DON´T EXPECT CAPITAL FLOWS OUT OF JAPAN / THE FINANCIAL TIMES MARKET ANALYSIS ( A MUST READ )

Don’t expect capital flows out of Japan

By Henny Sender

Published: March 31 2011 13:10


Minebea is not well known. But it is one of many Japanese companies that supply the innards of things that better known Japanese companies then slap their name on and export to the rest of the world.


Minebea was also among the earliest Japanese firms to venture abroad, setting up huge operations first in Thailand and then outside Shanghai in China. But the steel that goes into the ball bearings that Minebea makes all comes from Japan because Minebea needs the highest quality steel. Today, one senior Minebea official says he worries that China will bar imports from Japan for fear of radiation, whether that fear is legitimate or merely opportunistic in the wake of the disaster at the Fukushima power plant.


That is just one example of the many ways in which the next few months will test just how much the world depends on Japan for its goods and to what extent others will be able to take advantage of the disruptions to replace the proud made in Japan label. If they succeed, both Japan’s trade balance and its current account surplus could shrink at a dramatic pace, leaving the country with less capital to send offshore.


Already the brokerage firms are producing their urgent recommendations to buy Chinese cement firms and Chinese coal mining companies, on the expectation that in time Japan will not be able to meet its own needs, let alone those of the rest of the world. While these are early days, already Chinese, Korean and Taiwanese firms are gearing up to fill what is likely to be more than just a temporary disruption in the flow of Japanese goods.


Today, Japanese businessmen say they expect power supplies will lag demand through next summer. Japan will export less and import more, as a result of the disruptions. Because of initiatives from Japan’s global competitors and because Japan itself will inevitably turn more inwards, there are likely to be major shifts in both the global economy and financial markets in coming months. The result is that both Japanese goods and Japanese capital are likely to matter less to the world.


At home, industrial production will shrink. Food imports will surge. (This in spite of the fact that many Tokyo restaurants are dark and empty, partly because some companies are telling executives not to dine out for a month out of respect to the victims of the tragedy in Tohoku, and in other cases because both chefs and customers have fled to safer points west.)


Japan is especially vulnerable because the concept of diversification has never really taken hold in Japan. The structure of Japan is highly centralised – everything goes through Tokyo. Western Japan has seen its clout steadily diminish (a trend the Kobe earthquake did nothing to reverse).


Japanese industry’s embrace of just in time supply has recently been accompanied by an emphasis on cost cutting that has meant fewer suppliers, especially for the car industry. Over time, there has been more concentration, whether in terms of geography or suppliers, which works well in normal times but adds to the strain under current circumstances. Given that trend, industrial production is likely to drop dramatically. Indeed, JPMorgan economists forecast a 10 per cent drop this month – four times the drop following Kobe.


In addition, after Kobe, net Japanese foreign security purchases, which had already slowed, turned negative. But that was more than 16 years ago and mattered less. Since then, the world has gotten used to flows from low interest rate Japan as the country recycles the dollars it earns from exports abroad. Capital can earn far more offshore than onshore (setting aside the danger of adverse currency movements). Emerging markets, especially in Asia, commodity markets such as Australia, and the US Treasury market, have all been the beneficiaries. That may now come to an end as more money stays at home.


Less liquidity from Japan comes at the same time as China is trying to tighten its monetary policy, and the countdown to an end to the Federal Reserve’s large scale asset purchase plan in June begins in earnest.


In the short term, the yen may strengthen against the dollar on a combination of repatriation (which often happens at the end of the fiscal year in any case), liquidation of offshore investments, and speculation from both hedge funds and retail investors. But the long-term trend is surely down.


Of course, it is always possible that Japan will use the sad events of the past three weeks to shake off its torpor. But the Japan that emerged in recent days – poor rural isolated communities whose primary industry is fishing or gathering now contaminated seaweed – contrasts greatly with stereotypes of glitzy, neon lit, high tech Tokyo. The neon has been turned down and it will be a while before it is switched back on in the Japanese capital.


Copyright The Financial Times Limited 2011.