Headline: Accelerating Decline in Japan Evokes Rust Belt Comparisons

Source: New York Times, 31 August 2001

URL: http://www.nytimes.com/2001/08/31/business/31YEN.html?pagewanted=print

TOKYO, Aug. 30 — A generation ago, when America's manufacturing heartland was declining into a Rust Belt, Japan's leaders vowed to avoid the same fate as their own economy matured. Now, the global technology bust has sent manufacturing here into a precipitous decline that seems to be leading the chronically sick economy into another recession.

One after another, giant manufacturers of chips, home electronics and other goods are announcing plans for sharp cuts in employment as Japan faces up to its high labor and production costs and the sharp slowdown in the world economy.

Some companies, adhering to tradition, are cutting jobs abroad first. Today, the Kyocera Corporation said it would eliminate 20 percent of its work force, or 10,000 jobs, mostly in San Diego and South Carolina, and Fujitsu earlier this month announced 16,400 job cuts, mostly overseas.

But other big manufacturers are making painful cuts at home. On Monday, the Toshiba Corporation announced that it would reduce its Japanese work force by 19,000 through early retirements and attrition. Today, Oki Electric Industry said it was cutting 2,200 jobs in Japan.

During a decade of economic stagnation, the Japanese largely avoided the kind of company shutdowns and bankruptcy auctions that have raced through Silicon Valley in recent months and that devastated the manufacturing centers of America's Midwest and Northeast a generation ago. But the layoffs are picking up speed as Japan realizes that globalization is a two-way street; 20 years ago Japan Inc. was viewed as an invincible economic fortress by many in the West.

Unemployment figures released this week hit the psychological threshold of 5 percent, a level not seen since the post-World War II American occupation. More than 10 percent of young men between 18 and 24 years old who are just entering the work force are unable to find jobs.

Last month, Japan's trade surplus was down 64 percent from the previous July. If imports from China keep surging and Japanese manufacturers keep moving factories overseas, economists say that Japan's once fabled trade surplus could disappear by 2005 — four decades after the first surplus was recorded.

The Japanese stock market — which rallied last spring with the election of a new prime minister, Junichiro Koizumi, who promised to undertake painful structural economic reforms — fell today to its lowest close since October 1984. Investors are waiting to see if Mr. Koizumi, returning from a summer vacation, will act on his bold talk. Meanwhile, the weakened prospects of many of Japan's big exporters are leading the Nikkei stock index in its descent.

"Profits for this first half-year are going to be devastating," said Keiko Kondo, senior strategist for UFJ Capital Markets Securities. "Fujitsu, Toshiba — they are just the beginning of a big trend emerging."

Given the news today that industrial production fell 2.8 percent from June to July, economists here say that Japan's economy, the second largest in the world, is contracting at an annualized rate of 4 percent.

With low odds of a rescue by a stagnant United States, Katsusada Hirose, a top government economics official here, warned reporters today, "Economic conditions are getting severe."

This year is shaping up as Japan's third recession in a decade. Today, the government released figures showing that the nation's so-called output index had fallen to its lowest level in seven years. The latest gross domestic product data will be released next Friday.

For years, Japanese manufacturers ducked downsizing, clinging to a social contract that called for lifetime employment. By shuttling workers among companies in a conglomerate and by reducing payrolls through attrition and retirements, Japanese companies avoided outright layoffs. Even now, some analysts say, Japan is dragging its feet.

"The U.S. is restructuring at warp speed — companies are writing off bad debt; people are being laid off," Peter McKillop, a J. P. Morgan official in Japan, said after returning here from a visit to San Francisco. "Here, the bad-debt situation is excruciatingly slow. The layoffs are going drip, drip, drip. In America, it is a torrent."

Still, Japanese companies seem to be showing a new sensitivity to shareholder concerns about profits. That is a consequence, in part, of the rise of foreign ownership of shares on the Tokyo stock market, which has jumped to 20 percent from 4 percent during the last decade.

"The layoffs are a sign that the economy is indeed changing for the better," Robert A. Feldman, chief economist for Morgan Stanley Japan, said today. "There is greater awareness of shareholder value, better allocation of resources."

