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

Japan's manufacturing base is hollowing out as many electronic and car factories move overseas. Meanwhile, a strong yen is sending firms on an international buying spree.

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A worst-case scenario for Japan would be if its overseas investments are not able to cover a growing trade deficit, and a shrinking domestic economy was unable to continue buying enough government debt. The Bank of Tokyo-Mitsubishi UFJ recently announced it had developed a contingency plan in case of a crisis in the national debt. The bank, Japan’s biggest, has every reason to be concerned – it holds a whopping $550 billion in Japanese government bonds.   It would only take a small rise in the cost of borrowing for the government to make its huge debt unaffordable. With no European Union to bail it out, the only foreseeable outcomes would be hyperinflation or default.

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Sony, Nintendo, and Panasonic face tough times

On Thursday, Sony, once a symbol of Japan’s high-tech innovation, announced more than $2 billion in losses for the October to December quarter, traditionally the strongest period for sales of the company’s consumer electronics and game products.

Sony is hardly alone in its suffering: Game rival Nintendo announced its first annual loss in three decades. Toshiba cut its full-year profit forecast in half and Sharp forecast its biggest loss in its history as its share price fell to a 31-year low, while Panasonic predicted losses of more than $10 billion on Friday, the second-highest ever for a Japanese manufacturer. All three of the major TV manufacturers have lost ground to South Korean, Taiwanese, and Chinese rivals, and have announced more factory closures in Japan. 

Hiroshi Udo, director of Dai-ichi Life’s economic research institute, says he is concerned "about Japanese electronic makers and other global companies losing competitiveness recently. Lower profitability affects the domestic economy through their downsizing of employment.” 

Business up?

While Japan’s blue-collar workers look set to suffer as the industrial base continues to “hollow out,” corporations are on an unprecedented overseas spending spree buoyed by the strong yen and large cash piles accumulated through the good times.

Even while dealing with the effects of last year’s disasters at home, Japanese companies made a record 642 takeovers of foreign firms in 2011, worth more than 5.5 trillion yen ($729 billion). This was second in value only to the 7 trillion yen spent in 2008, and far higher than the 3.6 trillion yen spent at the height of the bubble economy in 1990, when there was a serious backlash against Japan’s global acquisitions.

Even as Japan’s balance of trade in goods looks set to worsen, the shortfall should continue to be covered by the earnings from its huge, and growing, overseas assets. The income from those assets is currently around 14 trillion yen ($184 billion) annually, and rising.

“When household savings, company earnings, and overseas assets are combined, Japan is still a net saver, and a creditor to other countries,” says BAML’s Kichikawa. “It’s not a solution for all of Japan’s problems but it means it is unlikely to default on its national debt.” 

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