Japan's Export Power Drifts Across the China Sea
New York Times - April 7, 2002

By JAMES BROOKE

MIKAWA, Japan — About 35 miles down Highway 1 from the auto factories in Toyota, the docks at this seaport are covered with thousands of new cars, many wrapped in plastic for a foreign voyage. But in a twist, all are imports, made in Europe or Mexico.

After two decades of unbroken trade surpluses, Japan now seems on track to see its surplus melt by the middle of this decade. Last year, its merchandise trade surplus plummeted by 38 percent, hitting 1983 levels. This year, for the first time, Japan is expected to earn more money from investments overseas than from exports of manufactured goods.

Also this year, China, fueled by a young and ambitious population, is expected to displace Japan as the biggest exporter to the United States. Only a decade ago, Japan exported to the United States four times as much as China.

"A Nation in Retirement" was how Ronald Bevacqua, a Japan economist for Commerz Securities, titled a report highlighting Japan's gradual shift from a nation of producers to one of coupon clippers. On bookstore shelves, "Japan as Number One" has been replaced by a new title: "Arthritic Japan."

"As more production is moved overseas and Japan opens to imports, and as an aging population leaves Japan with more consumers and few producers, the trade surplus looks set for a structural decline," Mr. Bevacqua wrote. With growth prospects poor at home, Japanese investors have increasingly looked overseas, largely to foreign bonds. Japan now has $2 trillion in offshore assets, the equivalent of half of the nation's gross domestic product.

With the yen weakening in recent months, Japan's eroding trade surplus reflects a wider loss of competitiveness. Chinese factory workers not only work at 5 percent of Japanese wage levels, but they are narrowing the quality gap.

Violating a decades-old taboo, Japanese vehicle companies are starting to sell in Japan vehicles made by their Asian subsidiaries. This year, following the lead of Japanese car-parts makers that export back to Japan from lower-wage countries, Isuzu is to import trucks from China, and Fuji Heavy Industries is to import minivans from Thailand. Toyota plans to phase out pickup production in Japan by 2004, concentrating its Asian production in Thailand.

In one year, Japan still imports fewer cars than it exports in a month. But here in Japan's industrial heartland, a photograph of a transoceanic car carrier disgorging imported Volkswagens provoked a bout of insecurity recently at the union headquarters for Toyota, Japan's largest car maker.

"When I see this picture, I naturally think, I wish we could make all these cars and give jobs to our workers," said Masaki Oka, an official with the Federation of All Toyota Workers' Unions.

In the face of statistics showing the hollowing of Japanese industry, he took comfort in Toyota's commitment to supply the Japanese market with Japanese-made cars, producing at least three million cars in Japan for the foreseeable future.

But he admitted that union membership was declining and that the number of temporary workers was increasing at Toyota, Japan's largest exporter.

With China expected to displace Japan in 20 years as Asia's largest economy, economists see Japan's trade future defined by its proximity to China — one day by freighter, one hour by air cargo.

From Hong Kong, Andy Xie, Morgan Stanley's Asia economist, predicted that Japanese automakers would go the way of Japanese appliance makers, assembling products offshore for export. Predicting that Japanese vehicle production would drop by one-third during this decade, he said, "It makes no sense to make cars in Japan, when you can make them in Dalian, China, which is less than a day away by boat."

The shift in capital across the East China Sea is striking. In contrast to China's growing industrial investment and production, Japan's industrial production dropped 8 percent last year, receding to 1987 levels.

Japan's capital spending fell 14.5 percent in the last quarter of 2001.

This year, Japan's manufacturing and capital spending are expected to drop another 8 percent. In the fiscal year that ended March 31, Japan suffered an estimated 20,000 corporate failures, the second-highest postwar level.

To compete with China, Japanese employers are cutting wages or using temporary workers at lower salaries. Here at Toyota, for the first time in memory, the annual spring wage negotiations ended with a pay freeze after management rejected the union's request for a token raise of $2 a week.

Much as seemingly endless streams of Japanese cars disembarking at California ports heralded economic shifts for the United States in the 1980's, the long rows of imported Volkswagens here are the visible tips of an import iceberg that is bruising Japan's high-wage industry.

On April 1, the Haier Group, China's largest consumer electronics maker, started marketing its refrigerators and appliances throughout Japan in an alliance with Sanyo Electric. Similarly, the TCL Holdings Company, China's largest television maker, is seeking a distributor partnership for the Japanese market.

"In China," Mr. Xie said, "you can make a good quality, modern sedan for sale in Japan at $5,000," about half the price of low-price cars made here. "Honda already has plans to move all its parts production to China."

He predicted that Japan could now expect the manufacturing portion of its economy to drop by half, hitting 10 percent in 2020. The American portion has fallen to 15 percent.

At the local office of Hello Work, the government's unemployment agency, Koji Inagaki, a 25-year-old unemployed security guard, gave a free trade analysis that could just as easily have come from economists in the high-rise office towers in Tokyo.

"It is a natural flow, companies shifting their operations overseas in order to compete, they have no other choice," he said after scrolling through job openings on a computer terminal here. "Japan should create expensive, high-quality products with great technology, great functions."

Looking ahead, Japan is trying to identify where its economy can retain an edge over China's.

"To some extent, the Japanese economy will be hollowing out in manufacturing," conceded Noboru Hatakeyama, the chairman of the Japan External Trade Organization, a government trade promotion agency known as Jetro. "But we can develop service sectors, just as the U.S. did." With the second-largest pool of patents after the United States, Japan may pursue computer games, high-precision machinery, and research and development for industrial technology. Japan may increasingly become a headquarters country where the design and marketing is done, while the manufacturing is performed elsewhere.

With Japan's trade picture changing fast, Jetro returns this year to its original mission: promoting Japanese exports. Since the huge trade surpluses of the mid-1980's, the agency's primary focus had been opening Japan's economy to imports.

"Japan's exports declined last year by as much as $75 billion — that's the equivalent of the entire exports of Switzerland," Mr. Hatakeyama said. "Now, other countries can't complain any more about Japan's big trade surpluses."