Crisis to hit inflows from Japan

With the country in rebuilding mode, both FDI and FII inflows may slow down.

As details of Japan’s nuclear crisis emerge, there could be a pullback in capital flows to other countries, at least in the short-term. Analysts at a Japanese investment bank believe that investments, both portfolio and foreign direct investment (FDI) into India, will be lower in the near term because the requirement of funds for the rebuilding process.

Aditya Narain, Citi analyst, said: “In debt and equity inflows from Japan, there are near-term risks of some reversals.”

Japan is the sixth largest investor in India in terms of FDI with $22 billion invested in the last 10 years. Nearly 70 per cent of this have come in the last three to four years. A banker with a leading Japanese bank said on condition of anonymity that at present all decisions on new investments, whether direct or portfolio investments, are on hold. For the next few months, no fresh investments could come from Japan.

Markets across the globe have shed $440 billion since the Japanese crisis. However, Japan accounted for more than three-fourths of this loss. While India’s loss is merely one per cent of total market cap eroded, the damage is not over yet, according to market experts.

Of the portfolio flows that have come to India in recent times, Japan accounts for $8 billion. Analysts and investment advisors said there may be some reversals in the short- to medium-term. However, Brajesh Koshal, managing director (investment banking), Daiwa Capital Markets India, said it’s too early to predict the fallout of this event. Japan traditionally has been a big FDI investor in China. And while this trend may reverse, the impact on India may not be very large.

While there aren’t a large number of Japanese portfolio investors investing directly in India, a large number comes through Hong Kong and Singapore, said analysts.

Only 10 institutional investors from Japan are registered with the Securities and Exchange Board of India (Sebi) out of the total 1,706 FIIs. However, according to a leading consultant to FIIs in India, “Most of them are coming through Singapore as India has cooperation agreement with that country and it is hard to get absolute numbers of Japanese FIIs’ direct investment numbers.

“The Japanese event had a significant downward impact on stock markets across the world and India is no exception. In the short term, there will be an impact. The long term impact depends on the extent of damage due to nuclear calamity,” said D K Joshi, principal economist, Crisil.

Based on what occurred after the Kobe earthquake, most analysts believe an all-out slump in the Japanese economy caused by the Sendai earthquake is overly pessimistic. However, a V-shaped recovery supported by a rapid upturn in demand driven by rebuilding work in the affected areas is also unlikely. Analysts in Japan now expect that the Japanese economy will take longer than expected to exit its current soft patch owing to the earthquake and tsunami.

The consensus forecast on the timing for this exit was January-March 2011. However, Nomura now thinks July-September or October-December is more likely.

In a highly integrated world, it is impossible to escape aftershocks of a crisis like the one Japan faced last Friday.