Honda's shifted most production overseas.

Photographer: Dimas Ardian/Bloomberg News

Honda's Bumpy Road to Recovery

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Over the last 12 months, fortunes have diverged for Akio Toyoda and Takanobu Ito, the leaders of Japan's No. 1 and No. 3 carmakers.

Toyota President Toyoda is the toast of Tokyo: His company is projecting a record $18 billion profit for the year. Honda President Ito, who many view as the more visionary of the two, is out of a job. Toyota appears to have fully recovered following a major safety crisis, when its cars were blamed for unintended acceleration that led to several deaths. Honda, meanwhile, is still grappling with a scandal involving deadly airbags manufactured by Takata, as well as several of its own quality-control issues.

A common thread, however, runs through their differing trajectories: the weak yen, which has become a major pillar of Prime Minister Shinzo Abe’s reform efforts.

QuickTake Abenomics

In effect, Honda finds itself on the wrong side of Abenomics. In a Feb. 18 column, I held up the automaker as a shining example of the kind of global thinking that Japan should be encouraging in its biggest companies. For 15 years now, Honda has been one of the rare Japan Inc. jewels that really "gets it" -- building vehicles where it sells them and going where the growth is as Japan’s domestic market ages and shrinks. Honda’s efforts to shift operations abroad have been both prescient and bold. It first started making more cars abroad than in Japan in 2000. Nine years later, when Ito took the helm, Honda was manufacturing 72 percent of its vehicles overseas. Last year that number rose to 79 percent.

The shift outside Japan stretched resources and exposed the company to risks, such as devastating floods in Thailand. But these things happen when you leave home and forge paths outside your traditional comfort zone. With Abe now focused on resurrecting domestic demand, Honda should in theory have been able to recover from its recent woes in short order.

The problem, as I’ve written before, is that the most evident result of Abe’s reform efforts has been a massive quantitative-easing initiative that’s driven down the yen 30 percent since he took over. By contrast, major structural changes to the economy -- plans to tighten corporate governance, lower trade barriers and loosen labor markets, among them -- mostly remain on the drawing board.

The weak yen has been a godsend for companies like Toyota, which have maintained their massive domestic production base even as they focused on sales growth abroad; their labor costs have declined, even as overseas profits have swelled. Honda, meanwhile, may find it harder to bounce back from its stumbles given how small its local production operations have shrunk.

The cheap yen has punished other daring companies as well, among them budget carrier Skymark. In the two years before Abe launched his reform program, Skymark President Shinichi Nishikubo bet big on Japan's travel market, ordering six Airbus A380 planes worth about $2.5 billion. The yen's plunge made the payments all but impossible, thrusting Skymark into bankruptcy last month and Nishikubo out the door. The company is now looking for a lifeline from the likes of Malaysian budget airline AirAsia.

Of course, any Japanese recovery must be powered by several self-reinforcing growth drivers. But Tokyo's retrograde focus on a lower exchange rate is arguably doing more harm than good. The number of bankruptcies linked to the yen, for example, surged to 345 last year, about 2.7 times that of 2013.

Abenomics bulls see these businesses as collateral damage necessary to revive Japan's giants. And if those big companies shared profits with workers -- boosting wages and encouraging consumption -- the optimists might be right. But so far, there’s little sign of any meaningful uptick in wages.

Over the long run, Japan should want its companies to display the kind of vision Honda and Skymark have. "Compared to the hard work that Honda and much of Japan's industries have already invested into such strategies for more than a decade, Abenomics becomes just a sideshow," says Martin Schulz of Fujitsu Research Institute. The danger is that the weak yen will encourage complacency and a misguided faith in a production model that excelled in the 1960s and 1970s, but is less relevant today.

A better strategy would require broadening efforts to boost growth in ways that support small-and-midsize companies along with Toyota-like behemoths. As long as Japan predicates its turnaround on the backs of a small handful of huge exporters, the real damage will be to its economic future.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Willie Pesek at wpesek@bloomberg.net

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net