Investment update from Chris Gilchrist and Deborah Owen for The IRS Report

March 2011 - Japan

The earthquake and tsunami would probably have prompted a modest fall in the Japanese stockmarket. There is ample historical evidence to show that natural disasters at this scale - the affected area accounts for perhaps 2% of GDP - in fact have little effect on economic performance other than in the very short term. Even a massive rebuilding programme, which will be spread over many years, will have little effect on the overall rate of growth. However, the nuclear crisis at the Fukushima plant has raised far more serious economic fears.

Even if experts are right and contamination risk from this plant is low, the likelihood of widespread power shortages while other nuclear power stations' safety is reassessed threatens industry, especially large-scale manufacturing. Carmakers' sares were among the biggest fallers in the overall 20% decline from February's 10,800 high on the Nikkei 225 Index to Tuesday's 8,600 close.

Against this, those with long memories will recall Japan's amazing performance in the first oil crisis of the 1970s, when industry reduced its energy consumption by almost a third in two years without any reduction in output. This is a nation that excels at crisis management. And though politicians are unimpressive, the central bank is on the case with massive liquidity provision.

My current view is that if, like me, you have brought into Japanese equities on the basis of improving profitability, you should stay put. I shall keep an eye on the investment trust discounts - currently about 18% for JPMorgan Japan and 15% for Schroder Japan Growth - and if panic sends discounts higher, I will probably add to my holdings.

Our technical analyst Deborah Owen of Investment Research of Cambridge add the following:

Natural disasters are what the Austrian economist, Joseph Schumpeter, described as external events and they cannot be predicted from looking at the charts. Until last week the Japanese stock market was outperforming other global markets but the sharp falls over the past two days have broken the pattern of rising highs and lows.

With the 9,000 support area on the Nikkei 225 index having been broken last night, the next big chart level is the 2009 low of 6,995. Long term, the massive reconstruction that will be needed may well break Japan's two "lost decades" of sub-par growth. Support levels often prove to be areas of resistance on level on any rebound and a sustained move back above 9,000 would suggest the market was beginning to look past the immediate horror of this catastrophe.

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