We are starting to get specific reports from individual companies in Japan that fill in some of the details on how long any economic recovery will take.

Below I’ve reprinted a recent update from Komatsu (KMTUY), the Japanese maker of construction machinery. Note the company’s outreach to suppliers and their own difficulty in procuring parts and materials, and the long-term worry about the electrical power supply.

“With respect to our production plants in the concerned regions (Ibaraki, Oyama and Kooriyama plants and Komatsu Utility Co., Ltd.), nothing has changed in their conditions since our last news release. We are continuing inspection and repairs of facilities and equipment of these plants. While Komatsu Utility has resumed production, resuming overall production still remains indefinite. Concerning affected suppliers, we are supporting to their inspection of facilities and equipment and their recovery to normal production. 
Concerning other assembly plants (Awazu Plant in Ishikawa Prefecture and Osaka Plant in Osaka Prefecture) which were not directly affected by the earthquake, we are stopping production at some lines this week due to the following situations. We are continuing inspection and repairs at the Oyama Plant, our supply center of engines and hydraulic units. We are also experiencing some procurement difficulties in some parts and materials mainly due to effects of the earthquake as well as problems related to power supply and the nuclear power plant in Fukushima Prefecture.”

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Komatsu as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

One long-term consequence of the earthquake, tsunami, and nuclear meltdown in Japan will be an acceleration of the hollowing out the Japan’s export manufacturing

One criticism of Japan’s big exporters during the strong yen period is that companies like Sony, Toyota, and Canon had been slow to move production out of Japan to low-cost production platforms such as China and Vietnam.

Part of that came from a reluctance to disrupt long-term relationships with suppliers in Japan. Part of it came from a frayed but still strong traditional commitment to life-time employment for workers.

Whatever the reason Japanese companies haven’t moved a aggressively as those in the United States to send manufacturing functions and manufacturing jobs overseas.  And that left Japanese companies paying higher costs as the yen appreciated.

The destruction of factories at companies such as Toyota have garnered the bulk of the headlines during this disaster. But Toyota can relatively quickly shift production to overseas plants.

The thousands of smaller companies that make up the supply chains for the big exporters don’t have that flexibility. Many are tied to a single plant and right now they’re looking at either the destruction of their own factories or of the exporting giant they supplied.

Some of these plants will get rebuilt—but many won’t or when they are the operators of these factories will find that some of their work has fled overseas. That one reason the Bank of Japan and the Japanese government is flooding the economy with money. They want to see Japanese factories rebuilt quickly to minimize job losses.

I doubt they’ll be very successful. After all the off-shoring of Japanese manufacturing was a long-established trend before this disaster. It was only the pace of the transition that was at question.

Now I think that pace will pickup. Eventually that will be good news for the profits of Japanese exporters. No way it’s good news for Japanese workers or the Japanese economy.

Could negative investor sentiment on Japan be wrong?

Japanese stocks soared overnight, February 17, to their highest level in nine months on forecasts of higher economic growth.

Of course, the higher forecasts of economic growth were for the United States and the Japanese stocks that soared highest were those of Japanese exporters who get the majority of their sales from North America.

Canon (CAJ) gets about 80% of its revenue from overseas—the camera maker’s shares were up 3.4% in Tokyo. Honda Motor (HMC), which gets 84% of its revenue abroad, rose 2.3% in Tokyo trading. Nintendo (NTDOY), Japan’s largest maker of handheld video games, was up 3.9% in Tokyo.

In contrast the Nikkei 225 index, which dilutes its exporters with a strong dose of domestic stocks, rose just 0.38%.

Japan’s more inclusive Topix index is up 7.6% in 2011. That’s driven the average price of stocks in the index to 16.5 times forward earnings. That’s more expensive than the U.S. Standard & Poor’s 500 or the iShares MSCI Emerging Markets index. The picture looks very different for Japanese exporters who are taking advantage of the recovery in the U.S. economy. Canon, for example, trades at just 14.9 times projected 2011 earnings per share.

But earnings per share has long been a deceptive measure of value when it comes to Japanese companies that often emphasize revenue and growth over profits. Read more

Egypt doesn’t have a corner on the crisis market: S&P downgrades Japan’s credit rating

If you’ve let the crisis in Egypt take you mind off some of the globe’s other less splashy crises, let me direct your attention to Japan.

On January 26 Standard & Poor’s cut its credit rating on Japan to AA-. It was the first cut to Japan’s credit rating by S&P in nine years. The ratings company cited Japan’s huge $11 trillion in government debt and the country’s dysfunctional politics as reasons for the downgrade. The Japanese government, S&P said, lacks a coherent strategy for addressing the country’s debt.

The biggest immediate effect of the downgrade has been to put downward pressure on the yen and raise fears that Japan will have to pay higher interest rates on its debt. (The latter seems a distant worry given the country’s massive pool of domestic savings.) Economy and Fiscal Policy Minister Kaoru Yosano called the downgrade “regrettable.”

I’d make an argument that this is just one adjustment in a string of many that the global financial system will need to make as it adjusts to a new world pecking order. Read more

It’s starting to feel a little bit like June 1930. And that’s worrying.

In that month President Herbert Hoover, despite deep misgivings, signed the Tariff Act of 1930, known as the Smoot-Hawley Tariff after its two authors, into law. By raising U.S. tariffs, the act set in motion a competitive trade war that devastated the global economy and helped create the Great Depression.

Watching the unilateral decision by the Japanese to intervene in the currency markets to force down the price of the yen in order to protect Japanese exports, I’ve started to worry about a replay of that history. This time the starring role would go to competitive, beggar-your-neighbor currency interventions and not to any tariff.

But the effect could be the same: Each of the world’s governments acting to protect the interests of its own economy would kill off growth in the global economy.

It’s still just a worry mind you. And we won’t head down this path to lower economic growth unless Japan gives signs that it’s not content with a relatively small drop in the yen and Europe and China star to retaliate to protect their own exports. But the consequences would be so disastrous that I think it’s worth understanding how this yen intervention could trigger Smoot-Hawley II. Read more