Healthy domestic spending giving recovery staying power
Firms' capital investment, consumers' appetite for IT driving growth in economy
Japan's economy seems to have returned to a recovery phase after wallowing in an extended flat period.
Inventory adjustments for information technology products have run their course and capital investment is starting to grow again. An upsurge in fresh hiring and strong consumer spending are also supporting the recovery. Unless higher oil prices and uncertainty about the U.S. and Chinese economies cast a shadow, the economy will likely continue to grow at a stable pace.
As for IT production, activities are regaining vigor nationwide. In Suwa, Nagano Prefecture, for example, production of hinges for folding cellular phones is rapidly increasing at a factory of Taiyo Kogyo Corp. In Hiroshima Prefecture, Elpida Memory Inc. has been boosting production of DRAM chips for digital cameras and flat-panel TV sets. In Fukuoka Prefecture, Dai Nippon Printing Co. is receiving an increasing number of inquiries about color filters for liquid-crystal displays.
Since the current broad economic expansion phase started in January 2001, there have been two flat phases. The first lasted about a year from autumn 2002, and the second started in mid-2004.
Higher private-sector capital investment is boosting the upturn. Yamazaki Mazak Corp., a major machine tool maker, has revised its capital investment plan for the two years through fiscal 2005 from 20 billion yen ($177 million) to 26 billion yen. Okuma Corp., another major player in the industry, is set to spend 20 billion yen on plant and equipment over the next three years, more than double the pace of its outlays up to fiscal 2004.
Sharp Corp. is spending 150 billion yen to build a second factory at its LCD panel/TV plant in Kameyama, Mie Prefecture, which is to be the largest of its kind in Japan.
Capital outlays in the April-June period posted a record 19.8% increase from a year earlier, according to statistics on corporate financial statements.
Behind the trend is growing corporate earnings power. The average pretax profit-to-sales ratio of domestic companies stood at 4.0% in the April-June quarter, higher than the 3.8% posted in 1989, the peak year in the bubble economy era of the late 1980s.
The brightening circumstances in the corporate sector are gradually filtering through to households.
Consumers at a big retail shop in Tokyo show a greater appetite for digital goods.
Wages expanded for the fourth month in a row through July, with the average 2005 summer bonus rising 3.6% on the year, according to a survey by the Japan Business Federation (Nippon Keidanren).
So consumers appear to be more willing to loosen their purse strings. The newly opened Yodobashi Camera Multimedia Akiba megastore in central Tokyo is attracting bigger than expected crowds of customers wanting to buy digital goods such as DVD recorders.
But there are some clouds over the domestic economy, including continuing investment adjustments for non-IT products. Asahi Kasei Corp. started trimming production of styrene monomer by 15% in late August. Toray Industries Inc. has reduced polyester staple production by 10% since July. Inventories of paper/pulp have also been piling up recently.
Another cause for concern is soaring crude oil prices. "If the average crude price turns out to be over $50 per barrel for fiscal 2005, that will have the effect of cutting corporate profit by 5%" for the year, Japan Research Institute predicted.
Higher oil prices are, of course, affecting overseas economies as well. Coupled with the damage inflicted by recent hurricanes, they will fuel inflation within the U.S. economy. "Higher oil prices are also retarding growth in the Chinese economy, which suffers low energy efficiency," according to Daiwa Institute of Research.