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."