The earthquake and tsunami in Japan is one of the greatest human tragedies of our lifetimes and our thoughts and prayers are with the people of Japan. It is difficult to accurately evaluate the complete impact as the situation remains fluid. I will defer to people who specialise in nuclear physics to discuss the problems with the reactors and to sociologists to discuss the problems Japanese society must cope with in dealing with the loss of so much life and the destruction of entire communities. I will focus on the economic and investment implications of the tragedy.1. The EconomyThe output loss to the Japanese economy will likely be quite noticeable for Japan. In fact it is likely that the quake will trigger a technical recession, with two subsequent quarters of negative growth in Gross Domestic Product (GDP). If we use history as a guide, we can point to the effect the 1995 Kobe earthquake had on the Japanese economy. This quake affected a region that accounted for 12.4 percent of Japan's GDP. In essence the 1995 event had very little effect on the economy as industrial production only fell for one month and the impact on GDP was imperceptible. While the Tohuko region accounts for even less than Kobe at eight percent of the national GDP, Japan has been forced to shut down 11 of its 54 nuclear plants and reduce power by some 25 percent to 50 percent. This has forced many export giants like Sony and Toyota to halt operations indefinitely. As a result it is likely that exports from Japan will suffer greatly and imports for reconstruction will surge. In the near term, the disruption of supply chains and the destruction of inventories coupled with a panic driven consumption binge are likely to lead to a temporary spike in inflation.Short term economic weakness, however, will be offset by reconstruction spending and a subsequent bounce in the economy later in the year. Preliminary estimates for calendar year 2011 GDP growth have been revised down from 1.5 percent to around -0.4 percent, while for calendar year 2012, growth of 1.7 percent has been revised up to 3.6 percent. The reconstruction spending will add to recorded GDP even though in a narrow economic sense the lost assets have simply been replaced and the productivity of Japan is no higher than before. Japan is one of the world's largest consumer s of metals so a slowdown in manufacturing will likely effect near term demand but as construction efforts ramp up demand for materials such as copper and steel should climb. Increased imports may also be necessary for equipment, like cranes and bulldozers. This will benefit many global construction and industrial firms.It is unlikely that the world economy will be hit significantly by this disaster. Although Japan is the third largest economy in the world its contribution to global growth has been shrinking considerably over the years. In 1994 Japan accounted for 17.9 percent of world GDP, now it only contributes roughly 8.7 percent. The International Monetary Fund suggests Japanese growth has only accounted for about one percent of the world's growth over the past five years. Japan has slowly become a passenger of global growth and not the driver. Only about five percent of US exports and three percent of Canadian exports go to Japan. This disaster should not end the global business-cycle expansion, nor will it change the earnings outlook for the major economies.The primary source of disruption to other nations economic activity is from intricately intertwined logistical sourcing of key components or products that have been disrupted. There will however be major offsets, as some sourcing is forcibly shifted to various domestic suppliers. As a proportion of global production, Japan accounts for around one-fifth of semiconductors, 16.5 percent of consumer electronics, 6.2 percent of large-size LCD panels and a much larger percentage of LCD components, including glass, color filters, polarizing film and so on. For example, Texas Instruments has announced that 10 percent of its chips are sourced from a single plant located in Japan and General Motors has halted production at one of its plants in the US due to its inability to get key parts. Depending on the types of chips or car parts produced in various Japanese facilities, the companies may not be able to obtain sufficient identical parts elsewhere, so its product sales will be hampered. This may open the door to competitors who have not suffered similarly, as would be true suppliers based in other nations. If competitors can ramp up production, they have an opportunity to capture some new business and benefit from exporting other items to Japan. Thus, many other companies will be beneficiaries of the problems in Japan. This may actually be quite negative for Japan's industrial export sector which may get hollowed out over time. Japanese multinationals may finally begin expansion into lower cost jurisdictions like Vietnam and China for more manufacturing. They have been hesitant to do so compared with other global companies. This would be positive for Japanese export companies' margins but negative for Japanese employment.2. Death of the Nuclear Energy Renaissance?Even if all the nuclear reactors are brought under control, this accident will have a huge impact on the global nuclear industry. The main worry is that the situation in Japan creates a new “Three Mile Island” environment where the US nuclear industry was essentially shuttered for three decades. Apprehensive actions and concerns abound globally. Germany has put on hold its decision to extend the life of seven of its existing old nuclear plants. Switzerland has halted its nuclear programme. The US has several nuclear plants in some stage of construction that could be halted. It also looks like growing plans to build more nuclear power plants in the US may be deferred, as government officials decide whether they will permit such projects to move forward. China, which has 27 plants currently under