February 12, 2015, 17:00 JST

Made in Japan again

Encouraging companies to produce and invest in Japan has been one of the core message of Abenomics. A weaker yen was supposed to encourage more exports from Japan and a need to invest in Japan to facilitate an expansion in production.

For a while, the strategy was seen not to be working, with both exports and production remaining stagnant despite the weakening in yen. However, more than 2 years into Abenomics, there are signs that the strategy is starting to work. Since October 2014, there has been a visible pick up in export volume. The real export index, estimated by the Bank of Japan, grew by more than 7% in the last 4 months of 2014.

 Source: BoJ, JMA.

Correspondingly, manufacturers are expanding their production. The industrial production expanded by 4% in the last 4 months of 2014. Ministry of Economy, Trade and Industry (METI) forecast even larger expansion in the next 2 months.

 Source: METI, JMA.

The situation has been less clear on the capital investment front. However, the machinery orders data we received today (February 12) seem to shed more light. Core machinery orders, a leading indicator for the private capital expenditure in Japan, rose robustly by 8.3% month on month in December. A breakdown by industries shows that orders from manufacturers expanded by as much as 24.1% month on month in December. As a result, the level of orders from manufacturers reached the highest since October 2008.

 Source: Cabinet Office, JMA.

Is "Made in Japan" making a comeback? . Pessimists have been arguing that Japanese manufacturers are moving their production facilities to overseas location to be nearer to their markets and also to escape the high labor cost in Japan. In our view, these fundamentals have not changed much. Japan still faces a low-growth domestic market and the labor market in Japan remains highly regulated. However, it seems that the apparent high profitability of exporting from Japan is starting to convince some manufacturers to bring their production back to Japan at the margin. There are some anecdotes that some of large producers in Japan such as Nissan, Cannon are expanding their production in Japan.

Nissan to make more cars in Japan (Wall Street Journal, December 19, 2014)

Weak yen Rekindles Hope for ‘Made in Japan’ (Wall Street Journal, January 18, 2015)

While we expect manufacturers to remain cautious in investing in Japan, we do think their investment in Japan is set to grow in the next 2 years. The Bank of Japan seem fully committed to keeping yen low. There were some political lobbying against weak yen in early 2014 but the falling international commodity prices have quieted down these voices. With corporate profits likely to renew historical high in the fiscal year 2014, Japanese companies are flash with cash and banks seem desperate to lend to anybody with a plausible excuse. 

 Source: MoF, JMA.

We are currently forecasting non-residential private investment to grow by 4.4% in the fiscal year 2015 and by 3.4% in the fiscal year 2016. We will probably need to revise these numbers upward. See our current forecast here

Two of our controversial macro calls for 2015-2016 is to forecast wage inflation to rise above 1% by the end of 2015 and the BoJ to accomplish its 2% inflation target in 2016. 

 Source: MHLW, JMA.

In our view, the expansionary trend in manufacturing are particularly favorable to our calls. The labor market in Japan is already at a full-employment status. A larger production will require more labor and it will add inflationary pressure onto wages. Higher wages will bring out even more demand for labor through stronger consumption. In our view, Japan is set to enjoy a pretty good year in 2015. 

 Source: MHLW, JMA.