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Japan’s Changing Trade Game

  To spur economic growth and end the decades-long deflationary spiral, Japan has been pursuing a vigo
 

To spur economic growth and end the decades-long deflationary
spiral, Japan has been pursuing a vigorous policy of monetary easing
(photo: EyePress)

As Japan’s seventh leader in six years, Prime Minister Shinzo Abe is embarking on an ambitious spending policy. Mr Abe has made reviving Japan’s economy his top priority. Since he made public his distaste for a strong yen, the Japanese currency has weakened by about 20 per cent against the US dollar. 

By contrast, the yen had appreciated by about one-third against the US dollar in the five years before September 2012. A renewed yen weakness is seen as giving small- and medium-sized Japanese exporters a respite. It’s also helping elite Japanese manufacturers, many of which are smaller establishments that have dominated the global market thanks to their technological prowess and loyal customers. 

According to a recent Ministry of Economy, Trade and Industry survey, 60 per cent of Japan’s SME exporters were negatively affected by the yen’s surge in 2011, with the other 40 per cent saying the impact ranged from nil to positive. 

Soaring Asian Investment

Flooding last year in Thailand disrupted Japan’s supply chain in the country 

Flooding last year in Thailand disrupted Japan’s supply chain
in the country
(photo: iStockPhoto.com)

 
In the face of the yen’s surge, Japanese multinationals have accelerated their establishment of offshore supply chains, taking advantage of lower labour costs in foreign countries and, increasingly, their expanding markets. 

In the six years to 2012, Japan has seen its net outward foreign direct investment (FDI) growing at a compound annual growth rate (CAGR) of about 16 per cent. The increasingly vertically integrated nature of offshore production has also raised cross-border trade in both intermediate and final products. 

China’s World Trade Organisation accession, in late 2001, may appear to be a watershed in Japan’s Chinese mainland investment, with its net outward FDI increasing almost five-fold, from US$2.6 billion in 2002 to US$13.5 billion in 2012. 

Excluding the impact of last year’s flooding in Thailand, which severely disrupted Japan’s supply chain, the country’s net outward FDI to ASEAN grew at a CAGR of 23.2 per cent between 2006 and 2011, higher than the global average of 16.7 per cent and the mainland average of 15.4 per cent over the same period. Impressively, FDI to ASEAN more than doubled, from US$8.9 billion in 2010 to US$19.6 billion in 2011, only to fall by half, to US$10.7 billion, due to the Thai floods. In 2011 alone, FDI to ASEAN accounted for about 18 per cent of Japan’s total net outward investment, compared to about 12 per cent earmarked for the mainland. Japan’s net FDI to the mainland last year showed only a 6.4 per cent year-on-year increase, accounting for 11 per cent of the total. 

Political Wrangling

 Protests in Beijing over islands’ dispute
 

Protests in Beijing over islands’ dispute (photo: iStockPhoto.com)

China-Japan relations have deteriorated since Mr Abe’s predecessor, Yoshihiko Noda, ordered the nationalisation of some of the disputed Diaoyu Islands in September 2012. 

Japan and China, however, are mindful of the enormous stake in terms of bilateral trade and investment, and the likely impact on regional and global supply chains, as they jointly account for about 15 per cent of global trade. Japan External Trade Organization (JETRO) figures show that the country’s cumulative investment on the mainland stood at US$83.4 billion at the end of 2011, about one-third of its outward FDI stock in Asia, and nine per cent of the cumulative total. According to China’s National Bureau of Statistics, more than 20,000 Japanese companies and joint ventures operate on the mainland. 

Mixed Views

Overshadowed by continuing political tensions and rising wages on the mainland, Japanese companies have mixed views about its neighbour. 

A JETRO survey released last December found that 52 per cent of respondents plan to expand business operations on the mainland over the next one to two years, down from 67 per cent, as reported in the 2011 survey. This marks the biggest drop among Japanese companies in the surveyed countries or regions. Nonetheless, rising labour costs on the mainland, rather than political tensions, were cited as the most notable reason for the decline. 

China-plus-One Strategy

New investment opportunities in Myanmar 

New investment opportunities
in Myanmar

 
Japanese companies, particularly the bigger manufacturers, have employed the “China-plus-one” strategy for many years in the face of the yen’s relentless surge, relocating some of their production to other parts of Asia. Thailand is a popular choice for Japanese manufacturers. While the wage trends are generally increasing in the region, Southeast Asia has not seen wages rise as fast as on the mainland. 

Bangkok’s minimum wage has shot above US$230 a month, yet the average wage remains far below that of Southern China (more than US$500). As a hub for Japan’s offshore manufacturing in Southeast Asia, Thailand has attracted many Japanese automakers and electronics producers, with well-developed industry clusters and supply chains. 

Japan is the largest foreign investor in Thailand, with the country being Japan’s top investment destination within the 10-member ASEAN.

Thailand’s ability to attract FDI from Japan last year, however, was compromised by the floods and disrupted supply chains, with Japan’s net outward FDI to Thailand declining by more than 90 per cent compared to 2011, bringing down the whole of ASEAN’s inward FDI from Japan. 

Since China-Japan relations started to sour last September, the “China-plus-one” strategy has gained greater traction among Japanese companies.

They’re increasingly using Southeast Asia as an alternative manufacturing base to balance their China risks.   

Last December’s JETRO survey found that Japanese companies would scale back expansion in Thailand, Malaysia and Singapore, while stepping up investment in Indonesia, Cambodia, Myanmar and Laos, as well as India and Bangladesh.  

New Production Corridor

In 2012, Indonesia became the largest recipient of Japan’s net outward FDI within ASEAN, chalking up more than US$3 billion and surpassing Singapore, which received only US$1.3 billion from Japanese investors that year. Vietnam, however, actually performed better than Indonesia in terms of annual growth, thanks to a lower base, with Japan’s net inward FDI rising 38 per cent, to US$2.1 billion compared to Indonesia’s 5.6 per cent gain, to US$3.1 billion. Increasingly, Japanese companies see Thailand, Vietnam and Cambodia as a production corridor in Indochina. The recent opening of Myanmar will certainly broaden the span of such a production corridor. 

Vietnam reported that Japanese investment more than doubled, to US$5.1 billion, in 2012. As the largest investor in Vietnam, Japan has reportedly widened its investment scope in the country, increasingly edging away from the business of processing and assembly for exports, while moving up the value chain to include the production of such items as spare parts, and investing in areas supporting the manufacturing industries. 

In addition, Japanese companies are taking advantage of the growth of Vietnam as a market, targeting the services sectors in the country. Japan was quick to cement ties with Myanmar, which was the first overseas visit of Mr Abe’s term. Japan is also committed to waiving Myanmar’s more than US$3 billion debt, while providing more than US$570 million in soft loans for infrastructure construction, including the development of one of the country’s special economic zones. Japanese companies are moving in fast. While Japan is the largest export market for garments made in Myanmar, it also exports used cars to the country, while stepping up production of motorcycles and trucks there. 

Compared to its investment in Vietnam, Japan’s FDI to Cambodia is relatively small, amounting to about US$260 million as of July 2012, with the bulk of Japanese investors operating in the garment sector. The prospect of Cambodia as an investment destination for Japanese companies is helped by fast-increasing wages on the mainland. Cambodia, however, is facing an increasing challenge from Myanmar in courting Japanese investment, including sectors other than garment manufacturing.  

For more on economic trends, please see the March issue of the HKTDC Trade Quarterly

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