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.
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.
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.”
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.”