There’s a growing lobby for Japan’s manufacturers to bring their production back home. Finbarr Bermingham asks whether there is economic sense in the movement.
When Shinzo Abe came to power in December 2012, he assumed the reins of what many perceived to be a superpower in decline. Japan, which had led the world in exports and innovation for a good chunk of the twentieth century, had been stagnating for years. The “lost decade” had led in years of recession before the financial crisis, while the subsequent global malaise also left Japan stricken.
By 2013, Japan’s nominal GDP rate was the same as it was in 1991.
The country’s ballooning trade deficit was exacerbated with the Fukushima nuclear disaster in 2011, which led to the closure of all of Japan’s nuclear power stations, with the energy replaced by expensive imports, most notably a massive increase in LNG purchases. Abe came in with a bold plan, which the media soon billed Abenomics. The “three arrows” of the policy were to be fiscal stimulus, monetary easing and structural reforms. And the cornerstone of this plan from a trade point of view was to boost exports by allowing the currency to depreciate.
The logic is straightforward. Years of currency inflation had made Japanese goods expensive to purchase abroad and competitor countries, such as neighbouring Korea, were stepping in to steal some of Japan’s market share. When the South Korean won lost 35% of its value against the US dollar in 1997, for instance, it led to a 15% rise in total exports volume.
The same strategy, Abe clearly thought, would provide similar well-needed tonic for Japan’s exports sector.
More than two years on, people are beginning to question this strategy. The yen has lost around 21% of its value since Abe came to office. Monthly exports in December and January rose by 17% and 12.7% year on year, signs that the policy engineered by Abe may be starting to pay off. But most in Japan are still concerned. These increases are coming from a relatively low base and, for the year, the figures are less encouraging. “People are not making more money, that’s the bottom line. The exports aren’t growing quickly enough,” Chris Taniguchi, a managing director at Tokyo Star Bank told GTR on a trip to the Japanese capital in February.
The conclusion that many have jumped to is that there simply isn’t requisite production in Japan these days to take advantage of the depreciated yen. Many of the major exporters have long since upped sticks and left. As is the case in most developed economies, manufacturing has been offshored gradually over the decades (later in Japan than in the UK or US, it should be said), in order to take advantage of lower cost centres elsewhere and, ostensibly, to be closer to the target market. It’s now estimated that 60% of Japan’s exports are invoiced in foreign currency.
“This trend began two or three decades back, particularly for large manufacturers, such as automotive companies,” says Fung Siu, Japan analyst at the Economist Intelligence Unit. “But I think – without having any hard industry data on it – the trend accelerated in the wake of the 2008-09 global financial crisis when the yen, because of its safe haven status, strengthened against a host of currencies. The strengthening spurred a whole lot more firms to locate their production bases overseas.”
So Japan became a victim of its own stability. This has led to a pseudo-nationalistic campaign among certain quarters of the Japanese political and media spectrums to bring production back to Japan, and a few producers are taking note. Last year, it was reported that Panasonic, the electronics giant, was considering bringing some of its manufacturing back home, with a company spokesperson telling the Financial Times that a “final decision would depend on the exchange rate”.
For Panasonic, the move may make sense because a large portion of its sales (around 50%) are to the Japanese domestic market. So with a weak yen, it actually loses out since it makes imports more expensive. Other manufacturers have made noises about following suit. TDK invested some ¥25bn in a site on which to produce smartphone parts. Daikin has reshored some of its air conditioner manufacturing business from China, partly for currency issues, but partly also because of the rising wage levels in China. In the grand scheme of things these are drops in the ocean, but there are some clear benefits to doing so, currency being one and a skilled workforce in Japan, along with existing production facilities, being others.
“There might be moves to position Japan as the home of the ‘mother factories’ with high investment in R&D in order to produce the most advanced products. Japan will be the production centre quality-wise, but not quantity-wise,” Akira Kimura, a director at the Japan Foreign Trade Council tells GTR. “More emerging markets require higher standards of goods, such as environmental and health-conscious and so on. This might lead to increasing demand for ‘Made in Japan’ products in the future,” he adds.
Land of the rising Sony?
“Reshoring” has been a buzzword among developed economies for a few years now. Electorates are fed up with jobs being lost to cheap production centres. Fears exist over intellectual property theft in China – an issue particularly close to the surface of the US debate, where the concept of near-shoring (that is, moving facilities from Asia to Mexico) has also been thrashed out. And in Japan these social quandaries exist too.
In the 2000s, the Japanese company Kawasaki signed up with the Chinese government to build a high-speed rail network to traverse its giant neighbour’s landmass. The company agreed to work on a technology-transfer basis, whereby once Kawasaki had finished the job, the Chinese partner would be free to use the IP within China, but not abroad. However, China then allegedly started building networks around the world using Kawasaki’s know-how. “China says it owns exclusive rights to that intellectual property, but Kawasaki and other foreign companies feel otherwise,” said a spokesperson in 2010.
Kawasaki was scorned and data shows that offshoring to China has slowed for Japanese firms in the years since. There’s a strong argument, though, that this is more of a reflection on the political relationship between the two than a testimony to Japan’s domestic situation. In 2012, Chinese people boycotted Japanese cars and attacked Japanese businesses over a dispute about islands. The pair are uncomfortable industrial bedfellows, but it would be a great upheaval for Japan to take all of its Chinese subsidiaries back to its own turf: while the idea has caught fire, the stats are slower to take light.
In the US, the case for reshoring may be easier to make: there is a growing consumer market, with relatively high levels of unemployment and big capacity in the manufacturing space. Not so in Japan. “Unemployment is at about 3%. There is no capacity in the labour market,” Marcel Thieliant, Japan economist at Capital Economics, tells GTR. Another factor is the issue of demographics: Japan’s consumer market is shrinking, whereas those in the US and UK, where reshoring is also sometimes mooted, are growing.
Some cite tax benefits: the Abe administration’s move to cut corporation tax would make it more favourable for companies to manufacture back home. But to make a gamble on such a changeable thing as monetary policy would be very dangerous. Furthermore, another recent shift in Japanese tax policy would likely serve to cancel out any benefit enjoyed by lower corporation tax back home.
Up until relatively recently, Japanese companies enjoying tax benefits through being domiciled overseas had to make up the difference in tax payments made by their headquarters back home. A paper by the IMF explained: “When dividends were paid, the Japanese parent was liable to pay a repatriation tax, with a credit granted for the foreign taxes already paid (so that the repatriation tax was equal to the difference between the Japanese and the foreign tax rate). In 2009, Japan moved toward an exemption system for dividends, consistent with territorial taxation. In particular, 95% of the foreign dividends received by the Japanese parent are now exempt if the ownership in the foreign company is at least 2%. If these conditions are not met – and also for other forms of foreign source income, such as royalties, interest, foreign branch income, and capital gains – the foreign tax credit system still applies.”
This is, Thieliant says, a factor often overlooked by people arguing the tax case for reshoring. The anecdotal evidence makes for nice stories, but the data suggests that the reshoring trend is exactly that: anecdotal. Statistics from the Japan Ministry of Economics show that manufacturing employees at overseas subsidiaries as a percentage of those based in Japan has risen from 10% in 1998 to 40% in 2014. This may change if the yen continues at its depressed rate, but most people in the market are sceptical.
Abe will be delighted with the recent uptick in the export performance. But until the progress is steadfast and sustained, doubts will remain. Likely, the Made in Japan lobby will continue to be vocal, but to date it appears that their protests are falling on deaf ears.