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Japan’s Recent Economy

The Japanese economy is one of the strongest in the world. Only the USA has a higher GNP. The United States also is one of Japan’s primary exporters which is advantageous to both countries. But how will the economy react to the evident recession that the United States is facing? Japan’s main export goods are cars, electronic devices and computers. Most important single trade partner is the USA which imports more than one quarter of all Japanese exports. Other major export countries are Taiwan, Hong Kong, South Korea, China and Singapore. Japan has a large surplus in its export/import balance.

The most important import goods are raw materials such as oil, foodstuffs, and wood. Major suppliers are the USA, China, Indonesia, South Korea, and Australia. Automobile manufacturers Toyota, Nissan and Honda usually meet and exceed expectations and remain a vital piece of the Japanese economic puzzle. Most view the Japanese economy as well-built and prosperous but factors such as U. S. recession, exchange rate fluctuation, and a weak United States dollar may prove that it is as vulnerable to recession as any other secondary economies. “PARTS FARE BETTER THAN THE WHOLE”

According to this article by John Murphy, shares of Japan’s Big Three automobile manufacturers (Toyota, Nissan, and Honda) have dropped significantly this year. The primary reasons this has come to pass is the strengthening yen and the struggling U. S. economy. But analysts say, investors looking for value in the Japanese industry are advised to look into auto parts makers industry. Auto parts makers are in a better position from the quirks U. S. consumers, less exposed to the fluctuations in the yen, and poised for rapid growth in economies such as China.

The yen creates problems for Japanese auto makers because it diminishes when converted and they export more than 40 percent of the cars they produce in Japan. Parts makers have an advantage when it comes to shifting demand. U. S. consumers are beginning to prefer smaller fuel sipping vehicles over large, gas guzzling and auto makers are having headaches trying to switch production plans and offload unwanted vehicles. However, parts makers don’t feel the pinch of market shifts, as many of their products like seat belts, brakes and seating can be used in more than one model.

For many parts makers the impact of the U. S. slowdown will be softened by the robust demand in emerging markets. The main growth engine in Japanese parts makers is China. Toyota, Nissan and Honda are all expected to do favorably well in 2008. Analysts favor shares affiliated with Toyota because of its expansion plans in emerging markets and commitment to hybrid vehicles. TWO JAPANESE GROCERS STAY HUNGRY Amid sluggish economic growth, stagnant wages and a faltering Tokyo stock market, Japanese consumers have been reluctant to spend.

Consumer sentiment fell to its lowest level in more than four years while nationwide supermarket sales dropped almost two percent a year earlier. Higher oil and commodity prices have spurred companies to raise prices on necessities for the first time in years. Nonetheless, industry giants, Aeon and Seven & 1, are wooing shoppers. They are using their market clout to hold down prices by putting pressure on food makers to absorb most of the rising material costs. Both retailers are expanding offerings of their private labels, whose products are less expensive than national names and retailers can reap bigger profit margins.

Yasuyaki Sasaki, a senior analyst at Lehman Brothers Japan, rates both companies as “overweight” which means they will outperform the wider market for the next 12 months. Smaller chains, however, remain likely to be hit harder by rising food prices. Seiyu, a unit of Wal-Mart stores, has struggled to set terms or prices with food makers. For 2007, it booked a net loss for the sixth consecutive year. Even Aeon and Seven & 1 can keep all price increases at bay. Companies with large market share that are valuable to retailers on the sales floor find it easier to raise prices. JAPAN GETS SHELTER VIA CHINA TRADE

Traditionally, Japanese economy is dependent on exports which results in panic in the event of threats in its overseas market. But this is not the case presently. Although the United States is under a slowdown economically, Japan is not worried. That is because of the exceptional speed that Japanese manufacturers have tapped into China. If Japan were to go into a recession, it would be because of serious domestic weaknesses rather than export dependency. For a long time, the U. S. was Japan’s biggest export market, and Japanese businesses are concerned with the threat of stagflation in the United States.

But the share of Japan’s exports fell to 20% in 2007, from 30% in 2001. Last year, China overtook the U. S. as Japan’s biggest export market. Japan is the only G-7 nation to run a trade surplus with China as it supplies industrial equipment and parts. China imports from Japan more than anywhere else, which means if China and other major export markets can avoid an impact from a possible U. S. recession, Japan would be less vulnerable to a U. S. slowdown than any developing economies who are far more exposed to the U. S. China’s economy has expanded by 11% in the last two years.

Any hiccup in Chinese growth would affect Japan. This is also the case with exchange rates. The Chinese yuan is pegged with the dollar and the Japanese yen’s recent rise makes Japanese products less competitive and diminishes the value of Japanese export revenue. JAPAN DEBATE: SECURITY OR STIMULUS In Japan, there is concern and uncertainty over how far it should open up its economy to competitors from abroad. An investment fund of Australia’s Macquerie Group sparked the debate last fall by buying a 19. 9% stake in the operator of the terminal facilities at Haneda, Tokyo’s major domestic airport.

Citing national security concerns, a bill was put together earlier this month that would bar a foreigner from owning more than one third of a facility operator at Haneda or Narita, the international airport serving Tokyo. The bill which was expected to pass through Parliament smoothly ran into opposition. It was objected by three ministers who stated the proposed law goes against the governmental policy of encouraging foreigners to invest as a way of invigorating Japan’s slow growing economy. Under the former prime minister Junichiro Koizumi, Japan pursued a raft of deregulation policies.

These deregulation laws has resulted in sharp increases in part time and temporary workers, thus widening the income gap. Declines in public-works spending have hurt rural communities. Government officials say the airport proposal is about ensuring national security and a high level of service at Japan’s airports. They fear foreign investors may be more concerned with making a profit than satisfying customer needs. People who oppose the airport bill limiting foreign ownership say the government could use other means to ensure airport safety such as requiring facility operators to follow orders from the government during emergencies.

