Abenomics speeds corporate investment, but not in Japan

by **Cals** Thu 26 Sep 2013, 17:28

Published: Thursday September 26, 2013 MYT 10:39:00 AM
Updated: Thursday September 26, 2013 MYT 10:46:29 AM
Abenomics speeds corporate investment, but not in Japan

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HONG KONG: 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$900mil’s worth of investments to boost production.

There was one drawback: the new assembly plants and expanded factories announced by Mazda Motor Corp and Honda Motor Co Ltd are not in Japan, but more than 2,000 miles 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% in the first six months of this year, compared with the same period of 2012. Japanese investment in Asia, meanwhile, rose 22%, according to the Japan External Trade Organization, or 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, which has fallen roughly 20% against the 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 S. 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."

"SECOND ARROW" MISSES TARGET

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$7.7bil from stock markets in Asia outside Japan and China since May, according to data from Nomura and Jefferies.

Japanese direct investment in South-East Asia in the first half, meanwhile, nearly tripled to almost US$6bil. Japanese banks have lent a record amount to the region, and Japanese corporate acquisitions in South-East 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$144bil in cash between June 2012 and June this year, according to the Bank of Japan, bringing their total cash pile to US$2.24tril.

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% in the first half, according to Jetro.

SLOW DECISIONS

Japan's notoriously conservative corporate boards can take years to make big investment decisions. Mazda's US$262mil Thai expansion plan, announced in January, for example, is part of a strategy adopted in early 2012, before Abe became prime minister, to nearly triple sales in South-East 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 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 US 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 (US$5.07bil) in tax breaks for capital expenditure on Oct 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% of all production outside Japan, according to Japan's Ministry of Economy, Trade and Industry, helping trim manufacturing's share of GDP to 19% from 27% in 1983.

LENDING BOOM

Manufacturing wages in Thailand are a 10th those in Japan, according to HSBC. So while Honda's production in Japan has halved, to 22%, in the past 10 years, it has more than tripled in South-East Asia, to roughly 11% of global production, most of it in Thailand, where its latest investment, unveiled in February, is worth US$634mil.

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.

South-East 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% 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 South-East Asia.

Loans from Japan's banks rose almost 8% to US$152.8bil by the end of the first quarter, according to the Bank for International Settlements, led by a 17% increase in loans to Thailand and 27% 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 South-East Asia have already reached a record US$8.2bil so far this year, led by Mitsubishi UFJ Financial Group's US$5.7bil purchase in July of a 75% 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$4.5bil in portfolio outflows in the second quarter. But US$1.2bil 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" – Reuters