Weak for Exports Business
Japan's multinational powerhouses may have become
too dependent on the American holiday shopper

It would be easy to Mistake Miyata for a boomtown. Located on Japan's southernmost main island of Kyushu, Its major employer, a 10-year-old Toyota Motor Corp. assembly line, looks set to churn out 267,000 new vehicles this year - a tally equal to its record-breaking performance in 2001. The plant employs about 2,000 people and makes top-selling Lexus sedans and sports-utility vehicles. Yet there's a worrying statistic hidden in Miyata's numbers: the plant's export ratio has risen from 52 percent in 1998 to 91 percent this year ・and most of those cars are headed to American shores. The problem is that Japan's export giants are counting on the United States at precisely the wrong time. These powerful multinationals ・about the only functioning elements in the country's moribund economy ・are all threatened by the same new math: strong yen + weak U.S. economy + Iraq=trouble. The equation not only helps explain the fact that Japan's exports fell for a fourth straight month in September. It also accounts for why pessimistic investors have recently shed even the best Tokyo blue chips, heaping more downward pressure on a stock market already saddled with debt-laden corporate "zImbies・and wobbly banks. Diminishing exports, economists now forecast, could push Japan back into recession by Christmas. If the U.S. economy turns down again,・says Shigeki Maeda, a senior analyst at the Japan External Trade Organization in Tokyo, Japans major manufacturing groups will surely suffer from the impact.・ Exports from Hangzhou to Ho Chi Minh City harbor similar apprehensions about the faltering U.S. economy. Yet the stakes are high test in Tokyo because Japan's economy is such a basket case. Its latest recovery was largely export driven. Overseas sales, which make up just 10 percent of GDP, accounted for fully half of all growth ・the bulk of it derived through export to the United States. According to the financial news service Bloomberg, up to 90 percent of Honda Motor's operating profit comes from North America. Its tally for Toyota is 70 percent (a figure the company disputes). Lofty dependency ratios likewise dog Japan's other auto, machinery and electronics makers, exporting one and all to a volatile yen-dollar exchange rate and tapped-out U.S. consumers. I have a feeling it's going to be tough on them,・says Norihiko Kamada, a fund manager at Tokyo's Chuo Mitsui Asset Management, referring to the weakening U.S. economy and looming conflict in Iraq. Anyone old enough to remember the go-go 1980s would find Japan's current predicament more than a tad ironic. Throughout those halcyon days major manufactures thrived on a booming domestic market and exported almost as an afterthought. Auto, electronics and steel makers routinely stood accused of dumping goods internationally, meaning that they financed loss-making overseas expansion with robust domestic earnings. Now it works just the opposite. Companies crave export income to bankroll unprofitable factories at home, there by delaying painful layoffs and plant closures. In short, what was once the icing has become Japan's Inc.'s cake. The strategy has cost dearly. One measure of how much it's hurt came when the yen began appreciating a few months ago. A strong yen means less profit for exporters, but as recently as 1999 Japan's major companies were able to weather a yen-dollar rate close to 100:1 No longer. This month, even before the yen hit 120 to the dollar, they were howling for Tokyo to intervene. Senior Japanese officials stabilized the currency's rise inappropriate. But slack-jawed analysts were left to ponder Japan Inc.'s latest display of weakness. The sluggish domestic economy and thinner profit margins have raised the yen threshold from 100\ to about 115\ to the dollar,・says Masaki Kanno, head of economic-policy research at JP Morgan in Tokyo. Below that the average Japanese firms' profits will be wiped out.・ The good news for some exporters is that the pain won't be spread evenly. In the automotive sector, for example, the top three manufactures ・Toyota, Honda and Nissan ・could fare better than some because they have quality products that have historically gained market share during U.S. economic downturns. But smaller makers sell a higher percentage of their cars overseas, which makes a company like Mazda Famously vulnerable to yen-dollar fluctuations,・says one analyst. Likewise, Sony should outperform lesser-known rivals in the computer and electronics trade. But a steeper-than-expected drop in U.S. consumption, or the shock effect of war in the Persian Gulf, could yet make the export algebra tougher for everyone ・including the bustling residents of Miyata.

With KAY ITOI in Tokyo News Week November 25, 2005