Since June, recruiters from at least seven Chinese provinces have hosted events in Japan. Vietnam came with a 20-person mission. Burma sent more than 300 representatives. One official from Zheziang province in China described it as a “rare opportunity” to lure Japanese businesses that are strained by the rising yen, high corporate taxes and a shrinking domestic market.
The prospect that companies big and small will relocate amplifies concerns about the world’s third-largest economy, as it tries to break a two-decade run of stagnation and rebuild its disaster-hit northeastern coastline. Politicians and business leaders fear a scenario in which major manufacturers, though maintaining a baseline presence in Japan, will build factories overseas and depend increasingly on local suppliers in their new countries; then, the smaller Japanese companies that once depended on those manufacturers will either cut costs to compete or move overseas themselves.
In his first major speech, Prime Minister Yoshihiko Noda said this month that the soaring yen and the rise of emerging economies had created “an unprecedented industrial hollowing-out crisis” that could lead to lost jobs and weakened Japanese competitiveness.
“Japan is on the verge of suffering a major loss of national credibility due to the hollowing-out of its industries,” Noda said.
Many companies say they have been approached with offers to begin operations overseas. The invitations, according to government data, come mainly from China and several Southeast Asian countries — especially Thailand and Singapore. Firms have also received offers from provinces in South Korea, even though Seoul has tried this summer to curb the recruitment of Japanese companies, thinking it inconsiderate in the aftermath of the March 11 disaster.
Attempts to poach Japanese companies is hardly new. Neither is Japanese interest in Asia’s developing markets, with many export-reliant giants — Toyota, Panasonic and Sony — building regional networks. What was once a business opportunity, though, has turned into a business necessity: Firms now relocate to China and Southeast Asia not merely to reach new markets, but rather to offset the pain in Japan.
That pain comes largely from the yen, whose value has soared this year amid concern about the U.S. and European economies. Investors see the yen as a safe bet, and they have managed in a short time to transform its worth. In April, the yen was valued at about 85 against the dollar. On Sept. 19, it was 75.94 against the dollar, a post-World War II high, and so far, Japanese policymakers have been helpless to stem the rise. The strong yen makes Japanese exports more expensive overseas and it pinches foreign-made profits when they are repatriated.
In a recent government poll of major manufacturers, one-third said they’d face “serious profit decline” if the exchange rate held steady for the next six months.
The poll, conducted by the industry ministry, suggested that Japanese companies will flee — quickly — if the Noda administration can’t soon provide help. Of the 61 manufacturers surveyed, 28 said they would transfer production plants and research centers overseas if the yen held its value. One in five smaller businesses reported that they were already seeing a decline in demand because trading partners had moved overseas.
“The worst case is, a greater percentage of business will be done overseas,” said Koichiro Ohtake, deputy director of the macroeconomic affairs division at the Ministry of Economy, Trade and Industry. “And that will lead to big, big problems for small- and medium-sized companies. They have two options. Either they follow suit and move overseas, or they go out of business.”
Many economists here say the hollowing-out process is already underway — and gaining momentum. They say a growing number of companies are finalizing plans not just to outsource their production, but rather to open new factories in foreign countries.
This summer, some of the biggest Japanese companies signaled their intention to bulk up beyond Japan, with Panasonic announcing a new procurement center in Singapore and telecommunications giant Softbank launching a data center in South Korea, citing the country’s lower electricity costs. Nissan this month said it would get more parts from overseas and consider a major re-think of its production strategy.
Those moves, analysts here say, reflect the government’s limited ability to lend help — even as companies are desperate for it. Only on Tuesday did Tokyo unveil a modest plan to cushion the pain of the strong yen, with subsidies for job creation and financial support for any firms that buy or merge with other companies.
But Japan’s problems go beyond the yen. Its corporate tax far exceeds levels in China and South Korea. So do its energy costs. Tokyo, moreover, hasn’t been aggressive in pursuing free-trade agreements, leaving high tariffs blocking Japanese exports.
On Sept. 19, hoping to express his support for struggling manufacturers, Noda visited a bayside industrial area of Tokyo, winding up at the Daiya Seiki factory, which produces gauges and metal molds. Noda spent almost 30 minutes at the plant, learning about the essential role these tiny parts play in the global supply chain. When the prime minister met one worker who measures parts to the micrometer, Noda said, “Wow, I shook the hand of God.”
But the company might soon establish its first base overseas. Daiya Seiki faces new competition against Chinese companies, President Takako Suwa said. Its revenue has been cut in half in recent years.
In March, scouting new locations, Suwa visited Thailand. In April she visited China. She recently started studying English, thinking it will help with overseas business deals. Suwa feels that Thailand is the “perfect location,” but just to be sure, she’ll pay a final visit there in November. She’ll participate in a trade show and do some marketing.
“I have almost decided that we are going to move there,” Suwa said, “but just to be sure I will go back [once more]. . . . When I visited there I could clearly feel that the economy is bubbling and people were very energetic. There is much more room for growth.”
Special correspondent Ayako Mie contributed to this report.