野村證券

Near-term downward pressure looks inevitable, but serious correction unlikely

1. The recent major earthquake is bound to exert downward pressure on Japanese equities as a whole over the near term, in our view. Based on declines after the Kobe earthquake, we expect the TOPIX and the Nikkei Average to decline and then rebound in ranges around 850–900 and 9,500–10,000, respectively.

2. Although we expect this earthquake to provide further impetus to the correction in Japanese equities that has been occurring since mid-February, we do not envision a serious correction for the following reasons. First, industrial production only fell in the immediate month following the Kobe earthquake. Second, the government is likely to provide fiscal support to the regions affected. Third, we see little risk that the earthquake will trigger a sharp rise in the value of the yen.

3. We expect the following sectors to perform relatively well as they are more likely to benefit from reconstruction demand: construction, metal products (including bridges, construction materials, housing equipment), glass & ceramics products.

Japanese equities overall bound to come under near-term pressure: In ouropinion, the recent earthquake is bound to exert downward pressure on Japaneseequities as a whole over the near term, partly because reports over the weekend pointto greater damage than initially anticipated. In terms of the impact on the Japaneseeconomy, observers are increasingly comparing this recent earthquake with the Kobeearthquake of 1995, when the TOPIX and the Nikkei Average fell 8% in the first fivedays thereafter before rallying 5% over the following 10 days, thereby falling 3% over15 days following the earthquake. Applying these numbers to today’s markets seesthe TOPIX and the Nikkei Average moving in ranges around 850–900 and 9,500–10,000 respectively. If the Nikkei Average and the TOPIX did fall below 10,000 and900 respectively, we think they could well find technical support around their 200-daymoving average lines, which as of 11 March stood at 9,840 and 873 respectively.

We do not envision serious correction: Although we believe economic activity isbound to fall in the immediate wake of the earthquake, we expect output to recoverrapidly as plants are repaired or production is transferred to alternative sites. Industrialproduction fell 2.6% m-m in January 1995, the month of the Kobe earthquake, butrecovered in February and was back up at its December 1994 level by March.Moreover, we expect the Japanese government to provide fiscal support to theregions affected. In the case of the Kobe earthquake, the government providedsupport totaling ?3trn, equivalent to the estimated amount of damage caused. Thiskind of policy response would probably help to provide some stability to the equitymarkets. Meanwhile, Japanese companies are now in a very different place toJanuary 1995 in terms of fundamentals and share price valuations. In January 1995,the TOPIX had a twelve month-forward ROE of 3.8% and equivalent P/E of 53x,versus equivalent metrics of 8.4% and 14x for March 2011. Also, whereas substantialyen appreciation through April constituted a major cause of the fall in Japaneseequities in 1995, we see little risk of this happening again in 2011, partly because theBOJ has indicated that it will implement additional monetary easing if the yen starts tostrengthen. Overall, although we expect this earthquake to provide further impetus tothe correction in Japanese equities that has been occurring since mid-February, wedo not envision a serious correction.

Impact by sector: The sectors that performed best in the month following the Kobeearthquake were those most likely to benefit from reconstruction demand, namelyconstruction, metal products (including bridges, construction materials, housingequipment), and glass & ceramics products. We expect these sectors to performrelatively well on this occasion too. Meanwhile, the sectors that performed worst(excluding transportation equipment and electrical appliances, which we think were hithard by the strong yen) were nonmanufacturing sectors such as marine transportation,warehousing & harbor transportation services, information & communication,wholesale trade and retail trade. Although direct comparisons are impossible becauseof differences in economic conditions and the economic structure of the regionsaffected, it may be that whereas damage to manufacturing output can be overcomerelatively quickly by repairing plants or transferring production to alternative sites,demand declines within nonmanufacturing sectors will take longer to overcome.Nomura analysts will be providing more detail on the impact on individual sectors andcompanies. (MS)