The Biggest Threat to Japan's Economic Recovery

Without question, the tragedy we've witnessed over the past two weeks in Japan is nearly unparalleled. We continue to offer our deepest sympathies and best wishes to all those with friends or family who have been or remain affected by this event.

Still, the Japanese are well-known for showing true resolve. For more than a week, the Bank of Japan has been injecting capital into the money market in an attempt to calm investors' fears. In the days after the initial earthquake, the markets have had a chance to digest the possible ramifications of what this might mean for Japan's economy. Most analysts firmly believe that Japan could eventually emerge from this disaster stronger than before.

Personally, I fear that the country has a threat looming even larger than a short-term drop in its GDP: its rapidly rising currency, the yen. A higher yen does make it cheaper to import goods, but it could also cripple the world's fourth-largest exporter.

Companies whose products Japan imports could see a major surge in demand. Freeport-McMoran (NYSE: FCX  ) derives more than 20% of its revenue from Japan, and the reconstruction efforts there should continue to drive demand for copper even higher. Weyerhaeuser (NYSE: WY  ) , highlighted last week as a beneficiary of the rebuilding process, generates 10% of its revenue from Japan; it will also likely see a surge in demand for lumber.

But an even greater sea of challenges oppose whatever benefits a surging yen might present. The big three automakers, Toyota (NYSE: TM  ) , Nissan, and Honda (NYSE: HMC  ) , account for three of the four largest exporters in Japan. Although the fates of these automakers aren't as closely tied to the yen as they once were, long-term yen appreciation will undoubtedly hurt their foreign sales.

Technology exporters would likely be at the most immediate risk of an earnings pinch from a stronger yen. Tech giants Sony (NYSE: SNE  ) , Panasonic (NYSE: PC  ) and Toshiba are already dealing with potential supply-side problem; getting their customers to pay more for their products would only make life even harder for them.

There's no button that we can press to clear up the situation in Japan. Clearly, the G7's economic backing of Japan will greatly calm shaky markets, but I'm not so sure it will successfully keep the currency down for long. If I were you, I'd keep a close eye on the yen. More than anything, it will provide the strongest indication of the Japanese economy's potential future

Where do you see the yen going from here? Share your thoughts in the comments section below. Also, consider making your life easier by adding these and your own personalized portfolio of stocks to the new and easy-to-use My Watchlist: click to add Freeport-McMoran, Weyerhaeuser, Toyota Motors, Honda, Sony and Panasonic now.

Fool contributor Sean Williams does not own shares in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that has no intra-day moves.


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