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 AOYAMA VIEW

ECONOMY BACK ON TRACK, RECORD PROFITS AT BIG COMPANIES
After rambling through politics around the world in last column, it's appropriate to return this time to economy and business in Japan. After all, we are a Chamber of Commerce and there's a wave of news to report with economic growth, corporate results, summer bonuses etc.

The Jan-March GDP growth turned better than expected rising 0.6% from Oct-Dec, which makes it 2.4% annualized speed. That compares well with any other developed economy. Big boost came from exports that grew on favorable FX rate while energy import bill declined with lower oil prices. At home, housing and construction continued to lead, corporate investments were strong and the private demand was better than expected. Seems better wages and cheap oil are starting to make their impact on consumers just as predicted. Remarkably, despite all talk of big government spending, the public demand was -5% down.

For the full financial year 2014 that ended in March, trade data showed still a big gap of JPY 6.5 trillion despite 8% growth in exports and only 2% in imports. Yet, this was more than well covered by big financial flows from overseas corporate investments, that pumped the current account surplus up to JPY 7.8 trillion, five times bigger than year before. Japan's primary income account with other countries stand now at JPY 19 trillion (USD 150 billion) positive, the largest since 1985. It certainly does not look like the system is going to run out of money any time soon.

At corporate level, FY2014 brought record high profits for second year in row for Japan's listed companies. Their total harvest is estimated over USD 200 million, which is more than they earned in 2007, the top year before the global financial crisis. While, the favorable FX rate was again a benefactor to big multinationals, it was a minus for many others depending on domestic demand and imported raw materials. For some laggards, who had seen poor results in past years, restructuring brought better results this time.

What's more, the profit growth looks like to continue during the new financial year. No wonder, the Nikkei index hit again the 20,000 point level and analysts predict it could reach to 25,000, if Japanese companies can meet investor expectations of return to equity at 11 percent. Counting from December 2012, when it became clear Mr. Abe would become prime minister and launch his aggressive financial campaign to get rid of deflation, the value of Japanese companies has risen to 2,4 fold, but counted on price-to-earnings base they are still one third cheaper than two years ago and stand at just PE 17 in comparison to US 20 and China close to 30. Moreover, the companies have now JPY 230 trillion or some USD 2 trillion cash in hand waiting to be used for global investments. Or for better salaries that Government and Keidanren is pushing them to pay. Apart from bigger than before annual base up in April, the summer bonus will bring next month JPY 379,000 to average worker's pocket, for many much more. Investors will be also rewarded with bigger dividends and share buy backs totaling JPY 13 trillion or over USD 100 billion. It's all peanuts, of course, for the cash in hand.

It was car manufacturers again that stood out and Toyota, who topped the scales with JPY 2,2 trillion (USD 18 billion) net profit from JPY 27,2 trillion (USD 220 billion) turnover, both new records. Such profit stands unparalleled in the global car industry and while the company officials carefully say they expect "roughly same" for FY2015, analysts put expectations clearly higher and the family-born CEO talks of "need to change the corporate mentality" for even more efficiency and quicker reactions to market changes. Not having started any new factory for 5 years in order to focus on quality instead of volume, Toyota might lose its position as the global volume leader this year to Volkswagen by sheer capacity restrictions, yet its new assembly-line technology that will be put in use in new factories it is finally setting up, is said to cost 40% less. That the new factories will be in Mexico and China, not in Japan despite the low yen, confirms again that Abenomics will not bring Japanese factories back to home. Any free capacity in Japan from slack in domestic sales, however, will be used for more exports at today's good FX rate and same applies for other car makers.

Governments' meddling into private industries seldom brings the wished for results in the long run. French government is a warning example, who has its fingers in the pie both at Renault and Peugeot-Citroen. It even allowed China government to join hands and also take a significant share in the traditionally family owned Peugeot through a company of its own. Now with Renault issuing new shares to raise necessary capital, the Holland government has opted to raise its share there in order to keep its voting power. This has raised concerns all the way to Yokohama: as Renault owns 30% of Nissan, that is much more valuable and well-to-do today with USD 5 billion profit last year, it looks like Japan's No.3 car maker is getting under government control - and by wrong government on top of that!

Quality remains a crucial issue in all global industries and probably more so in cars. It is said that assembling one vehicle takes over 2000 parts against 200 in a mobile phone and just one bad part is enough to ruin the whole result. Never has one part maker caused such worldwide destruction as Takata Industries, whose airbags, especially from its Mexico factory, have caused to global carmakers forcing them to recall millions of vehicles worldwide and especially in USA. Takata's biggest client Honda was hit worse than others forcing a USD 70 million write down and prompting resignation of its CEO, yet the total tally reached already 36 million cars from 11 manufacturers. Adding insult to the injury, Takata's US representants kept denying there was anything wrong until last week when another 5 million car recall forced on Toyota added pressure at home so much that the company finally agreed its airbags were indeed defective. It remains to be seen what this will cost to Takata and what its future will be when the big car makers have developed new sources for their airbags.

