Japan and the consequences for the financial markets: “The crisis is opening up opportunities”

Joachim Klement is the Chief Investment Officer at corporate consultants Wellershoff & Partners. In this interview, the investment expert answers questions regarding the impact of the Japan crisis on the financial markets.

How will the crisis in Japan influence the global financial market?

The greatest worries are the economic and social consequences of the nuclear catastrophe, though these are still difficult to predict. What is clear, however, is the destruction wrought by the tsunami. Although this has had a negative impact on the economy initially, in the long term the necessary rebuilding of the areas destroyed in the disaster will actually boost Japan’s growth. Nevertheless, Japan’s indebtedness – already very high – poses a problem, meaning that the reconstruction work may well overburden the state, sparking a credit crisis. Whatever happens to the economy, however, the scarcely conceivable level of human suffering is a much greater tragedy than the situation on the financial markets. Unfortunately, this is something that always gets lost in the debate.

What will the consequences of the crisis for the Swiss financial market be?

The export business in Switzerland will certainly feel the impact. However, this will depend very much on what type of exports we are talking about. The building and construction industry will be the first to profit from the rebuilding work, whereas exports of luxury goods will stagnate for some time, with fewer people able to afford such items.

How will events in Japan impact on financial market trends?

At this stage, it is difficult to say, although we can assume that the general economic trends in Western Europe and North America will not change. However, it will be interesting to monitor how the mood changes over the coming weeks with regard to the issue of nuclear energy. We can see this happening in Germany already: The reactors are being largely shut down and inspections carried out. Similar discussions are taking place in Switzerland. Over the long term, this is set to benefit the market for renewables such as solar, wind and geothermal energy. Nonetheless, in the short term, investments in natural gas seem most promising, because the infrastructure is already there and could step in if a move is made to cut back on nuclear energy and shut down the reactors.

Economically speaking, is the sudden shutdown of nuclear power plants a good idea?

First and foremost, a sudden shutdown of the nuclear power plants would be very expensive. Then there is the fact that Switzerland, perhaps more so than anywhere else, would be significantly more dependent on imports of alternative forms of energy, because the country is not currently in a position to be self-sufficient. Energy would either have to be imported from other power plants or from coal or gas-fired power stations, which would in turn have to boost their capacities. It is therefore difficult to say that all nuclear power plants should be shut down all at once.

Can you suggest an alternative to suddenly removing nuclear power plants from the energy policy?

Moving away from nuclear power plants as quickly as possible would take five to ten years. Sensible alternatives need to be found to ensure that CO2 emissions do not increase despite the switchover. The process of converting the energy industry as a whole would therefore need to happen slowly, and the abrupt shutdown of the nuclear power plants would have to be avoided.

First the upheaval in North Africa, then the nuclear catastrophe in Japan. Is there any way the economy can continue to rely on the two main pillars of energy supply?

Switching to other forms of energy is virtually inevitable. Fossil fuels will one day run out. For instance, if you consider current levels of oil consumption, it quickly becomes clear that this is not sustainable in the long term. Looking ahead to the future, a shift to renewable energy sources must take place, although it is unclear how long this would take. In all probability, a change will only come about when oil and other fossil fuels become so expensive that sustainable forms of energy become a more attractive option in terms of cost.

Solar stocks have risen sharply since the Japan crisis. Will this boom have any long-term effects?

The rise in solar stocks can be considered a positive consequence of the catastrophe. All the same, the stocks will not keep on rising forever. Although the construction of solar plants remains subsidized at present, government debt in Western countries is so high that more and more savings will have to be made in future. In many countries, such subsidies will therefore have to be shelved in the long term. Switzerland, however, is a special case: It remains virtually unaffected by the need to make savings and therefore seems well placed to lead the way in renewable energy.

Your consultancy work involves long-term forecasts for the financial markets. All the crises of the past few years had one thing in common: they were virtually impossible to predict. What value do forecasts of this kind still have?

In our consultancy work, we have tried to find ways of avoiding forecasts, because they contain many uncertainties. We have restricted ourselves to issuing statements on trends that can be predicted with a high degree of certainty. For instance, interest rates have been falling over the past 20 to 30 years, so nobody is currently predicting that they will continue to fall for the next ten years, because they have already reached a low point. This is practically the only forecast we are confident in making: Interest rates will tend to rise over the next ten years. However, even this one prediction can have serious effects on the financial markets. Just like demographic trends, which can be reliably predicted. These trends indicate that economic growth will tail off and recessions will in future therefore be a more frequent phenomenon than in the past; this also means more economic and financial crises than in the past.

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