Investment Adventures in Emerging Markets

Update on Japan

I’m saddened by the devastation and the lives lost in Japan as a result of the massive earthquake, tsunami and multiple aftershocks. I worked in Japan during the 1960s and have been visiting the country at least on an annual basis to meet with clients, even though our emerging markets-focused portfolios do not invest directly in Japan. Living on a fault line, many Japanese people have experience with disaster drills to prepare for such natural disasters. If there’s one thing that I’m confident of, it is the ability of the Japanese people to bounce back from this disaster, as evidenced by their quick recovery after the 1995 Kobe earthquake, which occurred in a more economically vibrant area.

The fiscal stimulus package to get the Japanese economy back on track is expected to be much bigger than that for the Kobe earthquake. Although Japan has a large fiscal deficit, unlike the U.S. or European countries, it also has one of the largest foreign reserves in the world, second only to China at almost US$1 trillion.[1] Most of the Japanese debt is also domestically funded.

Some concerns have been raised on the impact to commodity prices. Demand for iron ore or steel from affected plants in Japan is likely to decline in the aftermath of the earthquake, but could be balanced by the higher demand for raw materials used in the country’s widespread rebuilding efforts. Hence, I believe the net impact on the demand for raw materials is unlikely to be significant in the long term.

Panic selling in the markets is a common knee-jerk reaction in times of crisis. At Templeton, we believe in looking beyond short-term events and volatility to consider the longer-term picture. Our investment philosophy instills in our managers and analysts the discipline to re-evaluate our holdings with a five-year investment horizon in mind.

[1] Source: IMF, WEO, as of October 2010.

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