Yen’s Slump Failing to Stem Exodus of Factories From Japan
Japanese Prime Minister Shinzo Abe promises that Abenomics will revive the nation’s industrial might. For Takumi Tanaka at auto-parts maker Uchida Co., times are worse than after the 2011 earthquake.
Tanaka, managing director of a company founded in 1955, whose 94 employees supply Honda Motor Co. (7267) with parts molds, is contending with higher costs after a 17 percent drop in the yen in the past nine months pushed up the price of imported energy and metals. At the same time, he’s under pressure from clients to build factories near their overseas plants.
“We see very little benefit” from Abenomics, Tanaka said in an interview in Miyagi Prefecture, where two of the company’s three factories are located, close to the center of the earthquake that caused Japan’s worst nuclear disaster. “Even today, we are being asked to build plants in Vietnam, Thailand and Indonesia. There is little relief that manufacturing can stay in Japan.”
While the yen’s drop is giving exporters a boost as the central bank increases the money supply to tackle deflation, the currency benefit isn’t enough to reverse the effect of decades of stagnant growth that forced companies to seek expansion abroad. The success of Abenomics may rely as much on the health of the global economy as on fiscal and monetary stimulus at home.
“Currency isn’t the biggest factor in where companies make investments for new factories,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo who worked at the Bank of Japan for 15 years. “They are trying to reduce currency volatility on their profits and it’s better for them to make products closer to local markets.”
With the currency rebounding 8 percent since May 28, Abe is under pressure to implement stronger incentives for companies to stem the migration of production to faster-growing markets.
Japan’s overseas units almost tripled sales from 2002 to 2012 and nearly doubled employees to around 15 million people, Trade Ministry data show. Japanese manufacturers were forecast to make a record 33 percent of their products abroad in the year through March 2013, up from 14 percent in fiscal 1989, according to a December survey by the Japan Bank for International Cooperation. In the next three years, the lender predicts the proportion will reach 38 percent.
Sumitomo Metal Mining Co. (5713), Japan’s largest nickel producer, JFE Holdings Inc. (5411), the nation’s second-biggest steelmaker, and Sharp Corp. (6753), the country’s No. 3 maker of televisions, are among companies building or evaluating new operations abroad, swelling an exodus that almost tripled dollar revenue from Japan’s overseas units in the decade through 2012, according to trade ministry data. The profit-to-sales ratio for foreign affiliates was 5.9 percent, compared with 3.3 percent for domestic producers in the year ending March 2012, government data show.
The trend to build factories in destination markets helps explain why the yen’s slump is doing less to boost the economy than in the past. Japan exported 5.8 trillion yen ($62 billion) of goods in April, the same amount as in February 2006, when the yen was 17 percent stronger, and Abe was chief cabinet secretary.
The effect of the weak yen will be felt on exports from now on, Bank of Japan Governor Haruhiko Kuroda said on June 11, after deciding at a two-day meeting not to alter the central bank’s plan for monetary stimulus. In addition to the gain from booking profits in yen from overseas units, shipments from Japan are forecast to rise around 5 percent next year, according to lenders including JPMorgan and Bank of America.
While exports are recovering after declines in nine out of 12 months last year, the gains may be influenced more by the world economy. The International Monetary Fund in April pared its 2013 global growth outlook to 3.3 percent from 3.5 percent.
“Exports will be boosted by global demand that will pick up moderately in the second half of this year and continue in 2014,” said JPMorgan’s Adachi. “The impact of the yen will not be so significant.”
History indicates a diminishing boost to exports from a weaker currency. When the yen fell 20 percent in seven months in 1995, monthly exports grew 8.4 percent on average in the ensuing three years, even as the domestic economy hardly expanded.
A lower yen couldn’t save Japanese trade in 2001 as the U.S. tipped into recession and exports tumbled 5.2 percent. Shipments picked up in 2002 and 2003 as the global economy rebounded, despite the yen embarking on a three-year climb.
Today, the tradeoff between a cheaper yen, higher raw material costs and global demand is illustrated by Mitsui Chemicals Inc. (4183), Japan’s fifth-largest chemical company by sales on the benchmark Topix index of stocks.
Operating profit at the company rises by 600 million yen with each 1 yen deprecation as the value of goods sold in dollars and earnings booked at overseas units are higher when translated into yen, said Yuri Matsunaga, a company spokesman in Tokyo. At the same time, the cheaper yen raises the import price of raw materials such as naphtha.
“We are under pressure to pass on the higher costs but so far we’ve failed” because of weak global demand and increased competition, he said. “Demand in Asia won’t recover unless conditions pick up in China.”
