Japan Needs More Than a Devalued Yen

by Jason Clenfield 

The last time Masao Namiki bought machinery for his business, Emperor Hirohito had just died and Japanese investors were congratulating themselves on snapping up New York’s Rockefeller Center. That was 1989, a year before Japan’s overheated economy began to unravel. The $1 million that Namiki borrowed to buy computerized lathes and drills for his industrial molds company almost bankrupted him when orders from customers including Canon (CAJ) and Panasonic (6752) evaporated amid a stock market and real estate crash that erased $15 trillion in wealth. The bubble, and the five recessions that followed, help explain why many executives are less confident than investors that Prime Minister Shinzo Abe’s economic program, with its mix of monetary and fiscal stimulus, can succeed in pulling Japan out of its decades-long slump. Namiki says there isn’t enough demand to justify expansion—even if a five-month slide has pushed the yen to a four-year low. “The work’s just not there,” the 72-year-old says from his small factory in Tokyo’s Ota industrial district, where he and a handful of employees have crafted thousands of steel molds used to make phones, stereos, and keyboards.
While Japanese multinationals such as Toyota Motor (TM) and Fast Retailing (9983) are benefiting from Abenomics—as the prime minister’s policies are known—the weaker yen does little to help most businesses now that exports contribute only 15 percent of gross domestic product, says Martin Schulz, an economist at Fujitsu Research Institute in Tokyo. “Look how many employees Toyota has at home, having 60 percent of its production outside Japan. And look at how many people are standing behind convenience store cash registers.”
Boosting investment and hiring at home is key to Abe’s plans for reviving the economy. But companies are gun-shy about borrowing from decades of paying down debt, says Richard Koo, chief economist at Nomura Research Institute in Tokyo. The collapse of Japan’s bubble wiped out the equivalent of three years of GDP, compared with one year in the 1929 U.S. crash, notes Koo. “Many who lived through the Great Depression never borrowed again,” he says.
To revive the economy’s animal spirits, Abe and his handpicked Bank of Japan governor, Haruhiko Kuroda, say they will spark inflation by doubling the money in circulation. Abe wants to make Japan more hospitable to business by cutting corporate taxes, making it easier to fire workers, and reducing electricity prices through competition. In order to get much of that done, his Liberal Democratic Party must first win back control of the upper house in July elections, reprising its December sweep in the lower house. Investors are hopeful: The benchmark Nikkei 225 stock index is up 30 percent this year. “The currency has done a lot to improve sentiment,” says Kathy Matsui, chief Japan equity strategist at Goldman Sachs. “But it’s not just that. It’s that we finally got a government that’s pro-growth.”
Some companies are “beginning to see the light,” in the words of Toyota President Akio Toyoda, thanks to the more advantageous exchange rate. The automaker books an extra 35 billion yen ($352 million) in operating profit for every 1 yen the currency falls against the dollar and will probably report its biggest annual profit in five years on May 8. Nevertheless, Toyoda in April announced plans to start building Lexus sedans in Kentucky as part of his quest to “become free of currency risk.”
Shin-Etsu Chemical, the world’s No. 1 maker of plastics used in pipes and silicon wafers for chips, has prospered with a similar strategy: Two-thirds of the $29 billion company’s sales are overseas, where most of its factories are. Shin-Etsu hasn’t had a loss since Chihiro Kanagawa started running it in 1990, while its stock has almost quadrupled.
In an interview at his Tokyo office, the 87-year-old Kanagawa dismissed Abenomics with a wave of his hand. “I couldn’t care less,” he says. “I don’t depend on the government, anywhere.” Then he reeled off a slew of figures to show why he probably won’t build his next plant in Japan. For example, electricity costs 13 yen per kilowatt-hour, vs. 5 yen in the U.S. Shin-Etsu inaugurated a plant in China last month and will open a new one in the U.S. next year. “If you invest enough money and buy the best machinery, anybody can make good products,” Chairman Kanagawa says. “But if you can’t sell at the right price, you’re going to lose money.”

The bottom line: Despite the market’s embrace of Abenomics, the weaker yen will help only a minority of Japanese businesses.