Korean industries showing mixed reactions to Japan quake

The massive earthquake in Japan will have a negative impact on global financial markets over the short term and worsen the short-term prospects of world stock markets suffering from inflation, high oil prices, and fiscal crises in Europe.

Experts disagree, however, over the quake`s mid- to long-term effects on the global economy. Some say the catastrophe in the world’s third-largest economy is a big concern for the global economy and stock markets in spreading worldwide distrust of the Japanese economy, which has been suffering from a huge fiscal deficit.

Others, however, say global stock markets will overcome short-term shocks and ride the wave of a booming construction sector by citing what happened in the wake of the 1995 Kobe earthquake.

On Friday, global stock markets also showed mixed responses to the devastating quake in Japan. Stock markets in Asia and Europe were hit hard but those in the U.S. rallied.

○ Situation different from after Kobe quake

The Kobe earthquake on Jan. 17, 1995, took a heavy toll on the Japanese economy and sent Japan’s benchmark Nikkei 225 index plunging 0.5 percent on the day of the disaster and almost 20 percent in the following three-month period. By contrast, Korean stocks fell a meager 3.5 percent and U.S. stocks rose eight percent over the same period.

Experts warn, however, that the latest situation will unfold differently. Unlike the Kobe quake, the latest quake affected broad areas and the Japanese government has little room to implement policy measures for rescue and recovery due to its huge fiscal deficit.

Sung Tae-yoon, an economics professor at Yonsei University in Seoul, said, “The scale of damage goes beyond Japanese territory as the latest earthquake struck industrial areas in northeastern Japan. If international financial markets begin to distrust the Japanese government given its huge fiscal deficit, the negative impact from the earthquake will significantly grow.”

If the earthquake prompts global investors, who have been withdrawing investment from emerging economies, to flock to safe assets, this will inevitably deal a blow to the Korean stock market.

○ Impact different by sector

Though the latest earthquake will wreak havoc on the Japanese economy, it will not have the same impact on all Korean industries, according to experts.

Huh In, head of global finance at Korea Institute for International Economic Policy, said, “The impact on the financial sector will be different from that on other industries. If Japanese investors withdraw their investment from Korea, this will have a negative impact on the Korean stock and bond markets while industrial sectors will benefit due to growing exports.”

In this case, shares in sectors such as refinery, oil and chemicals, semiconductors and cars that were hit hardest by the quake can rally in the Korean market. Korean semiconductor shares gained in the wake of the Kobe earthquake.

If disruptions in parts production arise in Japan and sea and air transportation are suspended, however, the impact of the quake could hit Korean companies hard since they are highly dependent on Japan for their parts.

In this situation, the value of the Japanese currency against the U.S. dollar will play a critical role. The yen gained almost 18.5 percent in the three months after the Kobe earthquake because Japanese investors sold overseas assets and insurers bought yen to raise funds for claim payments.

Barclays Bank said the latest earthquake will have a positive impact on the yen. Japan’s rivals including Korea will benefit from a rise in the yen’s value, and this is why stocks of Korean exporters are expected to rally.

The yen, however, might not remain strong for a long time. After the Kobe earthquake struck in 1995, the yen’s value gained in the initial three months but fell 27 percent at the end of the year.

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