Another high-value export possibility for Japanese manufacturers

Financial Times Deutschland posted a report recently that describes how "China's introduction of locally assembled Japanese "bullet trains" shows that the country has completed the transfer of foreign world-class high-speed rail technology, Beijing's Ministry of Railways has claimed. Lightly modified versions of Japan's E2-1000 Shinkansen went into service on lines around Shanghai recently but the rail ministry and official media have played down the trains' origins and instead stressed China's success in ‘‘ digesting'' foreign technology." According to the same report, China is planning on building "5,400km of high-speed lines in the four years from 2006." If Japanese firms can get a significant portion of that business, it would provide a good boost to the exports side of Japan's GDP books.

There is a potential stumbling block, however. As the above quote mentions, the fact that the high speed train technology came from Japan has been kept as low key as possible. The reason for this as described in the FTD article is that"Lingering Chinese anger at Tokyo's 1931-45 invasion means that purchases of Japanese technology are particularly sensitive, in spite of a recent thaw in bilateral diplomatic ties. Reports of the 2004 Shinkansen deal prompted internet protests and street demonstrations, and an initial batch of trains exported from Japan was shipped without the customary public ceremony."

So politcal relations between Japan and China represent a significant hurdle to increased exports from Japan to China. It is remarkable to me how the Japanese occupation of China remains such a sticking point. Relations between Japan and the United States have been very warm since World War II in spite of the fact that on the US side, Pearl Harbor and the massive number of deaths in the Pacific theater could be sore spots; and on the Japanese side, the nuclear bombings of two of its cities plus catastrophic bombings of other cities could provide fodder for discord even now.

Potential new export market for Japanese manufacturers

According to Aviation Today, "Boeing’s jetliner product rejuvenation coupled with Lockheed Martin’s F-35 and broad U.S. defense export market dominance means expansion of the United States’ share of the industry, and with it dominance in leading edge technologies in such areas as avionics."

The military aircraft sector seems like a logical business for a large Japanese conglomerate to invest in. Japan really should be building up a somewhat greater military for its own self-defense purposes, and a home-grown fighter/bomber would be a logical target for investment by the Japanese government. I'm sure that global purchasers of the US's military aircraft would like to see an additional alternative source down the road.

Exports and Mayonaise in Japan

By Claus Vistesen
(cross-post from Alpha.Sources)

Many things can be learned from the recent report on Japan's trade surplus which saw a whopping increase on 36.9% y-o-y in March.

Japan's current account surplus widened to a record in March, as exports to Asia and Europe helped counter slower growth in shipments to the U.S.

The surplus expanded 36.9 percent to 3.32 trillion yen ($28 billion) from a year earlier, the Ministry of Finance said in Tokyo today, more than the 2.95 trillion yen median estimate of 28 economists surveyed by Bloomberg News.

Today's report supports comments made this month by Asian finance ministers that growth in India and China will help the region withstand a slowdown in the U.S. and Europe. Japan's exports to China, which overtook the U.S. as its largest trade partner last year, surged 15 percent to a record in March.

First of all it appears that Japan is indeed decoupling from a trailing US economy but not as it were through an increase in domestic demand but rather through exports to China, Europe and India. A notable data point is the surge in the trade surplus of 62.1% in March and more specifically the 15% increase in exports towards China.

A second point is derived from the income balance which of course reflects the low interest rate environment and subsequent low yield environment for capital in Japan. Especially net revenue earned in foreign direct investment grew at a very healthy clip.

Meanwhile, much ado have been made of the recent gain in producer price inflation (wholesale inflation) which rose 2.2 percent y-o-y in April. Yet, the gain was mainly and quite naturally derived from energy and commodities which of course begs the question of what measures of inflation you want to look at? Also, as is customary when gauging Japanese inflation figures the odd data point stands out. Normally it is café lattés from Starbucks but this time around the focus is on mayonaise and salt where prices are set to go up on the back of the high commodity component in the production. More generally we should really try to think about the inflation dynamics in Japan and whether and to what extent producer prices will trickle down into consumer prices to any sustainable degree? Remember here at producer prices and especially those tied to commodities are for a large part tied to capex and as we saw above capex in Japan is mainly driven by booming exports. Essentially, as I and other Japan watchers have been arguing we are looking at a disconnect between the domestic economy and a capex driven export sector. This does not mean that PPI inflation won't perhaps make those consumer price figures look better but as always with the Japanese economy, textbook theory should be applied with caution.

The state of the Japanese stock market

by Scott Peterson

Carl T. Delfeld over at SeekingAlpha asks "Is Japan's Stock Market on a Downward Spiral?"...he points out a couple of facts that I hadn't noticed before:

-"Having comprised a third of global market capitalization in 1990, Japan's market capitalization is now less than one tenth that of the world's $49,900 bn"...

-"Michiyo Nakamoto of the Financial Times goes on to say that in a stark sign of Tokyo's decline, the number of foreign companies listed on the Tokyo Stock Exchange has plummeted from 125 in 1990 to just 25...all of this seems to highlight a lack of confidence and risk taking so vital to growth in financial services"...

I don't know what advantage there ever might have been to listing on the TSE for foreign companies, given that Japan's securities and accounting practices have been quite different from those in the US and the EU. The key point to me is that even if Japan's market cap has increased in absolute terms since 1990, the failure to keep up with the rest of the world is glaring. However, in 1990 Japan's market cap was at the peak of a bubble-driven bull market, and since then the unwinding of that peak has likely been the primary driver of the decrease in share of the world's market cap. So this information is probably not a great indicator of where things are headed for Japan.