$200 Billion Hit to World’s 3rd Largest Economy! What to Do …

The images and stories out of Japan are truly heartbreaking. The devastating earthquake and resulting tsunami several days ago killed thousands of people, displaced tens of thousands more, and literally wiped several towns off the map.

They also unleashed the most serious global nuclear crisis since the former Soviet Union’s Chernobyl reactor blew up in 1986. I’m no nuclear engineer or seismologist. So I have no idea if we’ll see a full-scale meltdown, or if Japan will experience more severe aftershocks. But clearly the latest developments are not good, and the human impact will be severe.

So what about the impact on financial markets? The global economy?

Those are the parts of this crisis I’m more qualified to discuss, so I’m going to jump right in now …

Japan’s Economy Facing $200 Billion Hit!
What about the Rest of the World?

Japan’s $5.3 trillion economy is the third-largest in the world behind China and the U.S. It’s a major exporter of high-tech equipment and autos, and a big importer of energy and other commodities.

In 2010, the U.S. exported about $60 billion of products to Japan, and imported $123 billion from there. That translates to roughly 4.7 percent of total exports and 6.4 percent of imports.

So it goes without saying that a major disaster like the one Japan is experiencing will ripple through the global and domestic economy.

My research suggests that …

* The automobile food chain could be severely impacted, with parts shortages popping up and the inventory of Japanese vehicles for sale getting pinched. Companies such as Subaru and Toyota are already halting production in both Japan and the U.S., citing everything from power outages to the availability of parts like tires and semiconductors. The longer the crisis drags on, the worse those problems will get.

Parts shortages could hurt Japan’s auto factories around the world.

* The technology industry will face major headwinds. Japan makes roughly four out of ten lightweight chips that help smartphones and tablet computers store data. And those LCD screens in your tech products? Many of them come from Japan too!

If facilities operated by companies like Sony and Toshiba remain shut down for long, we’ll probably see shortages of key electronics products. Profit margins could also get squeezed as companies are forced to pay up for components from alternate suppliers.

* The nuclear power industry is going to be on the ropes. It was already next to impossible for U.S. utilities to build new nuclear power plants. None were built in the three decades after the Three Mile Island incident in 1979.

Japan’s crisis makes it highly unlikely that we’ll see much in the way of construction going forward. Instead, we should see a shift toward other fuels besides nuclear. A leading candidate? Natural gas. And as Ron Rowland pointed out yesterday, alternative energy sources such as wind and solar will also likely garner more interest.

All told, the Japanese economy could suffer losses of up to $200 billion. Goldman Sachs estimates Japanese GDP will shrink by as much as 2 percent in the second quarter, while Bank of America Merrill Lynch economists are expecting a 0.5 percent hit for all of 2011.

So it’s no surprise that Japanese stocks just plunged by almost 20 percent in two days, the biggest wipeout since the 1987 stock market crash.

As Rebuilding Gets Underway,
Here’s What to Expect …

But as bad as that may seem, the rebuilding process will get underway soon. That will likely BOOST Japanese GDP down the road. As economists at Société Générale note:

“Any disaster will diminish the value of assets and is never positive for the economy. The disruption caused by a disaster usually results in lower economic output in that particular month or quarter. However, in the longer term, disasters actually tend to bring a larger growth, rather than a smaller growth, because of the reconstruction demand for infrastructure and replacement demand for consumer durables.”

So after the panic subsides, it might be worth looking at key Japanese ETFs like the WisdomTree Japan SmallCap Dividend Fund (DFJ) or MSCI Japan Index Fund (EWJ).

Gold should continue its upward trend as investors seek a safe haven.

The crisis in Japan is also going to give the Federal Reserve yet another reason to keep monetary policy easy. So will the ongoing strife in the Middle East. I expect rates to remain pegged in the current range of 0 percent to 0.25 percent for many, many months.

Heck, I wouldn’t rule out the possibility of another QE program from Ben Bernanke and his buddies when the current $600 billion effort winds down in June. That means the U.S. dollar should remain under pressure vis-à-vis currencies in more fundamentally sound countries, and gold should remain in a long-term bull market. I would also stick with shorter-term U.S. Treasuries instead of longer-term bonds. And I prefer higher-quality corporate debt over junk. One fixed-income ETF we have in the Safe Money Report portfolio focuses on that part of the bond market, for instance.

Bottom line: The Japanese disaster will continue to reverberate through the global economy and the financial markets for some time. Make sure you’re positioned properly.

Until next time,

Mike