Back to annual result review, in the non-manufacturing sector constructors, real estate and phone companies did well - for instance KDDI's USD 6 billion operating profit should be enough to buy many more mobile networks from Nokia - but energy and resources took losses from global price fall and caused big write offs at trading companies, who had invested heavily in mines, shale oil, gas fields etc. In turn, lower oil prices helped transports and shipping, while the always well-to-do train companies reaped record profits from extra loads provided by the millions of foreign tourists. Adding further glory, JR Central, a FCCJ member company now building the world's first full size maglev line, saw its new model test train reach a world speed record over 600 km/h. Quite a difference to European train companies, where news of losses, strikes and delays seem to prevail. Same comparison seem to apply between the major airlines in Japan and Europe.

Despite much maligned consumer demand, there was many good figures from retail, too. Seven & I Holdings, the mother company of Seven-Eleven, reported record profit JPY 343 billion, thanks to its ubiquitous convenience store chain and despite its slacking Ito-Yokaido supermarket business. Its two big competitors Lawson and Family Mart, owned by trading companies Mitsubishi and Itochu respectively, reported growth as well and planned opening more stores, "Famima" even adding a plan to take over the fourth biggest chain Sunkus/Circle K. High-end department stores like Isetan-Mitsukoshi and Daimaru-Matsuzakaya, known today as J-Front Retailing Co., also reported growth in sales and profit, partly thanks to rapidly growing business with foreign tourists. In the center of the trade, between the low end and high end, the general retail sector remains tough with Aeon, the biggest conventional supermarket chain, reporting -19% decline in sales.

In the specialty store sector, the Uniqlo "fast fashion" brand, reported 23% quarterly rise in sales and 64% in profit. The company seem to be well on its way in overseas expansion with half of the sales coming from 800 stores there, same as at home, by end of this year. Most of the stores are in China and other Asia as well as in big cities in US and Europe, so it might be some time yet before the first Uniqlo shop is opened in Finland, but it's nice to know there's a young Finn already on the company's management training course.

In consumer electronics, where old Japanese giants have gone through tough times over the past 10 years, Panasonic is back with profits following drastic streamlining of its business and focusing now on solar power and batteries. It is the main battery supplier to Toyota as well as to the much acclaimed all-electric US Tesla. In fact, it has just built a big factory for Tesla in Arizona and, in addition to money, has provided brainpower to Tesla in form of its ex-Panasonic Chief Technology Officer. In fact, Tesla seems like another combination of Japanese knowhow and American business acumen with no guessing which way the profits will flow at the end.

It has been much more difficult and time consuming to streamline Sony because of its different corporate culture and immense technological pride. In the past, Sony was the inventor, Panasonic "the fast follower". Now it seems the current Sony CEO's travails to restructure the lossmaking tv-business and closing Vaio PC business are finally producing result. For FY2014 Sony still took USD 1,3 billion write down for the business closures, but showed already decent operating profit which helped to cut the net loss half from early estimates. The main earnings came from imagining censors supplied to others instead of consumers and from the more down-to-earth video games and Hollywood movies. The phone business that Sony took over from Ericsson seem to be the main drag now, but for FY2015, the company claims to expect net profit, too. If correct, it will be the first time in six years, if my memory serves me right. During that time Sony has burned off unbelievable USD 9 billions! In Japanese tradition, going through such hard times, Sony top executives have volunteered to give away half of their salaries.

Among the earlier proud electronics, Sharp makes the saddest story. Its shift of focus from televisions and mobile phones for consumers to LCD screens for the same B-to-B with big investments into new high-tech plants failed badly and took the Osaka company so deep into red it has been facing possibility of bankruptcy for some years now. It fell to another USD 2 billion loss for FY2014 in follow of USD 9 billions in 2011-12 and more or less flat zero in 2013. Its high technology and large scale production efficiency has failed to produce results as the company has not been able to find sufficient amount of customers for it. Apple has been Sharp's No.1 long term client followed more recently by China's new phone makers and there was even a plan to get Foxconn in as shareholder, but once again Sharp's miserable life will continue only thanks to another USD 2 billion capital input by its creditor banks, Mizuho and Tokyo Mitsubishi.

