Boom Time For Japanese Industry Ahead Of A Possible Slowdown

On the surface, the performance of Japanese corporations last year suggests that, for the country's leading companies, things are looking better than they have for years.

The top names, from Toyota to Sony, unveiled strong sales and profits increases, with many companies reporting figures unseen since the bubble of the late 1980s, when surging asset prices fuelled economic growth.

Toyota saw a 14 per cent rise in sales and a 50 per cent increase in net profits in the year to March. Its smaller rival, Honda, posted a 25 per cent jump in sales, trebled pre-tax profits and reported record net profits. In the electronics sector, both Matsushita and Sony achieved record sales, and even integrated electronics companies - hit by the plunge in semiconductor prices - saw healthy advances. Fujitsu lifted sales 20 per cent, to a new record, while revenues at NEC grew 13 per cent.

 

The relentless pursuit of excellence - the hallmark of Japan's leading manufacturers - has ensured that at least in those industries where the country is competitive, the dark days following the collapse of Japanese asset prices are fading quickly from the memory. ''The manufacturing sector has basically recovered from the bursting of the bubble,'' points out Jason James, strategist at HSBC James Capel in Tokyo. Supported by a 20.2 per cent rise in recurring profits at manufacturing companies, overall recurring profits of 1,049 non-financial companies listed on the first section of the Tokyo Stock Exchange have risen 15.7 per cent and net profits by 17.1 per cent, according to a recent report by Goldman Sachs in Tokyo.

However, the contrast between the performance of manufacturers, most of which have long been exposed to global competition, and of non-manufacturers, which have been protected by regulation, was underlined by a fall in non-manufacturers' profits of 3.5 per cent.

While financial institutions are still suffering from the asset deflation that has rocked Japan in the past few years, domestically oriented companies in sectors from oil to retailing -sheltered from competition by government regulation - are faced with the unprecedented pressures of deregulation. The gap in performance suggests the country will again have to rely on its world-beating car makers and electronics companies to support economic growth until other sectors emerge to assume part of the burden.

Japanese vehicle manufacturers, which enjoyed a windfall from the decline in the yen against the dollar and a domestic retail boom ahead of an increase in consumption tax in April, contributed a full 40 per cent to overall profits growth, notes Ms Kathy Matsui, strategist at Goldman Sachs in Tokyo.But there are serious doubts as to whether Japan's manufacturers really have achieved the turnround needed to sustain growth in the longer term.

''The results were better than expected. But while they showed phenomenally good sales growth on a consolidated basis, operating profit growth was not significantly higher,'' points out James. Toyota, for example, just managed to raise its operating profit ratio from 3.2 per cent to 5.4 per cent, while Hitachi's operating profit to sales ratio fell from 4.1 per cent to 3.5 per cent. Furthermore, while car manufacturers have been impressive in cutting costs, such restructuring contributed Y110bn ($944m) to the operating profits of Toyota, while the yen's weakness contributed Y240bn. Without the weaker yen, Matsushita's operating profits would have been Y165bn lower than reported. Given these factors, ''the message of last year's results is that if anything, Japanese companies did not do very well considering how positive the environment was,'' James says. Moreover, the favourable environment is not expected to last.

''The implication is that there is going to be quite a sharp slowdown in this fiscal year,'' he notes. Car manufacturers are bracing themselves for a significant drop in domestic demand this year in reaction to the spring buying spree. In addition, capital investment by the telecommunications sector, which has been a big contributor to overall private capital spending, will slow this year at a time when public spending is being cut back, says Matsui.

While the telecoms industry is still expected to grow, fierce competition in the wake of deregulation may undermine profitability. With the yen significantly below the level at which many Japanese exporters can turn a profit, there is also concern that many companies, having restructured their operations to beat the impact of a strong yen two to four years ago, are now beginning to relax their grip. ''Employment is picking up and growth in bonuses has picked up at a time when pension and welfare expenses are growing,'' James says. ''Wage costs are going to be a continuing problem.'' The hope is that new engines of economic growth can emerge in time to ease the transition from an economy dependent on manufacturing industries to one that can count more on services.

Without further restructuring in the meantime, however, the well-being of those companies that are still vital to Japan's economic health may remain at the mercy of forces largely beyond their control.