Look to Japan’s ageing industrial sprawl for roadblock to Abenomics; S&P says more than one-third chance of Japan downgrade, cites risks to Abenomics

S&P says more than one-third chance of Japan downgrade, cites risks to Abenomics

Mon, Apr 22 2013

TOKYO (Reuters) – Rating agency Standard & Poor’s said on Tuesday it saw more than a one-third chance that it would downgrade Japan’s sovereign ratings because of uncertainty about whether the government’s push to revive growth and end deflation will succeed. “The continuing prospect of a downgrade arises from risks associated with recent government initiatives and uncertainty of their success,” S&P said in a report. “Japanese Prime Minister Shinzo Abe’s plan to lift Japan out of deflation and spur economic expansion–known as “Abenomics”–has three pillars: bold monetary easing, fiscal efforts to spur growth, and a strategy to induce private sector investment,” it said. “Of the three engines that Mr. Abe foresees reinvigorating the nation’s economy, so far only one, monetary easing, has kicked into full gear. The others remain idle.” S&P has an AA- long-term rating on Japan’s sovereign debt.

Look to Japan’s ageing industrial sprawl for roadblock to Abenomics

Mon, Apr 22 2013

By Yoko Kubota

TOKYO (Reuters) – For a close-up view of where Japanese Prime Minister Shinzo Abe’s economic policies could falter, skip across Tokyo Bay to the sprawling Kimitsu steelworks, once a must-see icon of Japan’s export boom. By the early 1970s, Kimitsu in Chiba had become the hub of the world’s largest steel operation. It provided the sheet metal for the first wave of Japanese cars sold overseas and the beams to build the first skyscrapers in Tokyo’s Shinjuku district, inspiring Chinese leader Deng Xiaoping on a 1978 visit to build a copycat mill in China. But last month Nippon Steel & Sumitomo Metal Corp, (5401.T: QuoteProfileResearchStock Buzz) fresh off a merger that created the world’s second-biggest steelmaker, announced it would shut down Kimitsu’s No. 3 blast furnace, part of a sweeping restructuring meant to shed overcapacity at home in the face of unrelenting competition from China and South Korea. “It makes no sense to revive it,” the Kimitsu plant manager, Ichiro Sato, told reporters on a tour last week. “We want to operate without bringing it back.” That same caution is echoed by Japanese manufacturers in industries from autos to electronics.

Despite signs of an early stirring in consumer spending, a weaker yen and a recent rally in stock prices, companies remain deeply reluctant to invest in new plants and equipment even though the existing capital equipment — like Japan’s workforce – is ageing.

This reluctance could be the biggest challenge to Abe’s policies aimed at driving Japan out of a decade and a half of falling prices and stagnant growth by getting the Bank of Japan to flood financial markets with yen.

The idea is that the BOJ’s policies will reduce long-term interest rates to make borrowing cheaper and simultaneously encourage businesses to invest by turning around long-entrenched expectations of deflation into a belief prices will rise.

The risk is that unless Japanese companies and households start to borrow and invest and wages rise, the transmission between the BOJ’s monetary policy and the rest of the economy will remain uncertain.

“We are not seeing many manufacturers planning production capacity increase or building new factories,” Atsushi Miyanoya, the head of Bank of Japan’s Nagoya branch, told reporters last week. The branch oversees central Japan’s economy, a hub of manufacturers including Toyota Motor Corp (7203.T: Quote,ProfileResearchStock Buzz).

UPHILL TASK

Still, Abe’s efforts have so far sent Tokyo stocks to five-year highs and weakened the Japanese currency to nearly 100 yen against the dollar, pushing up profits of many exporters, like Toyota Motor Corp (7203.T:QuoteProfileResearchStock Buzz). Some companies, like Bridgestone Corp (5108.T: QuoteProfile,ResearchStock Buzz), have taken advantage of low interest rates to tap the corporate bond market for funding.

Abe contends that corporate appetite for capital spending has been recovering rapidly since the end of last year, although not all data supports that.

Corporate sentiment has improved under Abe, the BOJ’s quarterly “tankan” survey published this month shows. But, big companies said they planned to cut capital expenditure by 2 percent in the current business year.

More than a third of companies are worried about domestic demand stagnating, a Reuters survey of 240 companies released on Friday shows. A quarter said they were likely to increase output in Japan because of the weaker yen.

Longer-term comparisons also suggest Abe faces an uphill task. Capital spending in 2012 was 16 percent less than 2007. Early this year, factories were using about 19 percent less production capacity than in 2007, suggesting it will be some time before they need to invest in new industrial space.

The last time when Japanese manufacturers were actively deciding to build new plants in Japan was some six years ago, when the yen was around 120 yen against the dollar. At the time, companies like Toyota, Honda Motor Co (7267.T: QuoteProfileResearchStock Buzz) and Panasonic Corp (6752.T: QuoteProfile,ResearchStock Buzz) were looking to invest in plants at home.

But the yen’s rise over the following five years to a record high of 75 yen to the dollar in October 2011, raised doubts about the economics of the investment decisions and prompted a scramble to try to move production overseas.

‘TIME AND EFFORT’

Reflecting the pressures on Japanese manufacturers, spare production capacity at carmakers is expected to grow in the years ahead. IHS Automotive forecasts that carmakers’ 2012 capacity utilization in Japan of 84 percent will fall to 80 percent in 2013 and to 76 percent in 2018. In 2005, the industry had been using 90 percent of its capacity in Japan.

The only positive sign for new investment now, economists say, is that many companies need to invest to update outdated production equipment even if they keep output steady.

“Manufacturers may not increase production capacity. But equipment is getting old, so it is going to be necessary to make changes,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

Even so, manufacturers are unlikely to fundamentally increase production capacity at home because demand in Japan — where population peaked in 2008 — is unlikely to grow in the long run.

Toyota, for one, has said it has frozen plans to build any new plants in Japan or overseas in the next three years. The automaker, which battled to keep capacity in Japan during the yen’s surge, has no plans to expand its domestic output.

However, it does plan to expand output abroad, announcing on Friday that it would increase production at its existing U.S. Kentucky factory by 10 percent.

“It will take a great deal of time and effort to bring back what has left Japan. The yen, which stayed below 80 against the dollar for too long, has hurt the automotive industry more so than people imagine,” Toyota President Akio Toyoda said in February.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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