Japan

Japan's Export Rebound


At last, there's some good news for Japan Inc.'s beleaguered executives. Even as Japanese companies report dismal earnings for the fiscal year, Japan's fabled export machine, which has been idling for months, may be returning to life. On Apr. 30 the government announced that output at Japanese factories and refineries was up in March for the first time in six months. That helped buoy the bellwether Nikkei 225 stock index by 3.9%—its first rise in four days—to 8,828.26.

The news came two days after Honda (HMC) surprised analysts by reporting a profit of $1.4 billion for the year ended in March. Also beating analysts' estimates was Mitsubishi Motors (7211.T), which reported on Apr. 27 a smaller-than-expected $567.6 million annual net loss; that was the company's first time in the red in three years, but it expects to turn a small profit this year. "We may be starting to see the bottom," President Osamu Masako told reporters.

Signs of improvement were evident a week earlier: On Apr. 22 the government announced that export volumes rose 1.5% in March compared with February—the first monthly gain in eight months. And for April and May the Economy Trade & Industry Ministry (METI) is forecasting more production gains, of 4.3% and 6.1%, respectively. "It looks like February marked the trough for exports," Macquarie Securities' (MQG.AX) Richard Jerram wrote in a report after the figures were announced. Taken together, the gains suggest that the outlook is brighter. "In the ideal scenario, the economy will hit bottom in the July-September period and grow slightly in the quarter after that," Fujio Mitarai, head of the powerful Keidanren business lobby and chairman at Canon (CAJ), said this week in an interview with the Nikkei, Japan's largest financial daily.

Lower Inventories

Make no mistake, Japan is still suffering from its worst postwar recession. From October to December, GDP contracted 12.1% on an annualized basis and likely shrank 14% in the January-March quarter. (For the entire fiscal year through March, the government estimates that the contraction was 3.1%, the first annual decline since 2001.) The yen isn't cutting into exporters' earnings as it was last year. But to save on costs, manufacturers had halted production for months, laid off tens of thousands of contract workers, and focused on getting rid of a surplus of flat-panel TVs, cars, and air conditioners.

One indication of how drastically they cut back: In the first quarter of this year, car shipments from Japan to overseas markets plunged 63%. During that period automakers managed to lower their inventories from 103 days' worth of product to 72. Now inventories are expected to be close to 55 days, the average before demand went south.

For some automakers that strategy seems to have paid off. Honda's announcement of its $1.4 billion profit came despite a $1.9 billion loss in the January-to-March quarter. Those results were better than what most analysts expected—as were Honda's projections for the year ahead. For the year ending in March 2010, Honda estimates pretax earnings of $417 million despite expecting sales to fall in the U.S. and Europe by 9.6% and 17%, respectively. Honda is expected to ramp up production at factories in the second half of the year. It should benefit from rising sales in China, where shoppers are buying the Accord sedan; the launch of the new Honda Insight hybrid in Europe, Japan, and the U.S.; and possibly even a reversal of the currency swings that sapped earnings. Recent economic stimulus packages could also persuade some consumers to resume their spending.

New Plant for LCD Glass

Among tech companies, there are promising signs, too. Fujitsu (6702.T), which makes chips, cell phones, laptops, and servers, said on Apr. 30 that it will eke out an operating gain of $700 million and a $204 million net gain this fiscal year, following last year's $1.1 billion net loss. Three days earlier, Sharp (6753.T) forecast a $510 million profit for the current year through March 2010 despite the likelihood of a slight 3.4% dip in sales, to $28 billion. In the just ended year through Mar. 31, the world's third-biggest maker of flat-panel liquid-crystal-display TVs posted a $566 million operating loss, from the previous year's $1.87 billion in profit. Sharp's TV assembly plant is temporarily quiet. But even during Japan's weeklong Golden Week holiday now under way, the company's state-of-the-art facility in western Japan is churning out the huge sheets of specialized glass for LCD sets. In October, Sharp is slated to open the world's most advanced LCD panel-making facility near Osaka; that's five months ahead of schedule.

In other sectors, signs of economic recovery are less clear-cut. Japan's iron and steel industries are still holding back: Output fell 4% in March, and the government expects a 6.7% decline in April. But in May things could turn around as infrastructure spending and car buying in the region picks up, according to the METI. And by October a moderate recovery could take root, Japan's central bank predicted in its twice-a-year outlook report on Apr. 30.

Still, economists warn that the rebound is thanks to recent cutbacks rather than a sudden surge in demand. And some worry that the gains could be fleeting if the government doesn't approve another big dose of public spending by early 2010 or if the U.S. and China's economies sour. This week, Japan lowered its economic forecasts for the year, predicting that gross domestic product—the broadest measure of growth—would fall by 3.3% despite the government's announcement of four sizable economic stimulus packages since last October. Meanwhile, the swine flu outbreak and the possibility of a global pandemic has led some analysts to warn that economic recovery could be even further off. "The economy is likely to show an L-shaped recovery, with business sentiment diverging by industry," wrote Barclays Capital's (BCS) Kyohei Morita in an Apr. 30 report.

Hall and Rowley are correspondents in BusinessWeek's Tokyo bureau

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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