Europe attracts, Brexit bites - consumers rule Japan
The cold spell that covered Japan last two weeks all the way to Pacific Ocean and brought something resembling snow even to Tokyo seem to be over now. Plum trees are already blooming so it should be about only one month to sakura, the perennial symbol of spring. Spring does come with side effects, though. With warmer weather cedar pollen is now blowing from forests all over Japan and if you are one of the many who is allergic, you better continue keep that flu mask on.
The EU-Japan EPA deal took effect two weeks ago, but happily my wine shop down the street keeps up its "Price Down" campaign for its European imports that started already in advance. Dangerously nice!
More official steps of the closer relation with EU include the internet security protocol that was signed last month – first ever with any country for EU – and last week's mutual agreement on requiring all new cars to have automated braking systems based on sensor monitors that identify pedestrians or other objects ahead. Japan, where such systems advertised as standard now by almost every brand, will be the first to go ahead with the rule next year and EU will follow in 2022.
Europeans calculate that the system could save over 1000 lives of the 9500 roadway deaths that took place there last year. In Japan, 430,000 crashes last year took 3000 lives whereof 15% were caused by drivers over 75 year old. Pushing gas pedal instead of brake is the most common story in their cases. While the total figure continue to go down, old people's share keeps growing and the automated braking system is considered an effective help against it. Many other countries seem to follow the trend - 1 out of 3 cars sold in US are equipped with similar system on voluntary basis – but not yet China or India, two big markets.
BREXIT STARTS TO BITE
Another EPA impact – in combination with the mercilessly approaching Brexit crash – is Nissan's decision to locate production of new X-trail European model in Japan instead of its big factory in UK despite compensation promises received two years ago from PM May. With 10% EU import tariff from Japan now removed and only 20 pct staying in UK and 80 pct going to Continental markets, a possible new EU duty on UK produced cars would make production there uncompetitive. Not a business risk worth taking.
For all industries, it's easy to make decision not to invest in new production in UK until fog in Channel clears up, but the real critical decision will be what to do with the existing production there if the country crashes out of EU without any agreement as it looks now more and more. Those with no heavy machines bolted down to factory floors – sales, service, finance etc – are packing up their offices already, not only foreign owned but British, too. It's been sad to follow the complete mess that the country's politicians have created and seem to continue with.
NUCLEAR BUSINESS REACH DEAD END
One Japanese company to terminate business in UK with heavy financial loss - albeit for a different reason - is Hitachi. Its decision to give up the long term project to build a nuclear plant there is leading to USD 3 billion write-off likely wiping off most of the expected profit for this year. It was also final death blow to PM Abe's national policy to build Japanese infrastructure business in overseas based on nuclear technology. First to go was Toshiba, who took even bigger loss for writing off its failed US subsidiary Westinghouse and had to sell off its highly profitable memory chip business to survive. Then Mitsubishi Heavy gave up the government created nuclear project in Turkey, which was quickly taken over by China. Now there's no Japanese nuclear plant project left in overseas and there's no demand for new plants at home either. Most existing ones stay idle, off-line and power companies are annnouncing closures of old reactors one by one reaching their used-by-date.
Meanwhile, in Fukushima, the fatal turnaround point for global nuclear business, Tepco has finally managed to get a robot camera inside one of the reactors to see how the material melted at the bottom looks like. This took 7 years and it looks like it will take 2-3 times more to get the rot out and the reactors cleaned up. Ironically but not unexpectedly, the company who developed the camera and leads the clean-up technology is Hitachi, who built the reactors in the first place. There's always money to be made along the line.
In Finland, any new nuclear business seems over as well. It's difficult to recall today that just a few years ago all three Japanese nuclear reactor makers were in the forefront offering to build a new nuclear plant there.
At the end, the project went to Rosatom of Russia, yet it has frozen ever since as well – not a spadeful of earth has been dug at the site. The last ongoing nuclear project, Olkiluoto 3 from French Areva, is said to finally start at end of this year, 10 years behind the original schedule.
