Few status symbols matter more to Japan Inc than its much-vaunted trade surplus. For decades now, the huge extent to which exports dwarf imports has been a key metric of success.
In March, those bragging rights all but disappeared. Tokyo’s surplus dived 99% from a year earlier as coronavirus fallout slammed its biggest trading partners. It now stands at just US$45 million – less than 1% of the $4.8 billion a year earlier.
That, and the 11.7% drop in exports last month, should be viewed as a leading indicator of global pain to come.
Japan’s shipments to the US tumbled 16.5%. Exports to the European Union fell 11.1% compared with an 8.7% plunge in goods headed to China.
More warning signs are to come as Japan Inc’s ugliest corporate earnings period since at least 2008 warms up to hellish heat. The just-announced 30% drop in net profit at Canon Inc is an omen of things to come in the days ahead. The tech icon withdrew its full-year earnings outlook as the pandemic sweeps across Japan and key markets abroad.
The direness of Japan’s plight will become clearer in the days ahead as a who’s-who of corporate icons follow Canon into the red. From Sony to Toyota to Mitsubishi Materials, first-quarter earnings will make for grim reading.
A recent report from Teikoku Databank found that as of the third week of April, at least 217 listed Japanese companies signaled a downshift in sales and profits this year. That marked a 35% acceleration from the previous week and, so far, roughly $16 billion in lost overseas business.
The bleeding is especially heavy among manufacturers, accounting for roughly 25% of such downgrades. Next is the service industry and finance after that.
The global econosphere is looking grim as the pandemic triggers the human equivalent of a credit crunch. In a new report, Fitch Ratings warns of an “unparalleled” post-war contraction of 3.9% globally.
It expects the US to shrink 5.6%, the eurozone 7% and China to grow under 1%. For an economy at China’s level of development, that’s a deep recession with vast political and socioeconomic implications.
Amid the 2008-2009 carnage, remember, China earned its stripes as a growth engine. By the end of 2009, Beijing’s assertive stimulus moves were producing 8.7% growth. That helped fill the void as US demand for manufactured goods and commodities plummeted.
With China the first country to have been hit by the Covid-19 storm, no such buffer exists today. Even so, it is not quite “game over” for Japan.
Trade accounts for just over 30% of Japan’s gross domestic product as services assume an increasingly vital role. Nor is Japan Inc on its last legs. In fact, by certain measures, it is among the least ugly places to invest among major developed markets.
A canvassing of analyst estimates by Refinitiv, for example, finds that earnings per share at Topix index-listed companies are down about 8% since January 1. That compares to as much as 20% in Europe and 15% in the US.
Japan’s edge stems from massive cash hoards approaching $4 trillion at the end of 2019. It is cash that’s great to have as global commerce falls into a crater – and few Japanese creditors overseas can boast nearly as much. But the hoards will be hard to maintain as sales and profits evaporate.
And the breadth of the pain suggests 2020 could be a banner year for Japan Inc layoffs, one far exceeding the losses amid the 2008-2009 “Lehman Shock.”
A bomb is about to drop on jobs – specifically, the non-permanent jobs that have exploded over the last two decades.
While Japan’s fabled lifetime employment construct has been going away for years, the last dozen saw companies shift aggressively toward “informal” workers. These gigs allow employers to pay staffers less, offer fewer benefits and eliminate them easily.
Herein lies a central reason why Prime Minister Shinzo Abe’s reform program flopped. Rather than raise wages, companies exploited deregulation efforts to make more of the workforce expendable.
Women especially. Despite Abe’s stated plan to make Japan’s female population “shine,” women’s advancement worsened on his watch these last seven years. Since 2012, Japan’s ranking in the World Economic Forum’s annual gender-gap report deteriorated from 101st to 121st.
Pundits like to give Tokyo credit for increasing the percentage of women in the workforce to a 10-year high of 71%. About two-thirds of those jobs, however, are of a non-permanent nature. So oddly, the more women who enter the labor pool, the lower average wages have gone.
That is now a key hinge point in the time of coronavirus. Earlier this month, the Labour Lawyers Association of Japan pointed out that in the 2008-2009 era, most job losses were in manufacturing.
Now, the risk of job losses hovers over every sector of Asia’s second-biggest economy.
Against this backdrop, economist Taro Saito with the NLI Research Institute doubts that Tokyo’s $1 trillion stimulus plan is big enough to stabilize growth and employment. The jobless rate, he reckons, is headed toward the 4% mark from around 2.4%. That won’t sound so dire considering the epic job losses in the US – roughly 26 million in just over one month.
But Japan’s jobless rate is held down by demographic quirks that mask the severity of the labor-market disruption. A fast-growing 65-plus population, a negligible birth rate and scant immigration hold down the official unemployment rate.
Yet wages were flatlining long before Japan Inc ever heard of Covid-19. That’s largely the result of Abe putting monetary stimulus above structural upgrades to increase innovation, productivity and domestic competitiveness. In the 12 months ahead, Japanese workers will be lucky to avoid sizable wage cuts, never mind increases.
And the coronavirus fallout will deepen extant domestic woes.
Japan, remember, stumbled into 2020. Gross domestic product plunged 7.1% in the fourth-quarter thanks, in part, to an ill-timed sales tax hike to 10% from 8%. And, of course, these long, strong headwinds from the US-China trade war.
As 2020 unfolds, the costs of Abe’s failure to remake Japan are increasing before investors’ eyes. Since 2012, Team Abe relied on a 30% yen depreciation to boost corporate profits so that CEOs would increase wages. Yet that just deadened the urgency for companies to raise their economic games.
Moves to tighten corporate governance have been good for shareholders scoring bigger dividends. They’re doing little, though, to prod CEOs to fatten paychecks or invest in new ventures and industries necessitating new full-time staff. Nor have companies throttled back much on takeover defenses like cross-shareholdings between friendly companies.
Abe’s policies, it turns out, shielded Japan Inc from embracing the changes he promised.
That complacency is now on full view as unprecedented social-distancing edicts at home and abroad decimate demand, confidence and Japan’s earnings outlook – all in in one fell swoop.