PIMCO's El-Erian: Japan Will Recover

(March 17, 2011) — Mohamed El-Erian, CEO and co-CIO of the Pacific Investment Management Co. (PIMCO), is optimistic that Japan will recover, anticipating that the country will prove successful with its coming “massive reconstruction” program.

In an article originally published in the Financial Times, El-Erian explains that “Japan’s immediate focus is on the enormous human suffering, and rightly so.” He continues to write that attention also turns toward the extent of the damage to the economy and its reconstruction and rehabilitation plans, indicating that Japan’s economic growth rate will fall in the immediate aftermath of the natural disasters before rising due to reconstruction activities. “Disruptions to supply chains and the loss of inventories will cause shortages and inflation to spike temporarily from very low levels,” he writes, adding that fiscal deficit and public debt will rise significantly due to lost revenues and emergency spending.

“The world has a shared interest in the economic recovery of this systemically important country,” El-Erian states. “The good health of Japan is central to a robust global economy that generates lots of jobs and enhances productivity. And, at the most basic human level, we wish for the well-being of all those in Japan who have been affected by a truly horrible tragedy.”

El-Erian seems more optimistic about the future of Japan’s economy compared to many investment consultants. From an investment perspective, consultants have been skeptical about investing in Japan for some time, warning their clients to flee from equities in the region until major policy changes occur. “Equity investors have suffered quite a few hits — the bursting of the tech bubble, the global financial crisis, issues in the Middle East with sharp jumps in energy prices, and now the growing catastrophe in Japan,” consultancy LCG Associates Vice President Britt Bentley tells aiCIO. “All these events have created volatility in the marketplace,” he says. “Uncertainty in markets tends to not support market growth.”

El-Erian has been a forceful commentator on a number of other topics. Earlier this month, he expressed his sentiments about the Federal Reserve’s quantitative easing program, often called QE2, saying that its costs are starting to outweigh the benefits. In an interview with CNBC, El-Erian said the central bank should calculate how it can exit from its multi-trillion dollar QE2 program. Federal Reserve Bank of St. Louis President James Bullard indicated that the central bank is “determined” to get monetary policy back to normal, confirming that policymakers could subtly adjust its plan by backing off early from QE2. Berkshire Hathaway’s Warren Buffett later echoed El-Erian’s statements, claiming that the US does not currently need an economic stimulus. The sentiments by the financial heavyweights reflect waning public support for the Federal Reserve’s effort to stimulate the economy as well as fears that the US cannot forever continue with the stimulus.