construction and plans for 50 more, accounting for more than half of the world's nuclear build out, may require further oversight. If you want another less dire roadmap to judge what is to transpire over the next few weeks look no further that than the Macondo Oil Spill in the Gulf of Mexico. The immediate aftermath of the spill caused any stock leveraged to the Macondo well, or even vaguely tied to deep-water drilling, to be sold indiscriminately. Over time cooler heads did prevail and investors came to realize that the world needed deep-water oil production. The very word ‘nuclear' tends to spark fear, quite understandably, but the fact is that many more people die mining coal (2000-3000 Chinese alone per year) than are killed from any accidents associated with nuclear power. In the near term, however, I would suspect that anything tied to the nuclear industry will suffer from increased volatility and price pressure. At this point it is not clear if the nuclear renaissance is dead. Overtime we may get clarity and this could ultimately offer a great buying opportunity for any nuclear power related stocks.One other aspect is clear. There are 439 nuclear power plants in 25 countries supplying 17 percent of the world's energy and another 39 under construction. Nuclear plays a significant role in production of electricity. Most countries, like Japan, do not really have a choice but to use nuclear. They have no other viable options as they do not have sufficient natural resources and must rely on nuclear energy or be dependent on volatile energy imports. In fact, nuclear accidents in the past - although not as severe as this one - have not turned Japan away from nuclear energy and are unlikely to halt the Chinese expansion. Nuclear may lose support in the near term (Japan alone makes up for 11 percent of the world's demand for uranium) and conventional fossil fuels look like near term winners. We may see pressure on prices for imports such as diesel and liquefied natural gas as Japan tries to make up its lost nuclear power generation. Japan is the world's third largest oil importer and second-largest LNG importer. America's natural gas industry has the lucrative possibility of exporting its cheap gas to global markets for more than twice the US price. Companies in the natural gas and coal sector look to be beneficiaries of the murky outlook for nuclear.3. YenJapan suffered a triple nightmare of earthquake, tsunami, and nuclear meltdown...and the country's currency took off before recent intervention. It makes no sense - until you realise the Japanese are selling their foreign assets and bringing the money home. The repatriation of overseas assets by Japanese insurance companies and the government to cover losses at home has helped fuel yen buying.However, this repatriation However, this repatriationwill not last that long and weak fundamentals will eventually assert themselves which is likely to lead to future yen weakness. Public sector debt is likely to accelerate with additional fiscal stimulus programs creating more strain on Japan's already high public debt load. The Bank of Japan's recent injection of 1.5 trillion yen of liquidity amounts to nearly 30 percent of the size of the Federal Reserve's second quantitative easing (QE2) programme. The Japanese programme was done in one day! This is beginning to be noticed by the bond market as Japanese government bond credit default swaps have recently surged. Furthermore the currency is also likely to feel the weight of weaker external support that it has come to rely upon. Japan's current account surplus has fallen to a two-year low and a deficit is likely at this stage. Besides, the Bank of Japan does not want to see a stronger yen which would hinder reconstruction efforts and compound losses suffered by Japanese insurance companies. In summary, there may be near term support for the yen due to capital flows, but longer term weakening fundamentals would seem to indicate subsequent weakness.4. Reinsurance MarketIt's still very early to determine ultimate losses to insurers and reinsurers from the most powerful earthquake to hit Japan in over 100 years. Based on our understanding, a potential nuclear event is unlikely to have much impact on the reinsurers, as many insurance policies exclude certain events from coverage, such as exclusion of nuclear damage for homeowners' insurance policies. Catastrophe modeling firm Eqecat estimates it will cost insurers and reinsurers $12 to $25 billion. Rival modeler Air Worldwide estimates losses to range from 1.2 to 2.8 trillion yen ($15 - $34 billion). This Japanese catastrophe may turn out to be the second most expensive on record behind Hurricane Katrina, which cost the insurance industry $62.2 billion. Following Katrina, reinsurance rates rose to their highest levels since 1994 and ended a two year decline. This is potentially great news on the pricing side and has come at a very opportune time as Asia-Pacific rates get renegotiated on April 1. However, the majority of the cost of this quake is actually going to be borne by the Japanese state so there is no assurance that sufficient capital will come out of the reinsurance market overall to induce much higher rates. Standard and Poor's Rating service “doesn't expect to take widespread ratings actions” on insurers “because the industry is dealing with this disaster from a position of capitals strength”. According to Citigroup some $30 - $35 billion of capital has come out of the system recently but that may not be enough to create a broad hard market.However, pricing will likely firm on earthquake coverage due to four major quakes in a year and some reinsurers should be able to capitalize on this market if they are currently underweight.In summary we believe that the tragic events in Japan will have a significant impact on the third largest economy in the World and will hurt the supply chain in some industries but will not slow the current global economic recovery.