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By Jason Stipp | 03-11-2011 03:52 PM

Nervous Markets Apt to Oversell on Japan News

Causeway International Value manager Sarah Ketterer comments on the Japan disaster's economic impact, the reconstruction to come, and the market's reaction so far.

Jason Stipp: I'm Jason Stipp from Morningstar. We did start to see the Japanese market recover on Wednesday, but there's still a lot of uncertainty in the area, so we're checking in today with Causeway's Sarah Ketterer--she's a portfolio manager on the Analyst Pick Causeway International Value Fund--to get some context on the situation in Japan today.

Sarah, thanks for calling in.

Sarah Ketterer: Thank you.

Stipp: The first question I have for you, Causeway released a report this week about the economic impact of the earthquake and tsunami in Japan. It does still seem like there are some uncertainty out there. As you're looking at it today, do you have concerns that there will be a lasting economic impact from the damage; things that they won't be able to recover from at this point?

Ketterer: The greatest unknown as we evaluate it is the nuclear contamination, and the news coming from Tokyo Electric Power is patchy at best, so we, like everyone else, are struggling to determine just how extensive this contamination can be. Some of it has to do with the shift in the winds and factors that are entirely out of the control of just about everyone involved, but that's the biggest unknown as far as we're concerned.

We expect power to be resumed. Now there are power shortages and rationing going on in a significant part of the Honshu area, but it's the contamination that's really the big question mark.

Stipp: So you had spoken [in the report] a bit about where the epicenter of the disaster was, and aside from the unknown about the potential contamination. What effect potentially on GDP are you seeing just from the damage that we know about, and we know certainly has already occurred? What might investors expect about the headwind on the Japanese economy that would come from that disaster, right now?

Ketterer: Well, we talk about this as a local problem--meaning it's very much confined to Japan, and this Northeast region, this Tohuku region has about six prefectures, makes up 7% of Japan's population, and about 6% of the country's total GDP.

Now a good part of the production from that area has been wiped out. But Japan is a country of excess capacity. There is a lot of supply in other parts of the country. I'd point to automotive, where some of the plants there can be literally replaced by manufacturing elsewhere in the country. It's the supply shortages that are the issue, and maybe the single most critical factor for Japan is power outages, because this is occurring across the country. Those nuclear reactors are all shut down. There were three major facilities, all shut down, that takes a good 18% to 20% of the country's power, and eliminates it.

So this is a serious problem and with this power outage, we think that could cause half a percentage point of reduction in Japan's GDP. So instead of say 1.7% real GDP growth, we're looking at something more like 1.2%.

Stipp: Sarah, you did a little bit of comparison in this report between the Kobe earthquake that happened in '90s, and what the economic impact of that was as Japan was rebuilding. As you're looking at recovery and rebuilding in Japan from this particular disaster, what impacts might you forecast, provided that some of these major unknowns are able to be stabilized?

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