Guest Post: Made In Japan

By Peter Tchir of TF Market Advisors

Made in Japan

I still remember when there was a certain cachet to Japanese made products.  They were technologically advanced and better built than anything else available.  Sonyo, Toshiba, Toyota, Honda, Kawasaki, Yamaha, etc. were all dominating brands.  You could find products in Electric City in Tokyo that were generations ahead of what you could purchase in New York City.  That gap has narrowed and in many cases reversed over time, but now we might be hitting a stage where 'Made in Japan' is a big negative.

So far, most analysis about the reconstruction of Japan is based on the the experience from prior earthquakes.  I'm not sure how relevant prior earthquakes were to begin with, but Japan has now moved from a tragic earthquake event, to a nuclear event.  The nuclear problem continues to grow, and it is very different from the devastation of the earthquake or tsunami.

As more information comes out indicating much higher levels of radiation than previously thought and no real evidence of the situation getting under control, its time to examine the long term effects of this on any recovery.  The first, and most obvious difference, is you do NOT rebuild in areas that have been exposed to high levels of radiation.  This complicates the rebuilding process immensely as not only does property plant and equipment need to be replaced, you need to find new locations for them.  This is much harder logistically to do than the already difficult task of rebuilding.  Are we at this stage yet?  No, but the likelihood that there will be a large area of land where people do not want to live or work is increasing.  Using prior earthquakes as a guide is far less useful once land that was useful is no longer available.

The second problem is that goods 'Made in Japan' may become viewed as tainted.  So far, people are talking about when the supply chain will be fixed.  Its a function of rebuilding and solving the rolling blackout issue.  That may be the case, but as the radiation problem continues unabated, will people want to purchase products made in Japan?  Will there be a concern, valid or not, about radiation from products produced in Japan?  Given the near panic the U.S. media goes into at any sign of a salmonella or other tainted food outbreak (remember when you couldn't get jalapeno peppers at Chipotle grill) its not hard to imagine the media frenzy over irradiated products from Japan.  I think we already over react to fears of health risks.  I'm not sure why we do, but time after time we act irrationally once fears of health risks are brought up.  We tend to overstate the risk, overstate the potential for it to spread, and understate our medical ability to deal with it.  Tainted food, bird flu, anthrax....all of these hit, create a wave of almost hysteria, and then fade into the background.  Most recently, with the oil spill, shrimp sales nose dived, but that was relatively easy to manage.  Restaurants put up - No Gulf Shrimp signs, and if it didn't look black from oil, people accepted that it was okay.  Radiation is different since it can be in anything, and ironically, many of the products that have Japanese components emit some radiation to begin with (cell phones as a prime example).  Rational people will argue that any radiation detected is normal.  Fear-mongers will claim its related to Japan.  Again, we live in a country where many people worry about what type of plastic bottles are used as they are concerned about long term leaching of the plastic into the water its holding.  Its not much of a stretch to imagine people getting worried about products that potentially have extra radiation having being made in Japan.  I can see the Oprah show already.  Its easy to see why some companies, and even politicians would be happy to jump on the bandwagon, to push a made in America agenda.  Its not hard to see a politician lobbying for stricter controls so that factories in their district can gain market share.  On the surface this would be very bad for Japan, but good for America.  On the other hand, almost everyone agrees protectionism is bad, and we have generally managed to avoid it during this financial crisis, but an event like this could create the conditions for growing protectionism.

None of this has happened, and its still a low probability event, but its not a zero probability anymore.  The chain of events is fairly straightforward and as conditions at the reactor deteriorate from already high levels, the chance that land usage will be affected long term is very real.  Any analysis based simply on prior earthquakes then misses the point.  We need to see more detailed analysis of what happens to the recovery options in Japan under nuclear scenarios.  The most likely is some loss of land use, and a change in the energy mix the country uses (this was not affected by prior earthquakes, but will be affected this time).  Its wrong to compare Fukushima to Chernobyl, but its also wrong to compare this to Kyoto.

The potential that 'Made in Japan' carries a negative stigma affecting long term recovery there is a bit farfetched, but not at all impossible.  Its easy to scare people, and radiation has all the qualities that make it a prime candidate - you cannot see it, its extremely harmful, and since its already there, its hard to determine the source.  Its very easy to see how any evidence of radiation in products coming from Japan can quickly grow to an irrational but devastating movement to avoid 'Made in Japan' and if that occurs, all bets on the recovery there are off.

I was long Japan post quake as the market seemed to have over reacted to the earthquake.  The bounce, though, has been large and profitable, so I'm out, and as the situation in Fukushima continues to deteriorate, the market looks expensive as its not pricing in the potential consequences of this being a nuclear event rather than an earthquake event. 

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