In Part 3 of a look at investing in Japan, Sheryl Sutherland delves into the huge interconnected trade relationships with China, and how Japanese companies are assessing those risks

By Sheryl Sutherland*

[This is Part 2 or a three part series. You can find Part 1 here. And Part 2 here.]

Are we then on the verge of an incipient Japan corporate revival?  Even that small but august organ The Economist has noted that “not since the 1980’s have Japanese businesses generated so much excitement.”  A stirring opening to an article on this likelihood, intriguingly titled “Japanese Businesses are trapped between America and China”.

Buffet is not the only investor to “flock” to the country.  The Nikkei is up by 25% over the past year, and in February it at last exceeded the record it set in 1989, just before the Japanese bubble burst.  The growth is, of course, a reflection of 35 years of the Japanese industrial giants seeking growth offshore and away from a moribund economy.  The two markets the industrials focussed on will not surprise you: China and America.  More than 50% of the Japanese foreign subsidiaries comes from one or other of those two superpowers. 

It’s understandable that Japanese executives view the rivalry of these economic giants with some trepidation.  Some companies, siding with America, are shifting manufacturing to Southeast Asia.  This has the dual effect of easing the fears of customers concerned about geopolitical risk and diversifying their supply chains; Mitsubishi, for example, have announced that they won’t manufacture vehicles in China and are expanding to Thailand and Indonesia instead.

In America, Toyota and Panasonic have graciously accepted handouts of more than $US1bn to revive American manufacturing.  American politicians are treading a well-worn path to Japan in the hope of attracting money and creating jobs for their states.  It worked well for North Carolina; in return for a $US48bn investment by Toyota in battery production, the state provided hundreds and millions of tax incentives and infrastructure.

Needless to say, America’s stellar economic growth is making it the investment destination de jour.  Still, Japanese bosses grumble about domestic content requirements and restrictions which come with the handouts.  The phrase “moshitora” – Japanese for “if Trump” – frequently crops up in boardrooms.  If he is elected the current subsidy will be dismantled, Biden also has protectionism on his mind.  Mistrust of America is one of the reasons few Japanese firms are prepared to cut ties with China the way Mitsubishi has.  For many, the Chinese market is simply too lucrative to forsake.  In the last two years annual trade between Japan and China was roughly a third higher than in the late 2010’s.  The problem for companies sticking with China is that in some areas the Chinese are becoming more sophisticated in areas once dominated by Japan – automation, batteries, car making and electronics.  And of course there is no prohibition for China in trading with Russia.

Some Japanese firms have set up ‘war-gaming’ scenarios to establish the extent of disruption political change could have on their business.  A survey of large Japanese companies by the Institute of Geoeconomics – a think tank in Tokyo – found that 38% had established economic security departments, the government also supports such efforts.  Looking outward to other wealthy democracies is also crucial.  SK Group – a South Korean conglomerate with a leading memory-chip business – recently announced that they are expanding business with TSMC – a Taiwanese giant which is the world’s leader in advanced micro-processors who plans to build a second factory in Japan.

So, you are asking “what has that to do with me?”  It is useful knowledge which relates to your everyday life.  It is relevant to your Kiwisaver and your investment portfolio.  Markets don’t exist in a vacuum; markets are people, geography, politics, the climate, buildings – in fact, everything on the planet which affects what we buy, where we live, what we do and where we invest.  We need to keep an open mind to changes in economics and assess their ramification in relation to our investments.

*Sheryl Sutherland is director of The Financial Strategies Group, and author of Girls Just Want to Have Fund$ – Every Women’s Guide to Financial Independence, Money, Money, Money Ain’t it Funny – How to Wire your Brain for Wealth, and co-author of Smart Money – How to structure your New Zealand business or investments and pay less tax. You can contact her here.