Eric Chaney, chief economist for the AXA Group and the former chief economist for Europe at Morgan Stanley, comments on Japan’s economy and the equities market after the nation’s biggest-ever earthquake.
He spoke in an interview in Singapore:
On the impact of the earthquake on Japan’s economy:
“For Japan, it is a major blow, which probably implies a significant loss of output, partly due to the destruction and mostly due to the fact there is a big loss in electrical power, which has an impact on all the sectors of the economy in the whole country.
“The impact could be quite significant. The first fall of GDP may be not far from 2 percent. As power supply comes back, the economy will recover. The second stage, which will be reconstruction, will in turn generate very strong growth for Japan. For this year, growth in Japan is likely quite weak because of the loss of power production. For 2012-2013, I would expect much stronger growth than usual in Japan, due to the reconstruction of the destructions.”
On inflation in Japan:
“If supply goes down, demand is still there. How is Japan going to fill the gap? One, you let prices do the job. Prices go up, demand goes down.
“The other solution is import. Japanese people import the products that Japanese companies cannot produce. If you want to import, you have to accept an appreciation of the currency. In that case, the population can be able to buy cheap imports that the Japanese cannot produce.
“If you don’t want the currency to appreciate, i.e. you want to be on the side of companies, then prices will go up. And that is the choice the Japanese government has made with the blessing of the G7. That implies prices in Japan will rise, so there will be inflation in Japan.”
On the outlook for equities in Japan:
“Companies lose a lot of production, so it makes a lot of sense to have a downward adjustment. The stars are aligned for a very strong rally in the Japanese stock market because we know reconstruction of the country will take place even if it costs $300 billion. It will be financed by the government, by companies and by Japanese savings.
“Inflation is good for companies because it means more pricing power. The government does not let the yen rise. The future is quite brilliant. They will benefit from reconstruction, they will benefit from higher profit margins and a stable yen. I am very positive on the Japanese equities market.”
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