Japan

["Ian Murray" <seamus2001@xxxxxxxx>]

[NYT]
AUG 31, 2001
Accelerating Decline in Japan Evokes Rust Belt Comparisons
By JAMES BROOKE

TOKYO, Aug. 30 - A generation ago, when America's manufacturing
heartland was declining into a Rust Belt, Japan's leaders vowed to
avoid the same fate as their own economy matured. Now, the global
technology bust has sent manufacturing here into a precipitous decline
that seems to be leading the chronically sick economy into another
recession.

One after another, giant manufacturers of chips, home electronics and
other goods are announcing plans for sharp cuts in employment as Japan
faces up to its high labor and production costs and the sharp slowdown
in the world economy.

Some companies, adhering to tradition, are cutting jobs abroad first.
Today, the Kyocera Corporation (news/quote) said it would eliminate 20
percent of its work force, or 10,000 jobs, mostly in San Diego and
South Carolina, and Fujitsu earlier this month announced 16,400 job
cuts, mostly overseas.

But other big manufacturers are making painful cuts at home. On
Monday, the Toshiba Corporation (news/quote) announced that it would
reduce its Japanese work force by 19,000 through early retirements and
attrition. Today, Oki Electric Industry said it was cutting 2,200 jobs
in Japan.

During a decade of economic stagnation, the Japanese largely avoided
the kind of company shutdowns and bankruptcy auctions that have raced
through Silicon Valley in recent months and that devastated the
manufacturing centers of America's Midwest and Northeast a generation
ago. But the layoffs are picking up speed as Japan realizes that
globalization is a two-way street; 20 years ago Japan Inc. was viewed
as an invincible economic fortress by many in the West.

Unemployment figures released this week hit the psychological
threshold of 5 percent, a level not seen since the post-World War II
American occupation. More than 10 percent of young men between 18 and
24 years old who are just entering the work force are unable to find
jobs.

Last month, Japan's trade surplus was down 64 percent from the
previous July. If imports from China keep surging and Japanese
manufacturers keep moving factories overseas, economists say that
Japan's once fabled trade surplus could disappear by 2005 - four
decades after the first surplus was recorded.

The Japanese stock market - which rallied last spring with the
election of a new prime minister, Junichiro Koizumi, who promised to
undertake painful structural economic reforms - fell today to its
lowest close since October 1984. Investors are waiting to see if Mr.
Koizumi, returning from a summer vacation, will act on his bold talk.
Meanwhile, the weakened prospects of many of Japan's big exporters are
leading the Nikkei stock index in its descent.

"Profits for this first half-year are going to be devastating," said
Keiko Kondo, senior strategist for UFJ Capital Markets Securities.
"Fujitsu, Toshiba - they are just the beginning of a big trend
emerging."

Given the news today that industrial production fell 2.8 percent from
June to July, economists here say that Japan's economy, the second
largest in the world, is contracting at an annualized rate of 4
percent.

With low odds of a rescue by a stagnant United States, Katsusada
Hirose, a top government economics official here, warned reporters
today, "Economic conditions are getting severe."

This year is shaping up as Japan's third recession in a decade. Today,
the government released figures showing that the nation's so-called
output index had fallen to its lowest level in seven years. The latest
gross domestic product data will be released next Friday.

For years, Japanese manufacturers ducked downsizing, clinging to a
social contract that called for lifetime employment. By shuttling
workers among companies in a conglomerate and by reducing payrolls
through attrition and retirements, Japanese companies avoided outright
layoffs. Even now, some analysts say, Japan is dragging its feet.

"The U.S. is restructuring at warp speed - companies are writing off
bad debt; people are being laid off," Peter McKillop, a J. P. Morgan
official in Japan, said after returning here from a visit to San
Francisco. "Here, the bad-debt situation is excruciatingly slow. The
layoffs are going drip, drip, drip. In America, it is a torrent."

Still, Japanese companies seem to be showing a new sensitivity to
shareholder concerns about profits. That is a consequence, in part, of
the rise of foreign ownership of shares on the Tokyo stock market,
which has jumped to 20 percent from 4 percent during the last decade.

