As the tragic events in Japan - and their implications - continue to unfold, investors should try to hold their nerve despite the severe test of their courage this market now represents, argues Fidelity International.

Two concerns dominate the situation, the firm said: currency and the stock market. The dollar/yen pair is the talk of the FX markets at the moment and a few days ago, the yen rose temporarily to ¥76 against the dollar – a high not seen since 1995. These highs, prompted by expectations that Japanese firms will be forced to repatriate huge amounts of foreign assets to cover expenses such as restructuring costs, left markets on tenterhooks to see if the Japanese government will intervene to weaken the yen.

As Japanese economy minister Kaoru Yosano asserted that speculative buying of the yen in Europe was “groundless” and amid heightened expectations of government intervention, the yen trimmed its gains against the US dollar and a trading range of around ¥79 to ¥81 is within market expectations, Fidelity notes.

Such FX gyrations do of course hold risk, and the firm highlights heavy machinery and electronics as being sectors particularly at risk. Conversely, Fidelity points out that domestic sectors such as telecoms and software have very little exposure to currency movements, and online brokers are actually benefitting due to higher trading volumes.

Turning to the stock market, losses later in the week have not been as bad as one might expect against the backdrop of the perilous situation at the Fukushima nuclear plant, Fidelity International said. Financials and exporting sectors suffered modest declines, whereas commodity stocks and oversold domestic names were the leading performers. The electric power and gas sector also rebounded as utilities not affected by the earthquake regained lost ground.

Uncertainty still however reigns over the fate of not only Fukushima, but large areas of the country, and Steve Seneque, head of Japanese Equities at Fidelity International, concedes that “it is in such an environment that investors' courage is most severely tested”. However, he is urging investors to remain calm as newsflow is continually evolving and a clear resolution to the disaster has yet to emerge.

“While it is up to the individual investor to decide what to do, all investors should approach the situation with as much calmness and clarity as they can. Reacting in a knee-jerk fashion is more likely to increase long-term losses,” says Seneque.