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September 12, 1995

JAPAN’S MANUFACTURING ECONOMY HAS A HOLLOW RING

By CBR Staff Writer

The sudden changes in the yen-dollar exchange rate two weeks ago have only strengthened the mood of caution in Japan regarding the economy. Concerted effort by US and Japanese monetary authorities in the first week of August, followed by further moves in the week starting August 14 took the yen from a rate of around 86 yen to the dollar to 98 yen. The yen has strengthened again slightly since then but there is some consensus that the psychological mark of 100 yen to the dollar will again be reached in the near future. Aside from being a hot topic of discussion, does this sort of abstract monetary issue affect the mood of life in Japan? Surprisingly the answer is yes. While Tokyo, an international city with many workers in trading and other outward-looking businesses, may not be typical of Japan as a whole, the publicity given to the US-Japan relationship, and the strong yen as affecting that relationship, is relentless.

Sober year

Daily reporting of the exchange rate and analysis of its implications fill the media. A major effect of the strong yen, the low Nikkei Dow Jones stock index, discourages both institutional and personal investment. Overall this has been a sober year in Japan, with the Hanshin earthquake in January in which over 5,000 people died, and in which Japanese assumptions about quality of infrastructure and building construction were rudely challenged, followed in March by the Tokyo subway nerve gas attacks by Aum Shinrikyo, the radical Buddhist sect led by an almost blind megalomaniac. Repercussions are still being felt: the recent O-bon summer holiday marked the first season for mass mourning for those who died in January, and revelations continue regarding the abductions and murders by Aum of a lawyer and his family six years ago, and a notary public this February. Despite claims by the Ministry of Finance officialdom that the Japanese economy is improving, real growth appears elusive, and confidence that any growth will continue is low. (The Bank of Japan however predicted recently that the economy will resume its recovery in the next financial half year, September through to March 1996). One of the best indicators of reduced confidence is the new graduate intake for the next financial year. Japanese companies large and small offer jobs to new graduates once a year in April. Next year’s intake is to drop by 7.7% from this year’s level; Toshiba Corp for example will employ only 400 university graduates, 300 fewer graduates than this year; Hitachi Ltd has cut by 200 to 600 graduates. It’s a far cry from the days of 1,000 new graduate recruitment annually at major manufacturers and trading companies. Smaller companies are reaping the benefits of cuts in recruitment by the larger companies.

By Anita Byrnes in Tokyo

However male graduates of lesser name universities and all women are having a tough in the job stakes. Average families have felt the change from the bubble economy days in their reduced bonuses. Japan’s bi-annual bonuses traditionally are spent on white goods and on paying off the mortgage. This year’s end-of-June bonus was up slightly (1.67%) from last year, topping 700,000 yen – $7,200 – for the first time in five years. Employees in manufacturing companies received increases while those in securities companies saw their bonuses cut by a whopping 21.39%. The days of housewives investing the family’s money in stocks and shares are over, it appears, although a stockbroker employee reported that next year is the year in which a large number of 10-year mutual funds invested in the bubble days come to maturity, so it will be interesting to see what happens to the money returned to individual investors. Among executives of large companies there is scepticism about the reasons for the change in the yen-dollar exchange rate. Why has the yen weakened now when Japan still has such a large trading surplus with the US? asked Yukio Shohtoku, Director and Head of the Corporate Management Division for China at Matsushita Electric Industrial Co Ltd last week. His

comments reflect a feeling among businessmen and bankers that in the longer run (into next year) the strengthening of the yen once more is inevitable. While manufacturing companies profess to be pleased about even a temporary respite which makes Japanese products more affordable in world markets, the tide of moves to manufacture outside Japan appears unstoppable. The hollowing out of the Japanese economy has been a constant concern for the manufacturers that dominated post-war Japan.

Some such as Aiwa Corp, now owned by Hong Kong-based Semi-Tech Global Ltd, are closing down all manufacturing in Japan, while many manufacturers have moved operations to South-East Asia or, more recently China. The move is towards manufacturing within the major markets (Honda Motor Co cars or NEC Corp memory chips in the US and the UK, or Matsushita refrigerators in China), or assembly in low-cost countries for export to major third-country markets and re-import of partly assembled goods back into Japan. Reasons for the local market manufacturing include better responsiveness to customers in terms of product design and changes, while lower cost of labour is a factor in Malaysian or Thai assembly of chips into packages or memory and logic chips onto boards for companies such as Fujitsu. Whether the average small businessman is pleased or dismayed by changes in the yen rate depends on his perspective. Last week a trading company delayed its investment in a multicurrency accounting system because of the weaker y en, while at the same time the Keidanren organisation of large companies was claiming that if the yen stayed at the 100 yen to the dollar level into next year, Japan’s economy would grow by an extra 0.8% this financial year.

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