JP Morgan expects Japan to rebound from the recent devastating earthquake and associated nuclear power problems, saying the country had shown it can do this, citing its recovery from a major 'quake in the mid-1990s.

Dan Morris, an analyst for the US bank, said Japan’s economy is likely to see robust growth over the next few quarters, as was the case after the Kobe earthquake hit the country in 1995. Evidence for this was the expansion in Japan’s gross domestic product from 0.9 per cent in 1994 to a 2.5 per cent the year after the earthquake, due in part to the country’s reconstruction.

Secondly, he said that although the yen rose temporarily to ¥76 against the dollar last week - which is an appreciation not seen since 1995 - the effect on currency is yet to be determined until the true effects of the earthquake have been calculated. Therefore in the meantime, the yen’s true relative weakness should continue to benefit Japanese exporters.

Thirdly, Morris concluded that due to the fact that equity markets over-react to natural disasters, the Japanese indices should rebound to the pre-quake levels, which have, until recently, been strong.

Finally, he said that although the Japanese economy has been plagued by deflation in recent years, this has led to low government bond yields, contributing to cheap borrowing costs. The Japanese government will be able to finance future investments as a result, he said.

“The outlook for the rest of the year remains intact, namely that bond yields should rise and equity markets resume their gains…valuations are still attractive, earnings growth (particularly in the US) remains good, and liquidity is abundant,” Morris said.

He did warn, however, against increasing investment in risk assets at the moment until uncertainty about oil prices and eurozone debt had waned.

Examining the impact of the earthquake on oil prices, Morris said prices primarily fell after the earthquake due to the market’s reliance on Japan as one of the major world oil importers, however the reconstruction process of the country is likely to raise the demand.