific, may turn out to be a beneficiary, particularly companies in autos, financial services and pharmaceuticals in India.
Though the disaster has triggered a temporary decline in prices of critical commodities such as oil, coal and uranium from their peaks in February, researchers warn of a late 2011 or early 2012 spike, as Japanese reconstruction demand feeds into tightly balanced world markets.With about 8% of Japan's power generation capacity knocked out by the disaster, expectations are for Japan to immediately restore generation by bringing idling gas-fired or oil-fired power capacity on-stream. The impact of additional Japanese demand on global crude oil may be muted, but that on LNG may be sizeable for the region, particularly for user industries such as chemicals, pet-coke and fertilisers, in India. UBS Investment Research, in its March 25 report, estimates that with both India and China set to rely heavily on imports and mining costs heading up, thermal coal contract prices may be up sharply in 2011, especially if Japan shifts a little away from nuclear energy. Refining and petrochemical product makers such as Reliance Industries may be among the rare Indian beneficiaries of the Japanese disaster, as the shutdown of key Japanese petrochem capacity, tightens the supply of petrochemicals and packaging materials in the Asian region. Reliance may benefit through better volumes and pricing power, makers of consumer goods and downstream chemicals.