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Japan’s economy continues to
face serious challenges
(photo: EyePress)
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While Japan’s severe supply chain disruption from last March’s earthquake was largely resolved by September, major problems remain, with serious implications for regional trade and investment.
These new challenges span unstable electricity supply and higher energy bills, costlier fossil fuel – with more nuclear reactors lying idle – and the yen’s persistent appreciation. Add to that list a murky export environment, with Japan’s new supply industries in Southeast Asia threatened by flooding in Thailand.
The triple disasters dealt a heavy blow to Japan’s economy, while a plunge in exports and manufacturing output followed the severe supply-chain disruption.
But industrial production began to improve as early as April and continued to expand through August, as Japanese manufacturers scrambled for parts and components, including sourcing from alternative suppliers overseas.
Indeed, Japan’s industrial production continued its rebound despite mandatory cuts in electricity consumption and unstable electricity supply. Heavy electricity users such as automakers coped by switching part of their production to weekends, to avoid putting pressure on weekday electricity consumption.
Impact on Hong Kong
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While Japan’s parliament looks set to consider raising the war chest the Bank of Japan could tap, Japanese manufacturers can hardly expect a long respite (photo: Xinhua News Agency)
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As a global electronics supplier, Japan’s exports and shipments of semi-conductors and electronics dropped significantly over that period – 6.9 per cent compared to the 2.2 per cent decline in overall exports in March – its first decline in 16 months. Driven by a revival in industrial production, however, Japan’s exports recovered quickly into the second quarter. In June, industrial production moved up to about 94 per cent of the pre-quake level, with exports dropping only 1.6 per cent the same month, followed by a slight decline of 2.8 per cent in July.
As Hong Kong’s third-largest export market, Japan’s intake of Hong Kong goods started to show negative growth in April, with a year-on-year dip of 0.4 per cent reversing the uptrend in the first quarter. Hong Kong’s electronics exports to Japan, accounting for almost half its total, showed the sharpest year-on-year fall – 22 per cent – among the major export groups in April 2011.
As Japan’s supply chains recovered and Japanese manufacturers found alternative suppliers – in particular those on the Chinese mainland – Hong Kong’s exports of electronics to Japan expanded by 5.8 per cent, year-on-year, in June 2011. This put an end to two consecutive months of double-digit declines in electronics exports to Japan. Hong Kong’s overall exports to Japan rose 11.1 per cent, year-on-year, last June, and 12.3 per cent in August.
Despite the post-earthquake recovery in Japan’s supply chain, industrial production and exports in the second quarter of 2011, Japan’s second-quarter GDP contracted 1.1 per cent, year-on-year, amid widespread restraint in consumer spending and higher imports. This followed a second quarter GDP contraction of one per cent from a year earlier.
Although Japan looks set to post negative GDP growth for 2011, the International Monetary Fund (IMF) expects a gentle fall of 0.5 per cent, with growth picking up by 2.3 per cent in 2012. The IMF assumes reconstruction efforts will have a “trickle down” effect on domestic sectors, particularly infrastructure and housing.
Powering Japan
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Although Japan’s domestic supply chains have largely recovered,
the yen’s sharp gain and weak overseas demand suggest that
the post-earthquake export recovery may stall (photo: Xinhua News Agency)
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Still, Japan’s economy continues to face serious challenges. About one-third of the country’s electricity was generated by 54 nuclear reactors before the Fukushima plants were damaged by the March disaster, with only 10 operative in late September.
To compensate for the loss in nuclear-electricity supply, Japan has turned to the more costly thermal generation. For the April-September period, liquefied natural gas consumption by utilities rose 21 per cent, year-on-year, while the use of heavy fuel oil and crude oil surged, 21 per cent and 35 per cent respectively.
Despite the recent slide, energy prices remain high relative to the previous year’s levels. In September, consumer prices gained 0.2 per cent, year-on-year, to mark the third consecutive month of increase in a country otherwise besieged by entrenched deflation. Electricity bills grew 3.9 per cent, year-on-year, that month, while prices of gasoline and heating oil soared by 10.3 per cent and 17.4 per cent respectively.
To cope with idling nuclear power capacity, Japan introduced a mandatory curb, last summer, of 15 per cent from the peak consumption level for the manufacturing industry. Heavy electricity users such as automakers had to switch their production from Thursdays and Fridays to the weekends. But an even sharper drop in industry demand and widespread private consumption restraint meant areas served by Tokyo Electric Power (TEPCO) saw demand fall well beyond the required cut of 15 per cent from the peak consumption level.
While TEPCO indicated that it might be able to meet Kanto area demand this winter, Kansai and Tohoku may face power shortages, as more nuclear reactors are taken offline for regular maintenance. In addition, re-activation of idled nuclear reactors will not be carried out without undergoing stringent stress tests and addressing residents’ safety concerns over nuclear power.