JAPAN BUSINESS OUTLOOK
Many of Japan's big industrial companies are now reporting lower than expected sales for end FY2018 from China demand decline and casting doubts on next year's performance due to US trade war threats, yet the economic growth returned to positive track in Oct-December quarter after sudden fall in in July-September from natural disasters.
It's a good reminder that service business is here more than two times bigger than industrial production and exports are small in comparison to domestic consumers in the demand side. For instance, domestic appliance sales hit last year 22 year high with air conditioners leading the way in scorching summer heat followed up by new "intelligent" fridges and washing machines. As well, incredible USD 1 billion worth of chocolate was sold over the past weeks approaching St. Valentine again, almost half of the annual total. Another good part of the latter news was that ladies are now buying less "giri choco" for their male bosses or boy friends, but instead to spoil themselves and their female friends. No wonder expensive JPY 10,000 choco boxes have now become popular, not some cheap small box given out of obligation.
Looking forward, travel companies expect record sales for the Golden Week that will run this year for 10 consecutive days due to ceremonies around Emperor change. The number of reservations for overseas trip is 3 times up from last year already, some popular destinations even 7-10 times up and already sold out. Finnair tells they installed one extra flight per day from Narita for end April, but now all three daily departures have been sold out. And remember that domestic business is 10 times bigger than overseas in travel, too.
Recovery in consumer demand combined with rise in corporate investment and increased public spending from USD 30 billion supplementary budget set for FY2018 last quarter promise that Jan-March quarter GDP will continue on positive growth track.
One result of continued good business is that government expect record high tax revenue in FY2019 that will cover about 60% of its budgeted spending and help to reduce again the amount of new JGB to be issued, seventh year in row. Of course, the tax rise in October will contribute to this as well.
POLITICS: WORRIES AHEAD
In politics, heated attacks on government ministers supposed to control bureaucrats from making scandalous mistakes has been featured live on TV all day long, yet all observers' eyes are now on Okinawa Feb 24 citizen poll on the long debated shift of US Marine's helicopter base from tightly populated Futenma to new location less populated but equally fiercely opposed by local citizens. As most people acknowledge, US presence is of national importance and many Okinawans see it positively as well, so the vote result will be interesting. It will have no binding impact on central government, yet if the result will be overwhelmingly against the transfer as expected, it will be hard for Tokyo to proceed with it despite promises made to Americans already 23 years ago. (The vote is not about US presence per se and even the anti-base change governor Tamaki accept that as necessity. It's just why so many bases need to be in the island prefecture.)
Just two days after the Okinawa vote we will have Trump-Kim show Part 2, another potentially important event for Japan national security.
Nobody knows what will come out of that except countless photo-ops and TV reports shaking hands, garden walks, maybe even Hanoi sight-seeing as full 2 days have been reserved for the spectacle. It's difficult to recall that just one year ago Kim was a nuclear terror threat, blood thirsty dictator of a derelict poor country. Now he is a global leader worth of respect and friendship from all-powerful US president. Few leaders have managed such big image change in such short time.
Kim's "state-of-nation" speech sitting comfortably in big leather chair in his library surrounded by big shelfs of books, was a propaganda piece in a class of its own, a million miles from Trump's stressful boasting in front of his divided Congress crowd, half hostile, half paid for standing ovation. Then again, guess none of us would buy a scene of relaxed Trump in front of BOOKS!
Aoyama View remains that Kim will give up nothing meaningful in Hanoi, none of his nuclear weapons, missiles or biological weapons, not even tell how many of them he has. The question is only what will US give up to project a Trump "win"?
Tokyo, February 19, 2019
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The columnist is a Japan veteran among Finnish business, our Chamber ex-president and today Member of the Board of Trustees.
After running a major Finnish industry company's Japan business for over 20 years, he is now Senior Associate in a strategic consulting company.