High yen: a risk or opportunity for Japan?

It's hard to ignore headlines like Time magazine's "Why the Yen is Killing Japan Inc", especially when the Japanese economy lost 13 percent of its value in the three months from October to December 2008. But the news of these last few months hasn't all been bad.

In fact according to research released by Shinko Research Institute, one in 10 blue chip Japanese companies on the Tokyo Stock Exchange recorded big profits in 2008.  And according to New Zealand Trade and Enterprise (NZTE) North Asia Director Shaun Conroy, as of August 2008 Japanese companies had “a whopping US$545 billion cash-at-hand" making them "well placed to profit from the present global economic meltdown."

While obviously that hasn't been the case for companies like Toyota, which is set to record its first loss in seventy years and has been laying off workers and cutting production, it seems it's not the whole picture.

The high yen is good for Japan

Japanese telecommunications entrepreneur Dr Sachio Semmoto lectures at Canterbury University on entrepreneurship.  He says the problem hitting companies such as Toyota and Sony is that they lost sight of their core business and overinvested.  "All companies in the world need to review their business and reconfirm their own strengths, what is needed by users, consumers, and how to offer their goods and services."

Indeed his own company EMOBILE, which is focused on the mobile broadband market, appears to have come through these past few months relatively unscathed.  In large part, he says, because his business is focused on the emerging mobile high speed Internet market, instead of competing for a dwindling share of the traditional mobile voice business.

Japan has one of the highest rates of mobile phone use in the world, with nearly one handset for every person, but Japanese people tend to make relatively few voice calls. It's been reported that his company is about to sign a deal with Softbank (Japan's Vodafone equivalent) to lease its high speed network to the carrier.

Dr Semmoto believes the high yen is actually good for Japan, in spite of the pain it is inflicting on the country's exporters.  "As far as I know there are many companies who have a lot of cash at hand. They are seeking M and A (merger and acquisition) opportunities outside Japan... because you know today the New Zealand dollar is 49 yen, so in the past, about six, seven months ago the New Zealand dollar was 90 yen... So this is a great chance for Japanese to invest outside Japan including New Zealand."

Semmoto cites the example of Japanese food and beverage company Suntory which acquired ownership of New Zealand company Frucor from Danone last October.  According to NZTE, the 10 months from January last year to October saw a 300 percent rise in mergers and acquisitions activity. Food and beverage companies in particular spent US$2.8 billion, not including Suntory’s purchase of Frucor which went for NZ$1.3 billion.

Interestingly, Suntory beat out two other major Japanese drinks companies, Asahi and Kirin, to make the purchase.  Suntory's president Nobuta Saji is reported to have said that “Thanks to the strong yen, we got a 10 billion yen (US$103 million) discount [on the acquisition price]”.

Semmoto believes the high yen is "is an excellent opportunity for Japan to become more globalised."

Opportunities for New Zealand companies

Expat Terrie Lloyd has lived and worked in Japan for the last 26 years and survived the bubble economy that began in the late Eighties. He agrees that there are many Japanese companies showing an interest in investing outside Japan; "it's just that they don't know about New Zealand." He actively seeks out New Zealand technology companies he thinks have market potential in Japan and sets them up with Japanese partners.

He has noticed a maturing in the way Kiwi technology start ups are now approaching export opportunities. "People who own tech companies which are young and still growing are becoming much more realistic about the opportunities overseas and also they're becoming more interested in doing business overseas as well. So in terms of realism that means valuations are coming down and the conversation very much revolves around capital and use of capital, and there's a lot less... kicking the tyres."

But he warns against relying solely on the weakness of the New Zealand dollar to clinch the deal. "The people who are taking advantage of the exchange rate are people who are already in the country because setting up a relationship with another country is not a one week or a one month process." He says it can in fact take anything from three to six months, by which time the exchange rate might have reversed.

Japan as an entry to the wider Asian market

One New Zealand company that's been in Japan for the last 10 years and is still going strong, is Hill Laboratories. It specialises in food safety testing, an issue that's been making headlines with revelations of melamine-tainted milk from China and problems with pesticide-tainted rice being resold as edible rice in Japan.

The company's Japan manager Hiroshi Ito says the turnaround in the exchange rate has seen their rate of return almost double. "One year ago the exchange rate was at about 90 Japanese yen to the dollar, today it is about 50. So the one unit of currency Hill Laboratories are making in Japan is almost twice as much in terms of the New Zealand dollar."

He's optimistic about the company's future in the wider Asian market.  "Domestically people are getting richer and richer and they are paying more attention to food safety. This has been true all over the world for the past several decades so China is going into the stage where people are spending more money and are more concerned over food safety than before."

Mr Ito believes there are opportunities for New Zealand businesses to do well in the functional food market in Northeast Asia. Japan’s food production capacity will come under increasing strain due to adverse changes in the demographic structure of its population. Currently, Japan is experiencing a declining in its labour force due to the rapid ageing of the population, and now only produces less than 40 percent of its own food, meaning the remaining 60 percent has to be imported. According to NZTE, Japan’s workforce is expected to lose 14 million workers by 2030.

Lessons to be learned

So why aren't more New Zealand companies trying to get a foothold in the world's second largest economy? Sachio Semmoto says from his experience lecturing at Auckland and Canterbury Universities it's nothing to do with the quality of our graduates, who he believes compare well with those he has seen at Harvard and Oxford. Rather he says the problem is that "for lots of Kiwis, their major focus is still the UK or the Commonwealth so as a country you have to... shift to the world’s most aggressively growing area", which is Asia.

Terrie Lloyd agrees. "I find that most New Zealand companies don't come to Japan looking for a distributor, they normally go to Europe or somewhere where they can speak English so when I make contact with a company in New Zealand it's usually me initiating, not the other way round."

Lloyd points out that while Japan's economy is being hit hard by the current economic downturn, unlike that of the United States, Japanese debt is all domestically owned.  "And so even though it's one of the most indebted nations in the world in terms of government debt, the difference is the Japanese own their own debt so therefore nobody can call it in," which is one reason why he believes "the yen is holding firm."

However, in spite of this, he says Japan's economic recovery will still depend to a large extent on the US, although considering that Japan went through a recession for most of the Nineties, there is "less distance (for the economy) to fall."

Ito agrees.  "People are used to being in a deflationary economy, so am I, so I don't have a more pessimistic overview on the economy because things will not get worse."

Although Japan is known as a nation of pessimists who prefer to save instead of spend (because of the long period of deflation), on the plus side this means that the average household has savings of US$100,000 per family.

Add to that the government's economic stimulus package which includes a NZ$250 dollar cash handout for each worker and the billions of cash stored by the country's listed companies and, Conroy says, "Japan is awash in cash." The question is when and how it will be spent.

by Kristen Somerville

Kristen Somerville lives in Japan’s Tottori prefecture where she works as a freelance journalist. Formerly, she was a producer for TVNZ’s Breakfast programme and prior to that a reporter for TV One's ASB Business.

Story uploaded April 2009.