Japan Still Devastated but Outlook Hopeful

As Japan continued to battle an ongoing nuclear crisis in the wake of the earthquake and tsunami, its currency continued to fall on the world market thanks to a G7intervention on Friday, the first since 2000, that kept speculators at bay.

Warren Buffett also termed the country’s current situation a “buying opportunity,” and the World Bank said that, while the country’s economy would remain depressed through the middle of 2011, growth from rebuilding would result in a boost to the nation’s economy and end a “temporary growth slowdown.”

Reuters reported that the yen continued to fall on Monday after the G7 stepped in on Friday to prevent speculators from driving the currency’s value even higher; the yen had risen to a post-World War II high of 76.25 against the dollar on Thursday as speculators’ demand for the currency anticipated repatriation of funds for rebuilding and stop-loss orders were triggered by the dollar’s fall, driving it down even further.

The G7 intervention appeared successful, however, as Monday saw the yen extend its fall on the expectation of further intervention should the trend reverse. Closed markets in Japan also contributed to lower liquidity.

Warren Buffett also voiced his opinion that the earthquake presented investors with a rare opportunity. In the report, he said, “It will take some time to rebuild, but it will not change the economic future of Japan.”

Buffett, visiting a South Korean factory run by one of his fund-owned companies, added, “If I owned Japanese stocks, I would certainly not be selling them. Frequently, something out of the blue like this, an extraordinary event, really creates a buying opportunity. I have seen that happen in the United States, I have seen that happen around the world. I don't think Japan will be an exception.”

The World Bank seemed to agree with Buffett’s estimation, saying that while the devastation would briefly depress growth, both in Japan and in Asia, the surge of rebuilding to follow would boost its economy. In a supplement to its twice-yearly East Asia and Pacific Economic Update, it said, "If history is any guide, real GDP growth will be negatively affected through mid-2011. Growth should pick up in subsequent quarters as reconstruction efforts, which could last five years, accelerate.”

The report added, “A temporary growth slowdown in Japan will have a modest short-term impact on the region."

The World Bank further said that private insurers would likely absorb a small portion of the expense of rebuilding, with the Japanese government and the nation’s households having to absorb the rest. While it did not provide its own estimates of the cost of the disaster, it cited figures of $122 billion to $235 billion, or 2.5-4% of GDP, from other sources’ estimates, as possibilities.

The World Bank also theorized that the impact on developing nations in East Asia would translate to effects on exports, energy and finance. Regarding exports, if Japan’s GDP slowed by 0.25-0.5%, it could depress exports from developing East Asia countries by 0.75-1.5%. A 1% appreciation in the yen’s value would result in an increase of $250 million for the cost of regional annual debt service, and energy costs would likely rise, although that could benefit energy-producing nations such as Indonesia, Vietnam, and Malaysia.