Japan Bounces Back I

Partly thanks to China, Japan’s economy is growing

April 1 2004 by Toshio Aritake


It’s been several years since many American CEOs started writing off Japan and zeroing in instead on China as a gold mine of profitability. With the exception of a Starbucks Coffee shop here and there and a few specialty ambulance funds for bad loan clean-ups, there has been hardly any big American business foray into Japan since the early 1990s. The thinking has been that the Japanese would have to radically alter their economy before it would again blossom and become an attractive place to invest.

But lo and behold, the Japanese economy is recovering nicely. Embarrassed by the two recovery calls they prematurely made over the past 13 years, Japanese government mandarins say only that the economy is “on the path to recovery.”

The numbers are stronger than that, however. The world’s second-largest economy began recovering in the latter half of 2003, and its GDP grew at an annualized rate of 7 percent in the fourth quarter, the best showing since the 2.5 percent growth in the second quarter of 1990. That was just a few months before “the bubble economy” burst.

The key pillar of the new growth is cyclical domestic demand, including personal spending and corporate capital outlays. Once hailed as the world’s best savers, Japanese consumers appear to have grown tired of driving 10-year-old clunkers and putting up with noisy washing machines. Emboldened by the 40 percent stock market recovery, they are outspending their salaries and dipping into their hard-earned nest eggs. Manufacturers are seducing consumers with big-screen, flat-panel television screens, DVD players and other high-tech digital gadgetry as “you-got-to-have” products.

Adding to that consumer activity is exports, mostly high-tech parts and production machinery to China and elsewhere in the Asian region, not the traditional flow of cars and assembled products to the United States. The 14-year-old nonperforming loan saga, meanwhile, is expected to come to a conclusion by next year. “Both sentiment-wise and figure-wise, the overall record of Japan’s economy is improving,” says Toyota Motor Chairman Hiroshi Okuda, who also heads the influential Keidanren business group. “This recovery should be sustainable.”

Businesses are flexing muscles, convinced that the economy will sparkle further. Canon, Sharp, Sumitomo Metal Industries and NEC are among those bullish about the Japanese economy’s long-term sustainability. They are building new production facilities in Japan to make exports destined for the mainland and other markets, giving rise to the much-hyped fear that Japan would be “hollowed out” by the emergence of China. Why invest in expensive Japan and not in low-labor-cost countries? “Building production facilities for high-end products in Japan is a must to protect Japanese intellectual property rights” against foreign fake goods, says Masakazu Toyoda, director-general of the Ministry of Economy, Trade and Industry’s Commerce and Information Policy Bureau.

Manufacturers’ efforts to catch up with the digital technologies pioneered by the likes of South Korea’s Samsung Electronics also have resulted in a renewed emphasis on making things in Japan. “In this age of fast and short product cycles, especially for digital products,” adds Toyoda, “it has become vital to perform R&D and production at the same location. So, manufacturing, particularly high-end high-tech products such as next-generation cell phones and large flat panels, needs to take place in Japan.”

One example of an R&D-manufacturing consolidation is Hitachi Ltd.’s new 3-D display technology that enables viewing a 3-D image from almost all angles. Manufacturing that display equipment requires close interplay between the engineer and the production shop.

While the clouds have cleared for the Japanese economy, it still faces some challenges. “The greatest concern is the soft employment conditions in Japan, the United States and Europe,” says Teizo Taya, a Bank of Japan policy board member. Job creation has been slow in the United States, and Japan might be following that pattern, he speculates. So Japan’s economy is by no means perfect, but it’s come a long way since the darkest days of “the lost decade.”