Investors flock to Japanese stocks after quake

NEW YORK -- Investors are flocking to Japanese stocks in the wake of the costliest natural disaster in history.

Exchange-traded funds that hold Japanese stocks brought in a record $1.2 billion the week after a devastating earthquake and tsunami hit Japan and caused the worst nuclear crisis since the Chernobyl disaster, according to TrimTabs Investment Research. The inflow to Japanese funds represented a jump of nearly a fifth of total assets.

The rash of buying is a signal that investors believe that the disaster, which claimed thousands of lives, will lead to economic growth as the world's third-largest economy rebuilds much of the infrastructure along its northeastern coast.

"Natural disasters often have dramatic effects on the markets, but very often they are only short-term ones," said David Kelly, the chief market strategist for JP Morgan Funds.

JP Morgan analysts anticipate that Japan's gross domestic product, the broadest measure of an economy's health, will start to grow in the second half of the year from reconstruction and reach a rate of 4 percent during the last three months of the year. Any economic growth over 2 percent is large for Japan, which has an aging population and has battled deflation since its stock market burst in the early 1990s.

The rash of buying of Japanese stocks came after the country's benchmark Nikkei 225 index, the equivalent to the Dow Jones industrial average, fell 16 percent over two days in panic-driven selling, reaching its lowest level since the 2008 financial crisis. The index bounced back nearly as quickly, jumping 5.6 percent on March 16 and 4.3 percent on March 22. The index is now down 7.8 percent since the earthquake.

Japanese stocks were among the cheapest in the world even before the disaster. Though Japan is the world's third-largest economy, its national debt amounts to 200 percent of its gross domestic product, the largest of any industrialized nation. The Nikkei remains about 70 percent below its peak from the early 1990s.

Cleanup and rebuilding costs in the country will be considerable. The Japanese government said Tuesday that expenses could reach more than $300 billion, more than double the $125 billion in damage caused to New Orleans and the surrounding region by Hurricane Katrina.

Companies that are expected to take part in Japan's rebuilding efforts have benefitted the most from the surge of investor dollars. Taiheiyo Cement Corp. has jumped 32 percent over the last week, while Japan Steel Works Ltd. has gained 25 percent over the same time. Mitsubishi Heavy Industries Ltd., an industrials company that makes products from airplanes to air-conditioning systems, has gained 19 percent.

Kubota Corporation, another industrial company, is up 17 percent over the last week. Caterpillar Inc. has gained 7.5 percent as investors assume that the industrial equipment it makes will be used as part of the cleanup and rebuilding process.

"Caterpillar is going to get whatever is left over after Mitsubishi Heavy Industries and Kubota," said Paul Dietrich, the chief executive and chief investment officer at Foxhall Capital Management. "What would we do here? Politics are going to be involved."

Some investors said that Japanese companies were attractive even before the earthquake because they make high-quality consumer goods and technology that are exported to the United States and China. Neil Hennessy, chief investment officer at Hennessy Funds who manages two Japan-focused funds with $75 million in assets, said that Japan remains a buying opportunity.

"In the end, Japan is still going to make fantastic products, and they are still going to be the gateway to China's middle class," he said.