Earthquakes, a tsunami, and nuclear emergencies have taken a toll on Japan's already beleaguered financial markets, with Tokyo stock prices experiencing major declines.
"We're witnessing a terrible human tragedy in Japan, and portfolio considerations are obviously secondary, but such upheavals are the reality we have to prepare for as investors," said Joe Davis, head of Vanguard Investment Strategy Group and our chief economist.
The outlook for Japan
With events unfolding rapidly, it's too early to assess the long-range implications for Japan's economy-let alone the world's-but some degree of volatility is to be expected in the near term.
In addition to the immediate humanitarian concerns, investors may worry that a significant downturn for the Japanese economy will have global ramifications. Despite a lengthy slump, Japan remains a major force in the international economic arena, boasting the world's third-largest economy in terms of gross domestic product (GDP)-recently ceding the number-two spot to China-and the country is a financial, industrial, and technological giant.
But from a purely economic standpoint, Japan's current troubles have come at a time when the country is already facing severe pressures, Mr. Davis said.
"Japan has spent 20 years struggling to regain its economic footing after the collapse of its real estate and stock-market bubbles in the early 1990s. Even before this crisis began, the Japanese government was carrying an enormous debt burden, and the country would have been fortunate to experience GDP growth in the 1 percent to 2 percent range for 2011. As a result of these tragic events, the risk of recession in Japan is markedly elevated."
However, Mr. Davis said, history has shown Japan to be remarkably resilient.
"Over the past century, Japan has bounced back from many disasters, both natural and man-made. While Japan may never regain the commanding position it enjoyed in the 1980s, there's good reason to think that the country will be able to rebuild and recover over time."
The importance of diversification
As with recent political unrest in the Middle East and northern Africa, the crisis in Japan underscores the value of portfolio diversification, Mr. Davis said.
"Whenever we see a significant downturn in one particular area, we're reminded of the need for broad diversification," he said. "Any market can experience financial and economic crises as well as natural or man-made disasters. Experience shows us that the best preparation is diversification-across countries, market sectors, and asset classes."
Japanese equities play a role in many Australians' portfolios, for example as of February 28, 2011, Japan-based equities made up 10.4 per cent of Vanguard's International Shares Fund.