In theory, the Bank of Japan’s yuletide ambush of financial markets on Tuesday should have caused havoc across the nation’s corporate boardrooms. Or at the very least, spoilt a few year-end parties.
BoJ governor Haruhiko Kuroda’s surprise tweak to its yield curve control policy may have been comparatively minor, but its implications for future interest rate tightening (as guessed at by the markets) were not. The central bank’s move messed decisively with a dollar-yen exchange rate whose fluctuations affect the decision-making of tens of thousands of Japanese companies. But significantly less so than in the past.
The inflationary hit from the recently anaemic yen is clearly no joke: all companies, especially those that have benefited from that cheapness, are under much greater pressure to raise wages into an expected global recession. If the yen turns resurgent, as some suspect it will, that will make Japanese exports less competitive. Despite these headaches, suggests a new report, the strategic bandwidth of corporate Japanese management is diverted to much greater concerns than the currency. Geopolitics and demographics are foremost among those.
Early in the new year, Japan will have an exact reckoning of just how few babies the country produced in 2022 and therefore how rapidly the population is shrinking. The number for last year — 811,622 — was the lowest since records started in 1899. If, as seems likely, the tally dropped below 800,000 this year, that will be symbolically alarming. In its last major forecast five years ago, the National Institute of Population and Social Security Research’s projections did not imagine that line being breached until the end of this decade.
But many Japanese companies already understand perfectly well what is coming. For all the recent noise around the “reshoring” of manufacturing and supply chains, corporate Japan’s ambitions are necessarily limited by a suite of human capital issues — too few people, too few of the necessary skills and a diminishing ability to entice those from overseas. Even when the yen started pushing past multi-decade lows earlier this year, Japanese manufacturers only increased their desire to expand production overseas to where both workers and customers are available.
In its annual report on the subject, which dates back to 1989 and is based on a survey of almost 950 manufacturers with at least three foreign subsidiaries, the Japan Bank for International Cooperation (JBIC) predicted that corporate Japan’s overseas production ratio would continue rising from the previous year to reach 35 per cent by the end of fiscal 2022. In 2025, JBIC now forecasts, the ratio will be 36.3 per cent. In other words, concludes Mizuho Securities’ chief equity strategist Masatoshi Kikuchi, the weak yen has not been a significant factor in the decisions of many companies to press ahead with building out their foreign production.
Their reasons for doing so, according to the responses given to JBIC, also reflect an increasingly clear strategic focus outside Japan: companies say they are chasing participation in the global supply chain for electric vehicles and in building local production for local consumption in growing markets (particularly among the Association of Southeast Asian Nations).
At the same time, Japanese companies are also confronting incrementally trickier geopolitics around China, and recalculating how far it will realistically meet the production and demand profile Japan is after. While JBIC’s report showed that a majority of Japanese companies surveyed are not engaged in any particular discussions about US-China decoupling, their responses to other questions suggest they know they are navigating a rapidly changing environment. India, JBIC found, had overtaken China in the top position of countries deemed “most promising” for medium-term investment by Japanese companies.
However sincerely companies say they are not discussing decoupling, their investment plans appear to chart a course through a world where the divisions between the US and China are continuously sharpening. A majority of Japanese companies, when asked if they planned to bolster operations in either the US or China, told JBIC that they would do both. But while 23 per cent said they would focus their efforts mainly on the US, fewer than half that planned to direct more investment to their China operations.
Corporate Japan is investing overseas for a future where its own country is smaller than it expected, sooner than it expected and at a time when investment must be more fragmented to ensure success. The yen — still known on Japanese trading floors as “the paymaster” — may have to spend some time as a lesser priority.
leo.lewis@ft.com
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