The recent earthquake in Japan and its aftermath is a tragedy with enormous human consequences. What does it mean for your investments? While nobody can predict the future with any certainty, short-term events—no matter how tragic—generally pass. Japan is a strong economy with the resources to rebuild and to rebound from this event.

Oakland, Calif.–based financial adviser Cathy Curtis does a nice job of summarizing the situation:

March 17, 2011

Last week’s devastating earthquake and tsunami have focused the world’s attention on Japan. We are all keeping the country in our thoughts and hope that the people of Japan can recover quickly from these tragic events.

As increased stock market volatility is once more the rule of the day, many are also wondering, “What does the crisis in Japan mean for my investments?” Although there are many opinions from many sources, some views are consistent. What follows is a brief review that I hope will address some of your concerns.

  • The earthquake in Japan will have a negative impact on Japan’s economic growth in the near term. It will disrupt operations of Japanese and non-Japanese companies doing business in Japan. As a result, Japan’s stock market has declined 11 percent since Friday.
  • Over the longer term, Japan has a large enough economy to recover from the tragedy. However, Japan’s deficits are much greater than even those of the United States, and if the country is forced to borrow even more money at higher rates to rebuild, a fiscal crisis could ensue.
  • On a global level, Japan has contributed only 2–3 percent of global growth over the last five years, so the current crisis is unlikely to tip the world into a global recession. However, when you look at the challenges the global economy already faces―higher oil and food prices, the debt crisis in developed countries, and monetary tightening in emerging markets like China―the global economy is in a vulnerable position.
  • Most U.S. investors participate in Japan’s stock market through diversified international equity funds or index funds. Japan makes up 15 percent of the typical international equity index and plus or minus that amount in active funds, depending on the manager’s view of opportunities in Japan. Since international equities as a whole make up 20 percent of a portfolio on average, Japan becomes a small piece of the whole pie at 1–3 percent of a total portfolio.
  • Mixed views exist on whether Japan’s stock market is a bargain now. Some think it is time to buy. But more think that Japan’s problems (many of which existed before the earthquake) do not warrant increased investment there at this time.

The bottom line is that many respected investors don’t believe that Japan’s tragedy on its own will lead to a devastating impact on global earnings power. If global equity (stock) markets were to decline further in the short term, it may be an opportunity to increase equity exposure in selected markets.

Again, while nobody can forecast what will happen, the likelihood of the events in Japan causing a prolonged worldwide financial crisis seems low. Whether these events should cause any adjustments in your portfolio is of course an individual decision based upon your assessment of the situation and its potential impact.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments. Follow Roger on Twitter; connect with him on LinkedIn.