Japan sending more and more investment Asia's way: analyst
Japan sending more and more investment Asia's way: analyst
TOKYO (AFP): Asia can expect to experience a strong growth in Japanese direct investment over the next few years as producers here continue adjustments for the strong yen, according to a leading analyst.
BZW Research Ltd. analyst James Vestral said Asia outstripped North America in the year to March 1995 as the major recipient of Japanese offshore investment in manufacturing, and the gap is expected to widen.
The Asian market accounts for 42 percent of manufacturing investment, expected to rise to 50 percent, he said in a July report, "The Rising Sun Offshore -- Japanese Investment Overseas."
"In order to fully adjust to the strong yen, Japanese producers will need to exploit further low-cost production opportunities close to its domestic markets," he said.
But Vestral said North America should continue to be the dominant destination in terms of overall investment.
Japanese investment in non-manufacturing industries in North America is twice that of manufacturing investment and is four times the size of its investment in non-manufacturing industries in Asia.
"Rising outlays in such industries as services, commerce and finance should guarantee North America remains Japan's most important investment recipient through this decade," he said, adding that Europe, which receives the third largest share of Japanese outward investment, "should maintain its position."
Vestral said outward direct investment grew 25 percent in the year to March 1996 following a 14 percent rise a year earlier, Japan now has 515 billion dollars invested in overseas facilities, "placing about 10 percent of its production base offshore," with sales of goods produced overseas accounting for 10 percent of total sales.
North America and Europe account for 63 percent of that investment.
Non-manufacturing accounted for 71 percent of total overseas investment as of March 1996, with North America and Europe weighted in line with the average.
Investment in Asia was weighted more heavily towards manufacturing, a fact Vestral said reflected the importance of wage differentials in determining investment destination, as well as proximity to markets.
The opposite was the case in Latin America, which was predominantly a destination for non-manufacturers.
Vestral said Japan was lagging behind its major trading partners, and to catch up in the international diversification stakes "Japan will more than double outstanding investment overseas over the next decade."
"International diversification holds the key to the future strength of the Japanese economy," Vestral said.
He expected entire industries, such as labor-intensive, assembly type manufacturers, to shift overseas.
Jobs would be lost, he said, adding however that those jobs would disappear anyway as foreign competitors took advantage of low-cost offshore production facilities to undermine Japanese producers.
The United States has about 25 percent of its production base offshore, which Vestral said belies the fear that investment overseas would lead to a "hollowing out" of the economy.
But "hollowing out" could result from failure to deregulate the Japanese economy as "an abnormally large number of producers might have no recourse but to flee offshore to escape high regulatory costs."
Vestay argues that the domestic Japanese economy can only benefit from the shift of production offshore because jobs would be lost anyway to low-cost foreign competitors, rather than generating profits offshore that would benefit the domestic economy.
He also contends that increasing competition has made companies more sensitive to the cost of doing business in Japan, and much of that is a consequence of excessive regulation. "Japanese manufacturers can no longer afford to pay the higher costs resulting from regulations on distribution, transport and communications," he said.
"Should deregulation not proceed, offshore production will become even cheaper, and Japanese producers would be forced to exploit these opportunities lest their foreign competitors do so.
"The failure to deregulate would cause the hollowing-out of the domestic manufacturing base as the costs of regulations make domestic production uncompetitive."