“If I owned Japanese stocks, I would certainly not be selling them because of the events of the past 10 days or so,” says Warren Buffett, arguably the world’s most highly-esteemed value investor. “Something out of the blue like this, an extraordinary event, really creates a buying opportunity.”

As it happens, Buffett’s Berkshire Hathaway has a bullish derivative bet on Japan’s benchmark stock index, the Nikkei 225. But Buffett is not alone in his optimism about Japan. Increasingly, international investors are piling into the country, hoping to profit from rising demand for steel and raw materials as Japan sets about repairing the damage caused by the devastating earthquake and tsunami on March 11.

The Nikkei has dropped 12% since March 10, as investors fretted about the $200 billion or more in likely losses — much of which is uninsured — which were likely to flow from the earthquake and tsunami, as well as the possible nuclear crisis at the stricken Fukushima Daiichi nuclear power plant.

But some believe that when markets open today after yesterday’s public holiday, we’re likely to witness a wave of buying from international investors, which could push Japanese shares up by at least 10% in coming weeks. They point to the experience in the 1995 Kobe earthquake, which saw Japanese shares shed a quarter of their value, before rebounding in a matter of months.

What’s more, they say, Japanese shares are extremely cheap compared with other major markets. At current prices, Japanese companies are trading at just below book value (defined as assets less intangibles and liabilities). The average share in Japan is priced at 13.9 times annual profit.

Certainly, Japan’s economy is likely to be hard hit as a result of the latest disasters, which has caused disruptions in Japan’s electricity supply, and caused some companies to temporarily suspend production. Indeed, if the power outages continue past April, it’s possible that Japan’s economy could shrink this year, compared with previous estimates that saw it expanding by about 1.5% this year.

As a result, some international investors will likely to focus on the big Japanese electrical companies, such as Sony and Canon, and the big Japanese automotive giants, such as Toyota and Nissan, which have strong global brand names, and are likely to benefit from the stronger international economy.

But the Japanese economy is likely to experience very strong growth rates of more than 5% next year, as the Japanese government sets about the task of rebuilding infrastructure in the damaged areas. As a result, international investors are also likely to have a strong demand for shares exposed to the construction sector, such as the steel giants, JFE Holdings and Nippon Steel.

Investors are also cheered that Friday’s G7 intervention has stopped the yen from soaring, which would crimp the competitiveness — and profit margins — of the big Japanese export giants, as well as fuelling the existing deflationary pressures in the economy.

In punting on the Japanese recovery, investors are taking on some big risks. There’s the risk that the radiation leakage from the stricken nuclear plants will be much worse than currently expected, and that electricity supplies will be disrupted for months ahead.

In addition, the repair bill will cause Japanese government debt — which already stands at a massive 200% of GDP — to blow out even further.

But these are risks that investors seem prepared to ignore, at least for the moment.

*This first appeared on Business Spectator.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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