In March of 2011, a devastating earthquake and tsunami wiped out significant manufacturing operations in Japan. Production was curtailed and many U.S. manufacturers had to wait for components or find alternate sourcing. A few months later, Japan is no longer front page news. Does that indicate that production is returning to normal? Of course, it’s not that simple.
There are some bright spots. Manufacturing seems to be recovering faster than anticipated, particularly in the auto industry. Toyota is hiring 4,000 workers to help “catch up” production and resume normal operations one month earlier than planned. Other auto makers and manufacturers also are rebounding faster than expected. Recently, more than 100 of Japan’s largest companies were asked about the state of the economy. About 70% of the firms believed that the Japanese economy will improve in the near term but that power supply, strong currency and political fighting over reconstruction will continue to cause difficulties. Many Japanese manufacturers have announced major in-country capital spending plans. There is a lot to rebuild, and debt levels are rising fast as infrastructure is restored. At the same time, firms are investing significant capital in production facilities outside of Japan. They are also outsourcing the purchase of some component parts (particularly in U.S. facilities).
The yen remains strong, making it difficult for cost-effective inbound investment and raising the cost of Japanese products in the U.S. and other markets. Will the next Japanese government and the Bank of Japan be able to stimulate growth and control monetary policy while reducing (cautiously) the value of the yen? Although Japan’s economy shrunk again last quarter, the contraction was less than expected. While Japan continues to make progress, ultimately, global economic conditions may outweigh the local country concerns. Japan may be an island, but it is still just one piece of the global puzzle.
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