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The Impact of the Japanese Tragedy

March 2011

We have all watched in horror at the destruction that has occurred in Japan over this past week. Our hearts go out to all those affected.
The massive earthquake and tsunami hitting Japan will definitely have an impact on economic growth in that area.  However, we do not believe it will last long. Operations of many Japanese companies will be disrupted. Also, the supply chains of other global companies depending on parts from that region will be affected.

Over the long term, we believe the earthquake is unlikely to have a major impact on Japan's economic stability.

Japan suffered a major earthquake in 1995.  Rebuilding from that earthquake cost Japan more than $110 billion, and the Japanese were able to absorb those costs. Today, Japan is a $5 trillion economy so even if this disaster proves more costly, the country should be able to absorb the rebuilding expense.

While the devastation is tough to take, history has shown that over the longer term, countries do recover from such disasters, often with economies stimulated by rebuilding damaged infrastructure.

Japan has a very slow economic growth and currently makes up about 8% of global GDP.   Anything is possible, but it is unlikely that an economic slowdown in Japan could bring about a global recession. However, the global economy is already fighting strong headwinds, such as high debt, higher gas and food prices. Geo-political events like we've witnessed in Egypt and Libya just add to the problems.  It is certainly plausible that Japan could turn the world economy in the negative direction.

What could happen to your investments?  Japan makes up about 15% of a typical international equity index. Emerging market indexes also have exposure to Japan. Portfolios managed by WH Cornerstone Investments have very little exposure to Japan. If you are holding an actively managed mutual fund in your portfolio, it is currently underweighted in Japan.

Over the last week, we have participated in several conference calls regarding this disaster.  In general, most international analysts believe that there will be no material impact to their investment thesis or their estimate of a business long-term value because of the earthquake.

Is Japan a buying opportunity? Not yet. The Japanese economy has to deal with other structural issues that existed before the earthquake. Japan has been fighting deflation because of weak consumer demand. Similar to the U.S., Japan's private sector is deleveraging, but the public-sector debt is growing to hazardous levels. We currently advise to stay clear.

We will continue to monitor all global events closely and take appropriate portfolio actions based on the risks and opportunities we see.
If you need assistance navigating the often confusing world of personal finance, please let us know. We work with small business owners and individuals to provide sound, visionary stewardship of their assets.

For our clients, please advise us promptly if there are ever any changes in your financial situation or investment objectives.


Feel free to give us a call if you want to discuss anything further.



Paula SignatureMike & Jenn married
Paula and Bill Harris, CFP

WH Cornerstone Investments