Nobody should be surprised that Toyota, flush with $18 billion in profits this year, has emerged as a major beneficiary of Abenomics. After all, the weakened yen at the center of Japanese Prime Minister Shinzo Abe's economic program was designed to help the bottom lines of major exporters.
But it's still something of a shock that Japanese workers won't be sharing in Toyota's good fortune. Rather than invest any of its spoils in Japan, the car manufacturer announced plans this week to spend $1.4 billion to build new factories in Mexico and China.
It's certainly good news that one of Japan's most iconic companies is experiencing a resurgence. And Toyota CEO Akio Toyoda's plans to shift production to emerging markets, will surely please the company's shareholders. Toyota is the rare example of a Japanese manufacturer that has figured out how to create operations that are truly global.
But Toyota's move is a body blow to Tokyo's "reshoring" push. Officials had hoped the yen's 29 percent plunge since late 2012 would encourage manufacturers to bring back jobs they had shifted abroad over the last decade. Just last week, analysts at the financial holding company Nomura voiced confidence that the yen would "enhance the relative appeal of producing in Japan."
Toyota evidently disagrees. The company seems to have determined that Japan's shrinking, aging population and high labor costs don't offer sufficient room for growth. It may only be a matter of time until other Japanese companies decide to follow Toyota's lead.
In that sense, the strategy behind Abenomics has always been flawed. Tokyo had been betting on a cash-for-paychecks deal between the Bank of Japan and companies. In exchange for a weak yen, executives would be expected to fatten salaries, which would allow workers to flock to shopping centers and produce vibrant national growth. But executives haven't been interested in the quid pro quo. Last month, Toyota backhanded the BOJ by giving its 63,000 union employees a meager $33 per month pay hike.
By concentrating on foreign markets -- for both sales and manufacturing -- Toyota is simply responding to where the growth is. The company is intent on maintaining its strong position in North America, where economic growth is steady and wage gains, while still sub-par, outpace those Japan. China, meanwhile, is a longer-term project. Toyota hit the 1 million mark for annual sales for the first time in 2014. Even if China expands less than the government's 7 percent target, the rate at which incomes are rising among its population of 1.3 billion people is far outpacing the increases that Japan's 127 million people have seen.
The only way Tokyo can woo production back to Japan is if it implements pro-growth policies. The weak-yen model worked well enough for Japan in the 1970s and 1980s, but it has little relevance now that cheaper competitors have caught up as manufacturing hubs.
One option Japan should consider is using tax incentives to lure producers home. A key pillar of Abenomics has been cutting Japan's 36 percent corporate tax rate. More good would come from slashing the rate only for executives who create jobs in Japan. Additional sweeteners could be offered to companies that share outsized profits with workers. Tax penalties could be imposed on CEOs who hoard excess cash they could be using to enliven domestic demand.
Unfortunately, there's little evidence any of these steps are afoot. Rather, all eyes are on the Bank of Japan, which is expected to weaken the yen even further in the months ahead. Japan's economic wheels, it seems, will keep spinning, but only Mexico and China can count on enjoying the ride.
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