JAPAN’S STOCK BOUNCES BACK BIG On Thursday, February 14 Japanese stocks rose 4. 3 percent logging their biggest one day gain in nearly six years. This propelled gains across Asia. This was spurred by news that Japan’s gross domestic product expanded at a 3. 7 annual rate in the October through December quarter, trouncing expectations. Machinery makers and exporters paced gains and retail sales data from the U. S. overnight also helped sentiment. Economic weakness in the previous quarter as well as the year earlier set the stage for growth. It is predicted that the economy’s rebound will continue.

The strong performance of stocks in Tokyo fired up other regional markets in Hong Kong, Mumbai, Singapore, Zurich, London, and Frankfurt. In the Tokyo trading, shares machinery makers rallied, with Komatsu soaring 7. 9 percent, while Fanuc, a maker of industrial robots jumped 5. 1 percent. The recently weakened yen lifted exporters; Canon advanced 5. 1 percent and Honda Motors gained 5. 4 percent. Financial shares bounced from a string of weak finishes recently, with shares of National Australia Bank rising 3. 3 percent in Sydney, Mizuho Financial Group climbing 4.

2 percent in Tokyo, Cathay Financial Holding rising 4. 6 percent in Taipei, HSBC Holdings jumping 3. 4 percent in Hong Kong, and Overseas Chinese Banking Corporation adding 3. 1 percent in Singapore. Shares of Japan Airlines gained 1. 6 percent on plans to sell its maintenance centers at Tokyo’s Haneda Airport for 42. 2 billion yen as the carrier steps up efforts to reduce costs and scale back real estate holdings. UNDER NISHIMATSU, JAPAN AIRLINES TRIES TO RISE ABOVE LEGACY Japan Airlines (JAL)is a national icon that transports more passengers farther than any other carrier in Japan.

It enjoys a duopoly with All Nippon Airlines Co (ANA) in its protected home market and has been spared competition from low cost carriers that have chewed into the profits of full-service airlines elsewhere. Contrary to their beneficial conditions, JAL is suffering. They have hemorrhaged money for the last two years, posting a loss of 16. 3 billion yen (152. 6 million dollars) for its fiscal year ended March 31. ANA by contrast has had a good deal of success. In September, it launched Japan’s first all-business class service of flights to Mumbai, India with a Boeing 737 containing just 36 roomy seats.

ANA honed their image to be hip and customer oriented. In the past fiscal year, ANA’s net profit rose to 32. 7 billion yen. JAL’s predicament shows how a complacent corporate psychology can undercut any number of advantages that bless a company. Haruka Nishimatsu, chief executive and president of Japan Airlines, was put in charge of righting the wrongs that were done within the organization in recent years. He started by introducing JAL’s domestic first class service which offers a new menu every 10 days and leather seats that recline.

He kept in place a 10% cut in employee salaries and even reduced his own salary by 60%. Presently, the airline is replacing fuel-guzzling jumbo jets with smaller planes like the Boeing 757-800. Under Mr. Nishimatsu, the company expects a net profit of around 7 billion yen for the current fiscal year, its first annual net profit since 2005. WEAK JAPANESE CONSUMER SENTIMENT FURTHER CLOUDS OUTLOOK Japanese consumer sentiment was at its worst level in 4 ? years in December. This indicates that worsening private spending could drag down economic expansion.

Other indicators hint that Japan’s economy could be facing anemic growth or even a recession, making it unlikely that there will be a rate rise this year. The government maintained its view that the economy is recovering but warned about risks from continuing problems in the U. S. subprime mortgage market. The Cabinet Office’s consumer-confidence survey released Friday showed sentiment in December deteriorated for the third straight month. There are a number of concerns from consumers including the threat that prices will continue rising amid escalating crude oil and commodity prices.

The percentage of consumers who expect prices to steadily rise is 84% according to a consumer survey. Corporate profits and capital expenditures are softening, wages are sluggish and Japan’s most important export market, the United States, may be headed toward a recession. Hurting consumer sentiment even more, Tokyo stock market continues its slide and fuel and commodity prices are skyrocketing. Financial services are likely to be hit as customers concerned over United States sub prime problems will be jittery about purchases of new financial projects.

The government is increasingly concerned about how a slowing U. S. economy and financial market tremors may affect growth in Japan. High oil prices are another worry. JAPAN INC. PAYS PRICE FOR WEAK DOLLAR Japan’s biggest exporters are getting less than what they bargained for. The pressure from the weak dollar is raising the prospects that after years of solid growth, their earnings may take a big hit in coming quarters. The concerns have hit the Nikkei Stock Average hard as it has fallen six percent in the past week and dropped fifteen percent since the beginning of the year.

Presently the dollar has declined 8. 2 percent year to date against the yen. While many analysts are expecting a moderate rise in earnings, others are now predicting profit declines for the next fiscal year ending March 2009. A weaker dollar makes exporters’ products more expensive in dollar terms and also reduces the company’s dollar based earnings when they are converted back to their own currencies. Toyota Motor Co. announced that the weak dollar knocked 20 billion yen (194 million dollars) off its group operating profit for the October-December quarter.

Its currency related loss is likely to balloon for the current quarter ending June 30. Japanese stocks are particularly vulnerable to exchange rate fluctuations because exporters account for a disproportionately large chunk of the publicly traded market. While exports account for 15 percent of Japan’s overall economy, 30 to 40 percent of Japan’s pretax profit are generated overseas. By contrast, most of China’s are small or foreign owned companies so their performance has less influence on the mainland’s stock market than other Asian markets.

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