Abenomics encourages Japanese firms to invest - abroad
Japanese Prime Minister Shinzo Abe got an early sign of how his blueprint to revive Japan’s industrial vim and economic vigour was working when two of his country’s biggest car makers unveiled US$900 million worth of investments to boost production.
There was one drawback: the new assembly plants and expanded factories announced by Mazda Motor and Honda Motor are not in Japan but more than 3,000 kilometres away, in Thailand.
Since taking office last December, Abe’s stimulus efforts have barely dented a slide in private-sector investment at home, but they have done wonders for accelerating Japanese investment elsewhere in Asia.
Capital expenditures in Japan fell 4 per cent in the first six months this year, compared with the same period last year. Japanese investment in Asia, meanwhile, rose 22 per cent, according to the Japan External Trade Organisation (Jetro).
“Manufacturing investment is still contracting, because companies are investing abroad,” said Izumi Devalier, Japan economist at HSBC in Hong Kong.
Government spending and a weaker yen can’t conceal that Japan’s manufacturers are still forsaking their country’s shrinking population, high costs and regulatory barriers in favour of faster-growing, younger economies in Asia.
The prospect of a weakening yen – the currency has fallen roughly 20 per cent against the US dollar since December – sapping their purchasing power is only encouraging them to speed up investments overseas.
“The incentives to invest domestically are underwhelming,” said Kenneth Courtis, a former Goldman Sachs Asia vice-chairman who now heads Starfort Investments in Hong Kong.
“The long-term demographics, which are very problematic, and the threat that your firepower is going to be diminished with the value of the yen, are driving investment increasingly abroad.”
Abe returned to power for a rare second term pledging to revive Japan and banish deflation with a radical economic policy – quickly dubbed “Abenomics” – comprising “Three Arrows” of drastic monetary easing, fiscal stimulus and growth-generating structural reform.
Whether or not “Abenomics” works at home, it’s already helping soften the blow of slowing growth and a receding tide of cheap dollars as investors pull funds out of Asia to bet on recovery in the United States and Europe.
Foreign investors have pulled at least US$7.7 billion from stock markets in Asia outside Japan and China since May, according to data from Nomura and Jefferies.
Japanese direct investment in Southeast Asia in the first half, meanwhile, nearly tripled to almost US$6 billion. Japanese banks have lent a record amount into the region, and Japanese corporate acquisitions in Southeast Asia have already set a record this year.
Japan’s government has been encouraging regional investment to build ties and secure resources. Foreign investment also helps weaken the yen, boosting the exporters’ profits.
But increased profits only help Japan’s economy if companies use them to boost investment and wages.
“To defeat deflation, we need a negative corporate savings rate,” said Takuji Aida, chief economist at Societe Generale Securities in Tokyo. “We need companies conducting capital expenditure.”
Japanese companies socked away roughly US$144 billion in cash between June last year and June this year, according to the Bank of Japan, bringing their total cash pile to US$2.24 trillion.
That means that for every yen they earned in additional net income, three-quarters of it went into the bank. And existing factories are depreciating faster than companies are investing to replace them, according to HSBC.
That’s not a new phenomenon, nor is the rush to invest abroad. Japan’s manufacturers have been shifting to Southeast Asia for 30 years, a trend driven lately by efforts to cut their exposure to rising costs and anti-Japanese sentiment in China. Investment into China fell 31 per cent in the first half, according to Jetro.
Japan’s notoriously conservative corporate boards can take years to make big investment decisions. Mazda’s US$262 million Thai expansion plan, announced in January, for example, is part of a strategy adopted early last year, before Abe became prime minister, to nearly triple sales in Southeast Asia.
Some economists say it could thus be years before investments reflect the impact of Abenomics. Others say the yen, which has traded around 95 to 100 to the US dollar over the past three months, hasn’t weakened enough yet.
“Japanese companies are active investors overseas now because the yen is still too strong,” said Aida at Societe Generale. “The yen needs to weaken further, maybe to 110 per dollar, which could happen next year.”
But as former manufacturing powerhouses like Britain and the United States have learned, once manufacturing shifts overseas, a weak currency isn’t enough to bring it back.
Abe’s government is thus reportedly planning to unveil as much as 500 billion yen (HK$39 billion) in tax breaks for capital expenditure on October 1, when Abe is also expected to announced 1.4 trillion yen in corporate tax cuts designed to help offset the impact of a planned sales tax increase.
Japan’s own “hollowing out” has already pushed at least 18 per cent of all production outside Japan, according to Japan’s Ministry of Economy, Trade and Industry, helping trim manufacturing’s share of gross domestic product to 19 per cent from 27 per cent in 1983.
Manufacturing wages in Thailand are a 10th of those in Japan, according to HSBC. So while Honda’s production in Japan has halved, to 22 per cent, in the past 10 years, it has more than tripled in Southeast Asia, to roughly 11 per cent of global production, most of it in Thailand, where its latest investment, unveiled in February, is worth US$634 million.
But costs are only one factor.
“That is not because of lower labour costs, but because Thailand has potential in many ways as well as skilled workers,” said Pitak Pruittisarikorn, executive vice-president at Honda’s Thai unit.
Southeast Asia also offers something Japan cannot: a growing, increasingly middle-class population. One in four Japanese are aged 65 or older. Japan’s population shrank by 284,000, to 127.5 million, last year.
Indonesia’s population of 246.9 million is growing by 1.2 per cent a year. So is Vietnam’s population of 88.8 million.
“We’re now facing an ageing society,” said Sotaro Nishikawa, director of Jetro’s office in Hanoi. “If we invest our capital in Japan alone, in the future we can’t survive.”
Companies aren’t the only ones pouring Abenomics’ cheap yen into Southeast Asia.
Loans from Japan’s banks rose almost 8 per cent to US$152.8 billion by the end of the first quarter, according to the Bank for International Settlements, led by a 17 per cent increase in loans to Thailand and 27 per cent to the Philippines.
In addition to following loyal Japanese customers abroad, lending overseas earns banks higher margins than they can at home, where interest rates are nearly zero.
The result is a bank-led buying boom. Japanese corporate acquisitions in Southeast Asia have already reached a record US$8.2 billion so far this year, led by Mitsubishi UFJ Financial’s US$5.7 billion purchase in July of a 75 per cent stake in Thailand’s fifth-largest bank, Bank of Ayudhya.
Such inflows have not done much to halt a sliding Indonesian rupiah, but in the region’s smaller economies they are helping cushion the blow. Thailand, for example, suffered US$4.5 billion in portfolio outflows in the second quarter. But US$1.2 billion flowed back in as investment from Japanese companies, according to Jetro.
Best of all, FDI doesn’t flee as readily as portfolio investment.
“Most foreign direct investment is long-term and not sensitive to short-term economic or financial market conditions,” said Mathee Supapongse, senior director of the Bank of Thailand’s macroeconomic and monetary policy department.
“Direct investment from Japan is helping alleviate the impact of capital outflows and volatility in capital movements.”