By Simon Somerville, manager of the Jupiter Japan Income Fund.

Date on which written: 14 March 2011

Initial thoughts

Both members of Jupiter's Japan team were in Tokyo last week and thus experienced the terror of the earthquake at first hand. We are both back safely in the UK now and our deepest sympathies go out to those who have lost family and friends to this terrible natural disaster.

This massive earthquake caused little physical damage in Tokyo - the ability of Japan's skyscrapers to cope with such a large earthquake had been questioned but the first hand evidence shows that they have more than succeeded. 

The area immediately affected by the earthquake and the more devastating tsunami accounts for approximately 6%-7% of Japan's total industrial output. The Tohoku region is a large food producer and it will result in Japan having to import food going forward. There are also several large IT-related factories there, and so individual companies will suffer, e.g. Shin-Etsu Chemical makes over half of Japan's 300mm silicon wafers in the area. Toyota and Nissan also both have large plants in the area - accounting for 5% of their total global production. Clearly, the impact of the tsunami will have an immediate negative impact on Japan's industrial production.

The biggest concern is clearly the situation at the nuclear plants - in particular Fukushima. Currently 11 of Japan's 54 nuclear plants are offline and this has cut Tokyo Electric Power's output by 25%. There are now rolling blackouts planned through northern and eastern parts of Japan. With Western Japan using a different generating frequency, there is only limited ability for Tokyo to be supplied from different generators. The lack of power will also negatively impact industrial production particularly at auto manufacturers.

Offsetting the negatives from above, the Bank of Japan has already pumped $185bn into the money system and the government will announce an emergency budget to help the economy recover (hopefully quicker than the Kobe experience, which took 40 days to announce). It is worth noting that one positive impact of the earthquake may be to unite politicians, bolster Prime Minister Kan's position and result in more positive constructive reform going forward.

Even with some food and water shortages, power blackouts, limited railway services, continual aftershocks and nervousness over the Fukushima nuclear plant, there is little sign of panic in Japan. There has been no sign of looting at all and individuals have been queuing peacefully to get their bare necessities. Essentially this is a uniting event and their resilience is admirable.

Portfolio Impact

The fund marginally outperformed on Monday 14 March when the stock market fell 7.5% in yen terms, though we had several stocks that had specific reasons to fall. Most impacted was our defensive position, East Japan Railway, which fell 18% as its operating area has been seriously affected by the earthquake, the tsunami and the electricity shortage. Mitsubishi Heavy Industries and Toshiba were both weak, hurt by their exposure to nuclear power. Finally Tokio Marine fell 16% on understandable concern over their insurance and reinsurance operations.

On the positive side we had excellent relative performance from the majority of the portfolio helped by our focus on cashflow and strong balance sheets. 

The market's 7.5% fall added to the 1% immediate fall on Friday 11 March. We plan to take advantage of the steep corrections to add to those positions with which we feel most comfortable. With so many present uncertainties, it is difficult to be more specific at this time.

It is perhaps surprising that the yen has not really moved against major currencies, particularly following the significant BoJ stimulus and the likelihood in the short-term that imports will rise. Offsetting this is the potential for Japan to repatriate assets, i.e. by selling US treasuries. Therefore, net net, there may be little impact on the currency.

NOTE
Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM) are both authorised and regulated by the Financial Services Authority and their registered address is 1 Grosvenor Place London SW1X 7JJ. They are both subsidiaries of Jupiter Investment Management Group Limited and the group is collectively known as "Jupiter". The above commentary represents the views of the Fund Manager at the time of preparation and may be subject to change and this is particularly likely during periods of rapidly changing market circumstances. Their views are not necessarily those of Jupiter and should not be interpreted as investment advice. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given.