How the disaster in Japan might have an effect on the surrounding Asian economies?

Or indeed, whether we are starting to see this already?

We have now reached the end of the official seven week Buddhist mourning period – jishuku. At Ashburton, we are not only more informed as to the ramifications of the events of 11 March 2011 on our Japan Equity Fund, but also more cognisant of the wider effect on the supply chains in the Asia region impacting on our Chindia Equity Fund.

In the Tohoku region, the three largest manufacturing sectors are electronic components, auto parts and metal products. Electronic components (EC) are largely considered to be intermediate products, therefore lost production impacts more severely down the supply chain. Exports of intermediate goods for the auto and electronics companies will result in countries such as Taiwan, Korea and Thailand suffering supplies shortages, particularly due to the fact that substitute components are often unavailable. However, perhaps even more significant is the knock-on effect that this has on China’s re-export market, which relies on in-bound products from Korea, Taiwan and Singapore composed largely of Japanese components that are then exported on from China.

The major concern for both Japanese and overseas companies is the impact of the power shortages envisaged for perhaps the next six months. Should these shortages drag on into Q4, then this will have negative implications for industrial output in the medium-term, but will do more longer-lasting damage to Japanese producers, as overseas customers may revert more permanently to other producers. Whilst neighbouring countries will benefit in some areas as the supply chain demand moves away from Japan, these same countries will also see a slowdown as delays of components result in reduced volumes of goods.

China is now Japan’s top trading partner with the country shipping in excess of $100bn of exports to Japan annually. However, on the route of goods in the opposite direction, Japan is only China’s third largest trading partner, suggesting that any short-term slowdown in production will not hinder China’s run towards becoming the world’s largest economy.

The Japanese are more aware than anyone that “the big one” could strike at any time, knocking out Tokyo. Part of this worry has led to the dispersion of production facilities around Japan, but more recently has been one reason why Japanese corporate have been seeking to offshore their production facilities with China, Indonesia and India, amongst others, welcoming Japanese companies. This offshoring has been one of the reasons why Japanese corporate have seen peak earnings in recent years, despite the strength of the yen. One outcome from the recent disaster in Japan has also been that Chinese companies have also now realised the importance of dispersal of facilities, particularly when coupled with the Sichuan earthquake in 2008.

The nuclear story will also lead to changes across the region in terms of regulation, construction of new plants and those industries affected by the situation at Fukushima nuclear plant. Chinese food manufacturers have seen an increase in demand, as consumers become wary of the radiation risks associated with food from Japan.

One area that should see additional investment will be the renewable energy resources, such as wind and solar, as fears prevail about the safety of nuclear energy. Although China is planning on increasing its nuclear power plants to near 50 by 2020, we may see further investment in alternative green energy resources in China, as well as India, as both show a willingness to consider other “safer”, cleaner energy sources.

Although much of the news flow may on the surface be quite downbeat, initial progress seems to be ahead of expectations, with the infrastructure rapidly being restored and production facilities being brought back on line more quickly than first forecast, hence our belief that corporate Japan will recover and return to some form of normalcy towards the end of 2011.