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Yen’s slump fails to stem corporate exodus overseas

by Andy Sharp and Yuki Hagiwara

Bloomberg

Prime Minister Shinzo Abe promises that his growth policies will revive the nation’s industrial might. For Takumi Tanaka at auto parts maker Uchida Co., times are worse than after the 2011 quake-tsunami catastrophe.

Tanaka, managing director of the company, which was founded in 1955 and whose 94 employees supply Honda Motor Co. with parts molds, is contending with higher costs after an 18 percent drop in the yen over the past nine months drove up the price of imported metals and energy. At the same time, he’s under pressure from clients to build factories near their overseas plants.

“We see very little benefit” from “Abenomics,” Tanaka said in an interview in Miyagi, where two of the company’s three factories are located. The prefecture suffered some of the worst damage from the Great East Japan Earthquake and tsunami.

“Even today, we are being asked to build plants in Vietnam, Thailand and Indonesia. There is little relief that manufacturing can stay in Japan,” he said.

While the yen’s drop is giving exporters a boost as the Bank of Japan increases the money supply to tackle deflation, the currency benefits aren’t enough to reverse the effect of decades of stagnant growth that forced companies to seek expansion overseas. The success of Abenomics may rely as much on the health of the global economy as on fiscal and monetary stimulus at home.

“Currency isn’t the biggest factor in where companies make investments for new factories,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. in Tokyo who worked at the BOJ for 15 years. “They are trying to reduce currency volatility on their profits, and it’s better for them to make products closer to local markets.”

With the currency rebounding about 7 percent since May 28, Abe is under pressure to implement stronger incentives for companies to stem the migration of production to faster growing markets.

The yen gained 1 percent to reach ¥95.04 per dollar at 3:51 p.m. Thursday in New York, after hitting its strongest level on a closing basis since April 3.

Japan’s overseas units almost tripled sales from 2002 to 2012 and nearly doubled employees to around 15 million, trade ministry data show.

Japanese manufacturers were forecast to have made a record 33 percent of their products abroad in the fiscal year through March, up from 14 percent in fiscal 1989, according to a December survey by the Japan Bank for International Cooperation. In the next three years, the lender predicts the proportion will reach 38 percent.

Sumitomo Metal Mining Co., the nation’s largest nickel producer, JFE Holdings Inc., the second-biggest steel maker, and Sharp Corp., Japan’s No. 3 maker of televisions, are among the businesses building or evaluating new operations abroad, swelling an exodus that almost tripled dollar revenue from overseas units in the decade through 2012, trade ministry data showed.

The profit-to-sales ratio for foreign affiliates was 5.9 percent, compared with 3.3 percent for domestic producers in the year that ended in March 2012, according to government statistics.

The trend to build factories in destination markets helps explain why the yen’s slump is doing less to boost the economy than in the past. Japan exported ¥5.8 trillion worth of goods in April, the same amount as in February 2006, when the yen was 17 percent stronger and Abe was chief Cabinet secretary, before serving his first stint as prime minister.

The effect of the weak yen, which declined from around ¥85 when Abe took office in December to around ¥95 by noon Friday in Tokyo, will be felt on exports from now on, BOJ Gov. Haruhiko Kuroda said Tuesday, after deciding at a two-day meeting not to alter the central bank’s plan for monetary stimulus.

In addition to the gain from booking profits in yen from overseas units, shipments overseas are forecast to rise around 5 percent next year, according to lenders that include JPMorgan and Bank of America.

While exports are recovering after logging dips in nine months last year, the gains may be influenced more by the world economy. The International Monetary Fund in April pared its 2013 global growth outlook to 3.3 percent from 3.5 percent.

“Exports will be boosted by global demand that will pick up moderately in the second half of this year and continue in 2014,” said JPMorgan’s Adachi. “The impact of the yen will not be so significant.”

History indicates a diminishing boost to exports from a weaker currency. When the yen fell 20 percent in seven months in 1995, monthly exports grew 8.4 percent on average in the ensuing three years, even as the domestic economy hardly expanded.

A lower yen couldn’t save Japanese trade in 2001 as the U.S. tipped into recession and exports tumbled 5.2 percent. Shipments picked up in 2002 and 2003 as the global economy rebounded, despite the yen embarking on a three-year climb.

Today, the trade-off between a cheaper yen, higher raw material costs and global demand is illustrated by Mitsui Chemicals Inc., Japan’s fifth-largest chemical company by sales on the Topix stock index.

Operating profit at the company rises by ¥600 million with each ¥1 deprecation of the yen, as the value of goods sold in dollars and earnings booked at overseas units are higher when repatriated, said Yuri Matsunaga, a company spokesman in Tokyo.