Japan, of course, has been moving production offshore for years to better compete in world trade. Over the last decade, Japanese imports from Asian subsidiaries of Japanese companies increased eightfold, while Japan itself was eliminating three million manufacturing jobs, a cut of almost 20 percent.

This year, Aiwa is closing four Japanese plants to consolidate production in Malaysia. NEC is increasing its Asian production of computers; Canon is following suit with digital cameras, and Mitsubishi Electric is shifting its production of cellular phones offshore.

Lately, the biggest magnet for Japanese manufacturing investment has become China, a nation with 10 times the population of Japan.

A Chinese factory worker, just a short freighter trip away from here, will work two days for the same pay that some Japanese factory workers earn in one hour.

So a few months ago, Toshiba announced that it would shift all its television production for the Japanese market to China. Sony is making components for its PlayStations in China. Olympus is closing its digital camera factory in Japan to build one in China. And Honda is considering constructing a plant in China to build motorcycles to export to Japan. And today, Kyocera said it would shift more production to China.

The evolution has been gradual, and it is a seemingly inevitable aspect of Japan's economic maturation since World War II. But it nonetheless makes many Japanese uncomfortable. "China becomes the manufacturing center, taking over the role that Japan had," lamented Tomoharu Washio, a Japanese trade official. "But this time, China also becomes the market center. I am rather pessimistic about Japan."

In a survey last month of 562 major Japanese manufacturers, 49 percent told Nikkei Research that they planned to increase overseas production. Of this group, 71 percent said they were aiming at China. Increasingly beaten at its old game of exporting high-technology products, Japan experienced a 77 percent drop in July in its trade surplus with Asia, compared with last year's levels. With China, Japan registered a record $25 billion trade deficit last year, a sevenfold increase over the 1993 level.

"China is eating Japan's lunch," said Ronald Bevacqua, senior economist here for Commerz Securities. "More and more low-cost Japanese manufacturing is being shipped over there. Unlike the rest of Asia, China is doing high-end stuff as well."

To some degree, Japan is merely following the lead set by the United States a decade ago. Today, about 55 percent of production by American multinationals takes place outside of the United States. For Japan, the figure has risen to 45 percent.

Eamonn Fingleton, the American author of a book on Japanese production, "In Praise of Hard Industries" (Houghton Mifflin, 1999), says that Japan is staying one step ahead of China, shifting increasingly to capital- and knowledge-intensive processes like the manufacture of printing presses and textile machinery.

"Where you have a capital-intensive process," Mr. Fingleton said in an interview, "high wages are not the most important of your costs."

But trade flows seem to contradict that analysis. During the first half of this year, when Japan recorded a $12.6 billion trade deficit with China, machinery and equipment surpassed textiles for the first time to become the leading category of Chinese exports to Japan.

"China will become the world's manufacturing center," Yomiuri Shimbun, a conservative newspaper, said in an editorial last week, noting that Japan's share of the global semiconductor market had dropped by half in a decade. "Unless something is done, Japan's economy has no bright prospects."

Westerners who have seen the industrial erosion of their economies are not quite as gloomy. Many predict a world several decades hence when Japan, with its aging population, is a "headquarters country," living in large part off investments overseas and brain work at home.

"The reality is that the de-industrialization is happening very rapidly in Japan," said Jesper Koll, a German who is chief economist for Merrill Lynch Japan. "I can see the Nike model here, where you do the brand management in Seattle and the manufacturing in Indonesia. In Japan, you will do the brand management in Osaka or Tokyo and the manufacturing in China."

-- Andre Weltman (aweltman@state.pa.us), August 31, 2001

Answers

A Chinese factory worker, just a short freighter trip away from here, will work two days for the same pay that some Japanese factory workers earn in one hour.

The preceding paragraph is the active ingredient in this article. Japan won't allow unlimited illegal immigration like we do so they are going to have to export there labor requirements to the land of infinite labor, China. Our tactic is to do both. Allow infinite labor to swarm the border AND export our labor requirements to the land of infinite labor. We take the twofold approach.

Frankly, I'm not sure how Japan controls there immigration - I don't really know if they have an immigration problem or not.

-- Guy Daley (guydaley1@netzero.net), August 31, 2001.