The Tokyo-based company lost 10.3 billion yen in the year ended March. This year it plans to open a factory in Singapore to make material for eye-glass lenses, and a textile plant in Tianjin, China, Matsunaga said.
For some domestic manufacturers that face higher costs without the export benefit, the situation is worse than after the global slump that followed the collapse of Lehman Brothers Holdings Inc. in 2008, said Tanaka at Uchida, which had 1.6 billion yen in sales last year.
“Over the past 20 years, we’ve gone through deflation, the Lehman shock and the earthquake, but we are currently in the most difficult time,” he said.
To help Japan’s industry, Abe has promised to loosen business regulations and increase government support as part of the “third arrow” of his three-pronged strategy to end deflation, following fiscal and monetary stimulus.
The prime minister pledged to spur capital spending in the world’s third-largest economy back to the level before the 2008 financial crisis, and increase support for companies operating overseas. Expenditure excluding software fell 5.2 percent in the first quarter from a year earlier, a drop of 0.9 percent from the prior three months, the quarter when Abe came to power.
“Deregulation is the cornerstone of the growth strategy,” Abe said on June 5 in Tokyo. “Japan has regulations that are out of sync with the times.” Still, the effort to loosen legislation won’t begin before the autumn, after upper-house elections next month.
Meanwhile, the effect of Abenomics on the yen hasn’t been enough to stem overseas expansion plans by some of the nation’s biggest companies. With Japan’s population set to decline by about a third by 2060 to 86.7 million, according to government projections, producers are looking abroad for markets and labor.
Sumitomo Metal is considering building a 30 billion yen smelter abroad by 2021, said Masashi Takahashi, a company spokesman. President Nobumasa Kemori told reporters in February that the company needed the option to reduce risks including rising domestic power charges.
Sharp’s plan to open a plant in Karawang, Indonesia, by the end of 2013 to make washing machines and refrigerators also hasn’t been affected by the currency, said spokeswoman Miyuki Nakayama in Tokyo. “We expect a growing demand for appliances in Indonesia, where GDP growth is high,” Nakayama said.
JFE is considering building an integrated steel mill in Vietnam, its first outside Japan, as part of a push to be closer to customers in markets where demand is rising for Japanese cars and other products, according to Kaoru Ando, a company spokesman.
Japanese manufacturers aren’t the only ones with a global footprint. Munich-based Bayerische Motoren Werke AG makes sport-utility vehicles in South Carolina and Seoul-based Hyundai Motor Co. makes Sonata and Elantra sedans in Alabama, while Detroit-based General Motors Co. makes millions of vehicles a year in China.
Still, the yen’s decline has spurred some companies to consider bringing production home. Panasonic Corp. (6752), Japan’s largest appliances maker, will decide around this autumn whether to move some fabrication of household equipment back to Japan if the yen falls to 105-107 versus the dollar, Kazunori Takami, head of the company’s appliance unit, said on June 3 in Osaka. The yen traded at 94.86 per dollar at 3 p.m. today in Tokyo.
More may follow, or defer plans for overseas production, if the yen resumes a decline. The full effect of a depreciation usually takes around 12 to 18 months to show, said Takatoshi Ito, a professor at Tokyo University and a former member of the government’s council on economic and fiscal policy.
“You’re going to see both a strengthening of investment, exports and production for a growing amount of consumption here in the country and you’re going to see companies investing more abroad,” David Lipton, the IMF’s first deputy managing director, said in an interview in Tokyo on May 31.
The weaker yen also can benefit the economy in other ways, said Martin Schulz, a Tokyo-based economist at Fujitsu Research Institute, who has done work for the central bank. Currency gains booked by overseas subsidiaries encourage investment in stocks, he said. The Topix stocks index reached a five-year high on May 22, before falling 17 percent.
Shares of Tokyo-listed businesses that get more than half their revenue from foreign markets have risen an average 19 percent this year, compared with 11 percent for those with mostly domestic sales, according to data compiled by Bloomberg.
The cheaper yen also reduces the cost of investing in Japan from abroad. Foreigners were net buyers of more Japanese stocks in the week ended April 12 than any other week since Bloomberg began compiling the data in 2001.
That bullish trend isn’t shared by some of the country’s manufacturers that have been coping with one setback after another in the two decades since Japan’s property bubble burst.
“We worked feverishly over the past 20 years while the Japanese economy went up and down and clients accelerated overseas relocations, and we managed to tide over,” said Hiroto Yokoyama, managing director of auto-parts maker Iwaki DieCast Co. in Miyagi Prefecture, which has four factories in Japan and one in Arizona. “But I feel that we will go downhill from now.”
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