While rescue operations are still underway, it may seem premature to discuss the implications of Friday’s earthquake and tsunami to the Japanese economy, world stock markets and consequently your investments. But of course investors are concerned about the implications for their investments and world stock markets have already reacted.

Our first thoughts are of course for those who have suffered huge loss in this tragedy, the effects of this disaster will be felt on families and the affected region for generations to come.

From an economic perspective, it is perhaps possible to make some estimates of the impact of Friday’s events based upon the experience of the Kobe earthquake that struck Japan in January 1995.

The situation at the nuclear plants in Japan is obviously an added dimension which is not currently possible to quantify with news changing hourly. Our comments and observations therefore assume that the authorities are able to contain a serious nuclear incident.

The Japanese economy

It is highly likely that Japanese GDP will suffer an immediate impact. Some experts believe that the disaster could reduce Japanese GDP by as much as 1% and the total cost could be in excess of £100bn.

It is likely though that GDP will recover as rebuilding of villages, towns and infrastructure boosts growth.

Furthermore, profits of companies exposed to the affected region will be hit due to production disruption as factories and businesses close to save energy. Again though, profits should then recover as the situation normalises and as spending on rebuilding picks up.

All economic activity in the affected region is likely to be significantly reduced for some time. Economic activity across the Tokyo Metropolitan area will also be reduced due to the rolling power cuts, for example some major manufacturing companies, such as Toyota, have suspended production at least until 16th March.

Stock markets

The Japanese stock market has already seen significant losses. However, it is to be hoped that any major fall is due to short term earnings uncertainly, which may present a buying opportunity as it is unlikely that  the long term productive capacity of Japan has been irreparably damaged.

The Japanese government has shown its appetite to support the stock market with a multi billion Yen support package already announced.

We are also seeing worldwide stock markets being affected by the disaster. This is mainly because of a concern that global supply chains will be hit by the disaster as factories in Japan shut down. Shares in companies in the technology and automotive sectors have been particularly badly hit as concern rises that they will not be able to get the parts they need from Japanese factories.

As you might expect, share prices of companies linked to the nuclear industry have also fallen.

Your investments

The extent to which your investments will be affected is dependent on a two main factors.

Firstly and most obviously, the more you have invested in Japanese equities the more you are likely to be affected by falls in the value of the Nikkei. At the time of writing, the Nikkei fell by more than 10% on Tuesday 15th March, recovered a little on Wednesday and fell again on Thursday; significant volatility can be expected for some time to come, certainly until the nuclear dimension to the tragedy becomes clearer.

Secondly, it would be fair to say that the average portfolio of a typical UK investor has a relatively small exposure to Japanese equities; the wider concern for investors will therefore be continued falls on the UK, European and North American stock markets, to which the average UK investor has far more exposure.

Investment fundamentals

It isn’t easy, but at times like these investors should remember certain fundamentals before making a knee jerk reaction, which is usually to sell an investment.

For example, those investors who stay in a market and patiently wait for falls in equity prices to recover, generally fair better than those who decide to sell as prices fall.

It is possible, however, that your investments will have fallen in value over the past few days and you were planning to use the capital in the short term. This leads to a significant dilemma, encash at a lower price or delay and hope values rise.

For those who don’t need access to their savings or investments now, whilst it is never easy to ride the rollercoaster that equity investing can sometimes feel like, in many respects the damage is done, stock markets have already reacted to the disaster and fallen in value, the sensible move now for most is to remain invested and ride out the current volatility.