"The layoffs are a sign that the economy is indeed changing for the
better," Robert A. Feldman, chief economist for Morgan Stanley Japan,
said today. "There is greater awareness of shareholder value, better
allocation of resources."

Japan, of course, has been moving production offshore for years to
better compete in world trade. Over the last decade, Japanese imports
from Asian subsidiaries of Japanese companies increased eightfold,
while Japan itself was eliminating three million manufacturing jobs, a
cut of almost 20 percent.

This year, Aiwa is closing four Japanese plants to consolidate
production in Malaysia. NEC is increasing its Asian production of
computers; Canon is following suit with digital cameras, and
Mitsubishi Electric (news/quote) is shifting its production of
cellular phones offshore.

Lately, the biggest magnet for Japanese manufacturing investment has
become China, a nation with 10 times the population of Japan.

A Chinese factory worker, just a short freighter trip away from here,
will work two days for the same pay that some Japanese factory workers
earn in one hour.

So a few months ago, Toshiba announced that it would shift all its
television production for the Japanese market to China. Sony
(news/quote) is making components for its PlayStations in China.
Olympus is closing its digital camera factory in Japan to build one in
China. And Honda is considering constructing a plant in China to build
motorcycles to export to Japan. And today, Kyocera said it would shift
more production to China.

The evolution has been gradual, and it is a seemingly inevitable
aspect of Japan's economic maturation since World War II. But it
nonetheless makes many Japanese uncomfortable. "China becomes the
manufacturing center, taking over the role that Japan had," lamented
Tomoharu Washio, a Japanese trade official. "But this time, China also
becomes the market center. I am rather pessimistic about Japan."

In a survey last month of 562 major Japanese manufacturers, 49 percent
told Nikkei Research that they planned to increase overseas
production. Of this group, 71 percent said they were aiming at China.
Increasingly beaten at its old game of exporting high-technology
products, Japan experienced a 77 percent drop in July in its trade
surplus with Asia, compared with last year's levels. With China, Japan
registered a record $25 billion trade deficit last year, a sevenfold
increase over the 1993 level.

"China is eating Japan's lunch," said Ronald Bevacqua, senior
economist here for Commerz Securities. "More and more low-cost
Japanese manufacturing is being shipped over there. Unlike the rest of
Asia, China is doing high-end stuff as well."

To some degree, Japan is merely following the lead set by the United
States a decade ago. Today, about 55 percent of production by American
multinationals takes place outside of the United States. For Japan,
the figure has risen to 45 percent.

Eamonn Fingleton, the American author of a book on Japanese
production, "In Praise of Hard Industries" (Houghton Mifflin
(news/quote), 1999), says that Japan is staying one step ahead of
China, shifting increasingly to capital- and knowledge-intensive
processes like the manufacture of printing presses and textile
machinery.

"Where you have a capital-intensive process," Mr. Fingleton said in an
interview, "high wages are not the most important of your costs."

But trade flows seem to contradict that analysis. During the first
half of this year, when Japan recorded a $12.6 billion trade deficit w
ith China, machinery and equipment surpassed textiles for the first
time to become the leading category of Chinese exports to Japan.

"China will become the world's manufacturing center," Yomiuri Shimbun,
a conservative newspaper, said in an editorial last week, noting that
Japan's share of the global semiconductor market had dropped by half
in a decade. "Unless something is done, Japan's economy has no bright
prospects."

Westerners who have seen the industrial erosion of their economies are
not quite as gloomy. Many predict a world several decades hence when
Japan, with its aging population, is a "headquarters country," living
in large part off investments overseas and brain work at home.

"The reality is that the de-industrialization is happening very
rapidly in Japan," said Jesper Koll, a German who is chief economist
for Merrill Lynch (news/quote) Japan. "I can see the Nike (news/quote)
model here, where you do the brand management in Seattle and the
manufacturing in Indonesia. In Japan, you will do the brand management
in Osaka or Tokyo and the manufacturing in China."