That there still is technological prowess in Japan is best proved by Apple's decision to build a R&D center in Yokohama, its first outside of USA. Suitably, it will be located in the site of a former Panasonic factory that was closed four years ago as part of the corporate restructure. Not only Apple, but many other global phone brands rely on Japanese parts for their performance and Murata, who took over Finland's VTI some years ago, is one of them. Its compact condensers are global leaders in the phone business and bring steady profit for the company, whose name remain largely unknown for the big public as it rarely shows in the global consumer advertising. Same can be said of Nitto Denko, whose optical film for crystal panels is widely used in mobile phones around the world.

Medicals has proved a new field of invention for Japan's big companies, where they have turned their homegrown knowhow and good profits into global biz in leaps and bounds recently. Business restructuring and refocusing has also helped two rather unexpected companies to come up with new steps to help fight the Ebola virus. Fujifilm, whose old main business practically disappeared with the digital camera and since then refocused itself to medical, cosmetic and healthcare, has developed a new drug that has been tested to halve the high mortality rates from the rapidly spread disease. International testing organizations recommend Fuji to step up the production to make it widely available. Meanwhile, Toshiba, who is more known to many for its elevators and nuclear plants, has developed a reagent that makes testing the Ebola virus much faster. If used with the most advanced testing equipment, it takes only 20 minutes to find if the patient has the virus or not. It will be now field tested in Guinea.

All these news show that, while there are challenges, Japan Inc is doing pretty well and there is much happening among its big companies. Hopefully, the many new young start-ups reported in the previous column will add more vibe. Many old companies have also opted out this year for younger CEO's in unforeseen process based on merit, especially overseas experience, instead of age, finance and engineering as usual. 50 year old CEO's, not 60 year olds, lead now companies like Mitsui, Denso, Fujitsu and Honda and this should help them compete with American and European companies which are today often led by 40-50 year old quick decision makers.

From its own part, the government has now submitted all its promised reform bills to the Diet ranging from new labor laws and special economic zones to agricultural reform, in total 71 new laws or amendments to old ones. To make it sure all will pass the process, the ruling parties are considering to extend the ongoing session from its scheduled end in June to August. As I have earlier said many times, don't expect these new laws will bring about any radical change, but they are decent steps to right direction.

The much-talked-about changes to defense rules were also submitted to the Diet this week. Again, despite all furor, they don't seem to change really much as any co-operation with Americans and other allies will remain limited to back lines like logistics, reconnaissance, mine sweeping and other services - and even that only if Japan itself is clearly threatened. Japan will continue to defend only Japan, while Americans are supposed to defend both Japan and USA, hardly an alliance of equals. Even so, Opposition is promising it will do its utmost to prevent the laws passing during this Parliament session. The first debate yesterday between DPJ's Okada and the PM was a fiery starting shot.

Any plan that Prime Minister had for changing the pacifistic Constitution itself got blocked with last weekend's local election is Osaka, where Mayor Hashimoto's proposal to unify Osaka City and Osaka Prefecture administrations for better efficiency and sizeable cost savings got beaten by the unholy alliance of all established parties from LDP and DPJ to Buddhists and Communists prompting the young impish mayor to declare he will retire from politics all together. It seems his whole Innovation Party, the biggest in opposition today, yet likely to support Abe in constitution change, could now disintegrate with many MP's joining back to DPJ, where they came from. Without Innovation, it looks unlikely that LDP could alone reach the necessary 2/3 majority in Upper House in the forthcoming 2016 election, which has been part of Abe's plan. Instead, Hashimoto's retirement will cement the pacifistic Buddhists' position in the government as LDP's allies as they cannot be changed now to Innovation radicals, something PM has been scheming to pursue his nationalistic agenda. In turn, hope this will also help change Abe's focus again to economy, public finances and improvement of people's lives.

At least, that's how things look today. Let's see where we are by the next column.

Timo Varhama  
Tokyo, May 21, 2015   


Previous Columns

11 May 2015
Spring Events: Odaiba Rock, Shibuya Sex, Capitol Hill, White Hall and Red Square

22 April 2015
Elections, Elections - Finland, Japan, Around the World

30 March 2015
Sakura: beautiful, but just for a short, fleeting moment

16 March 2015
Better late than never - Japan moves slowly

2 March 2015
Three struck out, three more in doubt - Abe's ministers under attack again

19 February 2015
Spring, Sibelius, Chocolate, Budget and Big, Bad Putin

5 February 2015
Reform Work Starts - Energy, Farming and Food on Wish List

26 January 2015
Terror strikes, plenty work, sad memories wait

15 January 2015
Watching AKB, Eating Mochi, Spending JPY 96 Trillion - Japan Off to Better 2015 After So-So 2014



About the Columnist

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.

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