Economy falling behind other Asian neighbours Japan may well be coming out of its slump but many of ...
Economy falling behind
other Asian neighbours
Japan may well be coming out of its slump but many of its traditional leading industries are now falling behind those of other Asian countries.
The first task will be to catch up with overseas competitors who have challenged Japan's hegemony in key areas such as electronics, mobile phones and the auto industry.
Countries such as Korea, Singapore and Thailand have not been held back by a history of cross-shareholder ownership and overstaffing on the same level as Japan.
John Hayter, senior Far East fund manager for Pavilion Asset Management, says up to 10% of Japanese are unnecessarily employed. He adds: "Japan is grossly overemployed and so this is likely to be a recovery in which jobs will not be created. Korea has dramatically cut its production costs and Samsung has now displaced Toshiba as the premier semiconductor manufacturer."
Korea also is competing in the auto industry and with hydraulic excavators, mobile phones and liquid crystal displays.
Hayter says: "Sony felt the need to respond by reducing its costs. There's been an increasing move to performance-related pay and now the question is whether smaller Japanese players will follow suit to compete."
It is Japanese technology and training that can give it the edge against its newly strengthened competitors, as the country's traditional manufacturing base is replaced with hi-tech industries and services. This change can only make a difference if the economy continues recovering.
Personal consumption is 60% of GDP, whereas net exports are around 2%-3%.
Philip Whittome, fund manager of Investec Guinness Flight, says: "People tend to be over-obsessed with the exchange rate. Japan is seen as a manufacturing-led export economy but these days it's pretty much a services and domestic demand-led economy."
Japanese-owned factories tend to be situated all over Asia and the rest of the world, to take advantage of low labour costs. This gives companies some flexibility in coping with strong competition. A potential threat to Japan's recovery is that effective and painful restructuring will stop once companies start to be rewarded by the markets.
Hayter adds: "Even if corporate Japan restructures, the government won't. You'll end with all the good work being swallowed up by a wasteful civil service where there has not been any restructuring."
Whittome has been more optimistic about Japan than the consensus. When some GDP forecasts were -2.5% for this year, he predicted 0.5% growth. On the basis of the government's Yen24 trillion spending package he could not see any reason to be so negative.
Whittome thinks all GPD forecast upgrades from -2.5% to about zero have now been discounted and the market has risen enough to reflect the better economic outlook. In the short term, he thinks the market will go more or less sideways, although the momentum of foreign investment should keep the market fairly positive.
Hayter thinks that at some stage there will be crisis of confidence, when investors ask themselves whether restructuring is really going to take place. Then the market should go up again.
He says: "Japan has a lot of things going for it. It has a well-educated workforce and it has an incredibly strong work ethic."
Whittome says: "In the last seven or eight years the right thing to do has been to sell on strength, whereas for the next five years, it is to buy on weakness."
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