At the same time, the cheaper yen raises the import price of raw materials such as naphtha. “We are under pressure to pass on the higher costs, but so far we’ve failed” because of weak global demand and increased competition, Matsunaga said. “Demand in Asia won’t recover unless conditions pick up in China.”

The company lost ¥10.3 billion in the year through March. In 2013 it plans to open a factory in Singapore to make material for eye lenses, and a textile plant in Tianjin, China, according to Matsunaga.

For some domestic manufacturers that face higher costs without the export benefit, the situation is worse than after the global slump triggered by the collapse of Lehman Brothers Holdings Inc. in 2008, said Tanaka at Uchida, the auto parts maker, which logged ¥1.6 billion in sales last year.

“Over the past 20 years, we’ve gone through deflation, the Lehman shock and the earthquake, but we are currently in the most difficult time,” he said.

To help domestic industries, Abe has promised to loosen business regulations and increase government support as part of the “third arrow” of his three-pronged strategy to end deflation, following radical fiscal and monetary stimulus.

The prime minister pledged to return capital spending to the level before the 2008 financial crisis, and to increase support for companies operating abroad. Excluding software, expenditure fell 5.2 percent in the first quarter from a year earlier and 0.9 percent from the prior three months — the quarter when Abe came to power for his second stint at the government helm.

“Deregulation is the cornerstone of the growth strategy,” Abe said June 5 in Tokyo. “Japan has regulations that are out of sync with the times.”

Still, the effort to loosen legislation won’t begin before the autumn, after July’s Upper House election.

Meanwhile, the effect of Abenomics on the yen hasn’t been enough to stem overseas expansion plans by some of the nation’s biggest companies. With the population set to decline around a third by 2060 to 86.7 million, based on government projections, producers are looking overseas for markets and labor.

Sumitomo Metal is considering building a ¥30 billion smelter abroad by 2021, said Masashi Takahashi, a company spokesman. President Nobumasa Kemori told reporters in February that the company needed the option to reduce risks, including rising domestic power charges.

Sharp’s plan to open a plant in Karawang, Indonesia, by the end of 2013 to make washing machines and refrigerators also hasn’t been affected by the currency, said spokeswoman Miyuki Nakayama in Tokyo. “We expect growing demand for appliances in Indonesia, where GDP growth is high,” Nakayama said.

JFE is considering building an integrated steel mill in Vietnam, its first outside Japan, as part of a push to be closer to customers in markets where demand is rising for Japanese cars and other products, according to company spokesman Kaoru Ando.

Japanese manufacturers aren’t the only ones with a global footprint. Germany’s BMW AG makes sport utility vehicles in South Carolina, South Korea’s Hyundai Motor Co. produces Sonata and Elantra sedans in Alabama, and General Motors Co. makes millions of vehicles a year in China.

Still, the yen’s decline has spurred some companies to consider bringing production back home. Panasonic Corp., the nation’s largest appliances maker, will decide this autumn whether to shift some fabrication of household equipment back to Japan if the yen falls to between ¥105 and ¥107 versus the dollar, Kazunori Takami, head of Panasonic’s appliance unit, said June 3 in Osaka.

More may follow, or defer plans for overseas production, if the yen resumes a decline. The full effect of a depreciation usually takes around 12 to 18 months to show, said Takatoshi Ito, a professor at the University of Tokyo and a former member of the government’s council on economic and fiscal policy.

“You’re going to see both a strengthening of investment, exports and production for a growing amount of consumption here in the country and you’re going to see companies investing more abroad,” David Lipton, first deputy managing director of the IMF, said in an interview in Tokyo on May 31.

The weaker yen also can benefit the economy in other ways, said Martin Schulz, a Tokyo-based economist at Fujitsu Research Institute who has done work for the BOJ. Currency gains booked by overseas subsidiaries encourage investment in stocks, he said. The Topix index reached a five-year high May 22, before shedding 18 percent.

Shares of Tokyo-listed businesses that get more than half their revenue from foreign markets have risen an average 19 percent this year, compared with 11 percent for those with mostly domestic sales, data compiled by Bloomberg showed.

The cheaper yen also reduces the cost of overseas investment in Japan. Foreigners were net buyers of more Japanese stocks in the seven days through April 12 than in any other week since Bloomberg began compiling comparable data in 2001.

That bullish trend isn’t shared by some of the country’s manufacturers, which have been coping with one setback after another in the two decades since the property bubble burst.

“We worked feverishly over the past 20 years while the economy went up and down and clients accelerated overseas relocations, and we managed to tide things over,” said Hiroto Yokoyama, managing director of auto parts maker Iwaki DieCast Co. in Miyagi Prefecture, which has four domestic factories and one in Arizona. “But I feel that we will go downhill from now.”