Corporate Earnings Hurt
The Japanese yen appreciated about 15 per cent against the US dollar last year, despite the negative fallout of the March disasters. Over the past four years, the yen has gained by about one-third against the US dollar.
With the US and Europe struggling with sovereign debt problems and recessionary worries, the yen has been favoured as a safe-haven currency, despite Japan’s consecutive quarters of negative GDP growth. Even a concerted intervention by the Bank of Japan (BoJ) with other G7 central banks after 11 March created only a temporary dent in the yen’s strength.
In late October, the yen-dollar rate hit Y75.5, prompting yet another large-scale and, this time, unilateral BoJ intervention. While Japan’s parliament looks set to consider raising the war chest that the BoJ could tap, Japanese manufacturers can hardly expect a long respite.
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Overseas and Away
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Japanese companies are increasingly considering overseas relocation and production expansion, with the yen’s continuing appreciation a prime factor.
While the Chinese mainland is a popular destination, many Japanese companies adopt a China-plus-one strategy. Among ASEAN countries, Japanese companies have been keen to invest in Thailand because of the country’s strong clusters of supporting industries, and well-established road and port systems.
There are about 7,000 Japanese companies in Thailand, which is five times more than in Malaysia or Indonesia. Many Japanese automakers and electronics firms have positioned Thailand as their main export base for Asia.
In the first six months of 2011, Japan’s direct investment in Thailand surged 130 per cent, year-on-year, to about US$2.7 billion.
Production there, however was dealt a blow in the fourth quarter by Thailand’s devastating flooding, disrupting the production of cars, electronics and related supply chains for the rest of 2011.
Further diversification in Japanese production locations is likely to continue. There is growing interest in investing in Indonesia, another low-cost location in ASEAN with a good labour supply. Major Japanese carmakers have indicated that they would step up production there.
For the first nine months of 2011, Japan’s direct investment in Indonesia totalled US$1.1 billion, up more than 60 per cent year-on-year. Japan’s small- and mid-sized companies are also seriously exploring the relocation option.
The number of loans by the Japan Finance Corporation to help smaller companies establish overseas subsidiaries almost doubled, to 250, in the six months to September 2011. At the same time, Japan’s local governments have become more supportive in helping companies expand overseas, as long as they are prepared to maintain domestic bases.
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For one, the Honda Motor Company indicated that none of its Japan-made export models is profitable, as the yen’s current strength wipes out gains on all of its automobile exports, accounting for about one-third of the total produced in the country.
According to surveys conducted by the Nikkei, major Japanese companies have revised their yen-dollar rate assumption to below Y80, while projecting lower profits in light of the continued yen gains. Sharp, Komatsu, Denso and Fujitsu have revised their assumed yen-dollar rates to between Y75 and Y78 for the second half of fiscal year 2012.
Tough External Environment
Japan’s industrial production plunged four per cent last September from the previous month, marking the first post-earthquake drop in six months, on a month-on-month basis.
Although Japan’s domestic supply chains have largely recovered, the yen’s sharp gain and weak overseas demand suggest that the post-earthquake recovery in exports may be quickly losing momentum. After posting a year-on-year growth of 2.8 per cent in August 2011, Japan’s exports edged up only 2.4 per cent, year-on-year, last September.
With the sovereign debt crisis in Europe casting a long shadow over the region’s economic performance and the United States struggling to recover at a faster clip, the external environment facing Japan will remain challenging. This will likely weaken Japan’s intake of parts and components from the region. Hong Kong will feel the downturn, given that slightly more than half of its exports to Japan are parts, components, raw material and capital goods.
Restrained spending by Japanese consumers will also put pressure on Hong Kong’s exports to Japan of such finished goods as clothing. In September, Hong Kong exports to Japan dipped 1.5 per cent, year-on-year, with electronics and clothing exports easing to single-digit growth, and machinery exports posting a steep decline of 20.8 per cent.
It would not be surprising if all major categories of exports to Japan post negative growth in the coming months. Following its first decline in six months, in September 2011, Japan’s industrial production in October will likely decline further, as the impact of Thailand’s flooding on Japan’s local production becomes more evident, as will its impact on Japan’s trade with the region.
A Nikkei survey conducted last October revealed that Thailand’s floods had affected Japanese shipments to almost half the major Japanese manufacturers in Thailand. More than two-thirds of the respondents noted that their manufacturing operations in Thailand had been suspended, at least in part.
With many industrial parks in Thailand inundated by floods, Japanese companies’ output of cars and electronics items, including hard drives, has been severely affected. This has led to a knock-on effect on global supply chains. About one-third of respondents said they experienced problems supplying to Southeast Asian countries, including Thailand, while about 15 per cent indicated that supply disruption had spread to plants in Japan and around the world.
For more on international trends, please see the December issue of the HKTDC Trade Quarterly, which can be ordered at: http://bookshop.hktdc.com/.
