Market Overview

Trading Bank of Japan's Negative Report (EWV, EWJ, HSOL, ESLR)


The Bank of Japan lowered its economic assessment for seven of Japan's nine regions on Monday because of difficulties that were being felt throughout the country due to the devastating earthquake and tsunami that hit northeast Japan early last month.

The earthquake and tsunami initially damaged infrastructure in the northeastern area of the country, but the disruptions to the economy were affecting areas far from those that were immediately impacted during the the catastrophe.

Much of Japan's oil refining capacity and nuclear power generation capabilities were taken offline when they were damaged by the earthquake and tsunami and the fires that followed them. This led to widespread power shortages, which in turn had a negative affect on the supply chain.

The supply chain and power supply problems had a ripple effect, reducing production even in areas that weren't physically damaged by the natural disasters.

The Bank of Japan's report also noted that the Japanese economy is under pressure due to negative consumer sentiment.

Not only have many Japanese reduced their spending because of economic concerns but they are also worried about how the radiation leak at the Fukushima Daiichi nuclear power plant will affect their health.

Last month, the Tokyo water supply was found to have radiation levels that were far above the recommended level for safe consumption by infants and there have also been reports of the radiation contaminating the land and sea in the areas near the leaking nuclear power plant.

Worries about the radiation leak contaminating the food supply have spread internationally, with many countries imposing restrictions on food and dairy products from areas near the Fukushima Daiichi nuclear power plant.

This has led to Japanese exporters suffering from internal infrastructure and supply problems, as well as external limits placed on what goods are allowed access to foreign markets.

The Nikkei 225 index of Japanese stocks fell 48.38 points, or 0.50%, to 9,719.70 on Monday. However, the impact from the Bank of Japan's report on the financial markets may be minimal because the problems that the report covers were already well known and priced into the market.

There are a number of ways for investors to play the market, depending on how quickly Japan is able to recover or if its economy has to endure prolonged suffering.

If things continue to look bad for the Japanese economy and there is no recovery in sight, the ProShares UltraShort MSCI Japan (NYSE: EWV) could climb higher.

On the other hand, if Japan is able to turn things around, operations return to normal and the problems at the Fukushima Daiichi nuclear power plant are brought under control, the iShares MSCI Japan Index Fund (NYSE: EWJ) could see its share price moving higher.

Continued concerns over the use of nuclear energy as a power source could also see solar power stocks like Hanwha SolarOne Co., Ltd. (NASDAQ: HSOL) and Evergreen Solar, Inc. (Nasdaq: ESLR) posting significant gains.

Posted-In: Long Ideas News Sector ETFs Short Ideas Specialty ETFs Small Cap Analysis Events Global


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