Japan: Risk Assessment
Country Rating1
Rating: A1
Business Climate Rating1
Rating: A1
Risk Assessment2
Strong growth in 2010 driven by a spectacular rebound in exports
Japan surprised everyone with the acceleration, albeit limited, in household consumptions (1.9%), spurred by the very reactive fiscal policy pursued by the authorities and the spectacular rebound in exports (up 24%) in 2010, which benefited from strong demand from the other Asian economies (54% of shipments). Exports thus made back ground lost during the crisis. Economic growth surged in 2010, up 4%, a pace not achieved since 1991.
The effects of the earthquake and the tsunami will persist until the end of 2001
In the fourth-quarter 2010, economic growth stalled, affected by the contraction in both exports, hobbled by the appreciation of the yen, and household consumption, affected by expectations that the disposable income might begin to stagnate, or even decline, again. It was in that context of economic weakness that Japan was hit by the earthquake and tsunami in March 2011. Compounded by nuclear fears, the two cataclysms subjected the country to a shock of unprecedented violence, reflected by a growth contraction of 0.9 per cent in the first quarter of 2011. Breakdowns in the supply of electricity and water, in conjunction with the destruction of road, port, and rail infrastructure have affected production not only by factories operating in the stricken regions (the four counties affected represent 6.2% of GDP) but also in administrative subdivisions supplied with energy by nuclear power plants located in north-eastern Japan and which are more industrialized (Kanagawa and Shizuoka). The sectors that have suffered most include automotives, electronics, steel, pharmaceuticals, and food. So exports, where a slowdown was already expected before these dramatic events, should decelerate for months to come. This particularly concerns sales to China, South Korea, and Taiwan of electronic components and other intermediate products essential in the assembly of finished products notably intended for Japan, the United States, and Europe. The existence of excess production capacity in Japan could nonetheless partially mitigate that negative effect. The price competitiveness of Japanese products moreover continues to suffer from the strength of the yen. This trend could be curbed, however, by the monetary policy pursued by the Bank of Japan, which has very large foreign exchange reserves at its disposal for use in limiting the Japanese currency appreciation and thereby supporting exports. Households suffer from this new and unprecedented crisis, which should have a lasting effect on their confidence even if national solidarity and cohesiveness will ensure that support will be provided to those that suffered most. Their spending is thus also expected to decrease this year especially with household savings having declined considerably in past years to a level in 2010 representing about 2.5% of disposable income. However, the negative effects should fade, at the best, by the end of the year, and give way to an economic rebound driven by reconstruction. Nonetheless, the intensity of the recovery will depend on Tepco's ability (Tokyo Electric Power) to limit the radioactivity contamination on the environment and to restore electricity supply. The supply of energy should actually remain erratic, especially in summertime when air-conditioning is extensively used. The reconstruction financing is unlikely to be a source of concern with Japan possessing the financial means to cope with the situation. Although public-sector debt is currently very high (233% of GDP according to IMF), 95% of the amount outstanding is owed to residents. And the archipelago holds considerable assets abroad (60% of GDP). The government could also draw on the substantial reserves accumulated at all levels of the national economy (25% of GDP) mainly by companies. In this context, the 2011 outlook for economic growth has been revised downward (-0.3%).
Smaller companies seem to be the most vulnerable
Large Japanese and foreign groups have production units in the regions affected by the earthquake and tsunami. But many smaller subcontracting companies and high technology hubs also have production facilities there. The Japanese just-in-time production model, which eliminates the accumulation of stocks, tends to amplify the impact of production stoppages. The lack of essential production inputs can lead to the shutdown of assembly lines while the electric-power rationing put into effect could result in losses, particularly in the manufacturing of products for the electronic component sector were Japan provides 21% of world production and which entails very high precision work. Subcontracting companies may, furthermore, be faced with increases in input costs they will be unlikely to be able to pass on to customers since they are locked in by annual contracts. The pressure on their margins will consequently increase. Even before the onset of the financial crisis, companies in this category had been giving signs of serious weaknesses (low profitability, overdependence on one large customer, difficult access to credit). This situation contrasts with that of large companies, which have largely been able to reconstitute their cash flow (up from about 60% mid-2009 to over 115% late last year). The continuing strength of the yen in conjunction with lessons drawn from this latest catastrophe could serve as a catalyst to the already broad movement to delocalize manufacturing facilities abroad, which would tend to weaken subcontracting companies even more. And even if the risk of nuclear contamination either fails to materialize or remains limited in scale, consumers might nonetheless be likely to remain wary of any product whatsoever "made in Japan". That will particularly be the case for agri-food industries. The impact of the massive catastrophe on the environment (radioactive radiation, petrochemical complexes in flames), besides the public health issues it will generate, will have a long-lasting effect on farming activity. The number of bankruptcies has decreased in 2010 (-12.4 per cent) and in the first quarter of 2001 (-5.3 per cent), but has not recovered its pre-crisis level. Coface payment incident experience is satisfactory.
Strengths
- Export-oriented specialization, diversified exports to the other Asian economies
- Very high national savings rate
- Advantageous geographic position in a dynamic region
- Public-sector debts mostly held by domestic investors
- Advance in R&D
Weaknesses
- Rapidly ageing population with virtually no immigration
- Decline in the working population (unfavourable demographics and a virtual non-existence of immigration)
- Growing portion of workers with little job security: One third of the working population
- Low productivity of small and medium companies
- Government instability impeded management of the crisis
- Strained relations with China over resources (rare earth, gas fields in the East China Sea)