As red ink flows, Japanese firms struggle to keep manufacturing at home

Following the report of Japan’s first annual trade deficit in more than 30 years, the country’s major manufacturers have been delivering earnings results soaked in red ink.

The factories that once powered the economy by churning out world-beating electronics, cars, and machinery are either being relocated overseas or losing out to Asian rivals.

Japan will now have to come to terms with a new post-industrial economy that will see it increasingly rely on income from overseas investments. 

Japan recorded a trade deficit of nearly 2.5 trillion yen ($32 billion) in 2011 as a storm literally battered its industries. The March tsunami destroyed factories, ports, and infrastructure, disrupting supply chains across the country and the globe.

With nuclear reactors shut down for safety checks in the wake of the Fukushima crisis – 50 of Japan’s 54 reactors are currently offline – there has been no choice but to import more fuel and fire up old thermal power stations.

Tellingly, the only major Japanese companies to announce increased profits for 2011 were the giant trading houses that import much of the fuel required for the revived power plants. The strong yen also made Japanese exports less competitive as economic troubles in Europe and the US weakened their own currencies and the demand in those crucial markets.

Although 2011 was something of an aberration, the days of huge trade surpluses for Japan are almost certainly over.

Faced with lower wage costs in developing countries and innovative rivals in South Korea and Taiwan, Japan’s corporations are struggling to keep meaningful manufacturing at home. One concern is that without the surpluses Japan has had as a buffer for decades, its ability to service its huge national debt – currently around 200 percent of GDP – could be at risk.

Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch (BAML) in Tokyo, says that while the big trade surpluses are over, Japan isn’t about to plunge into huge deficits – provided the price of imported raw materials doesn’t increase much for the resource-poor country.“Commodity prices are the Achilles heel of Japan because it’s so heavily dependent on imports such as oil. If there were a large fluctuation, it would have a severe impact,” says Mr. Kichikawa.

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