Weak yen to keep output in Japan up

Tokyo

CHIEF executive Carlos Ghosn at Japan's Nissan Motor Company has declared that his company will step up production in Japan provided the yen remains at around its current levels versus the dollar - a pledge likely to have cheered the Bank of Japan's embattled governor, Haruhiko Kuroda, and also Prime Minister Shinzo Abe.

The pledge by the internationally well-known motor industry chief could do much to vindicate the BOJ's aggressive monetary easing strategy, even though the bank is still far from reaching its inflation target. It also suggests that Japan's ambitious economic growth envisaged under Abenomics could come within reach, analysts said.

"What we are seeing is a much more competitive yen that allows exports to be feasible," Mr Ghosn told a Japan Chamber of Commerce and Industry meeting last Thursday, adding that output from Nissan's Japan plants would "increase steadily" over the next two years.

Mr Ghosn added that Japanese exports can be competitive as long as the dollar is worth more than 100 yen, according to a Reuters report. The yen was trading at around 124.06 to the dollar as of July 18.

The significance of his words, apart from the fact that they come from the head of the country's second largest car manufacturer, is that it was Mr Ghosn who warned five years ago that Nissan and other Japanese manufacturers would be forced to move production offshore because of the then strong yen.

Mitsubishi Motor Corporation's then president, Osamu Masuka, said the firm was "fighting to adjust" to yen levels of around 90 to the dollar at that time while Toyota Motor Corp, Asia's biggest car maker, told parts suppliers to slash prices or risk being replaced by overseas rivals.

Nissan then shifted substantial amounts of vehicle production to Mexico and other locations outside Japan while other car makers and manufacturers across a broad spectrum of products followed suit, accelerating sharply the "hollowing out" of Japanese industry.

The Bank of Japan cannot be seen as "targeting" the yen exchange rate and instead targets inflation in order to, ostensibly, raise inflation expectations and encourage consumption and investment within the country. But maintaining a stable and competitive exchange rate is another objective, analysts say.

"The BOJ's view (is that) it's worth trying to depreciate the yen to 130 or 140 to the dollar in order to stop production from offshoring or hollowing out the economy," former BOJ official and now Japan economist at Credit Suisse in Tokyo Hiromichi Shirakawa said earlier this year.

Last week's statement by the head of Nissan is likely to encourage the BOJ to continue its current monetary strategy even though the central bank - and governor Kuroda especially - have been widely criticised for pursuing an "over ambitious" and economically "damaging" inflation goal.

Mr Ghosn said last week that Nissan would export its popular Rogue crossover vehicle from Japan to North America in order to meet robust demand, Reuters reported. Analysts expect to see similar strategy switching by other Japanese manufacturers.

Canon's chief executive, Fujio Mitarai, who is also a former head of the nation's leading business lobby, Keidanren, said several months ago that the firm intends to raise the proportion of products made in Japan to 50 per cent within the next three years, from 42 per cent at present.

"Right now, we have spare capacity at home because we gradually moved production overseas," said Mr Mitarai, referring primarily to cameras and photocopiers. Canon cut back production at home from over 60 per cent before the 2008 financial crisis to 40 per cent in 2009.

Moving some production back onshore is designed to make manufacturing more flexible, and Canon will leave the option to move production back overseas open, should the yen strengthen again, Mr Mitarai added, though he indicated that he expects the currency to weaken further from here on.

Other Japanese manufacturing firms could follow Canon's example "one after another", by re-shoring some production back to Japan, Keikichi Honda, an adviser to Keidanren told The Business Times recently. He added that the factors influencing Canon's move are "shared by almost all Japanese manufacturers".

He cited the "sustainability of the normalised yen parity" as the first of such factors; there is also the need for internationally known brands such as Canon to preserve the made-in-Japan image, and to maintain an optimum balance between domestic and overseas production.

Mr Honda also pointed to "labour union considerations" in Japan and the need to make "optimum utilisation of domestic human resources", plus the fact that the costs of offshore manufacturing are continually "creeping up".

Other analysts are more cautious and argue that only by maintaining a stable yen exchange rate at below 100 to the dollar for some time can monetary authorities hope to change the mindset of Japanese firms away from offshoring to onshoring to using their rich cash reserves to make new investments at home rather than overseas.