Japan Uneven Recovery: Updated Nov. 27, 2021

 https://mainichi.jp/english/articles/20211107/p2g/00m/0bu/009000c

Article:

TOKYO (Kyodo) -- The earnings recovery from the COVID-19 fallout is still uneven, with a wide gap remaining between Japanese manufacturers and nonmanufacturers.

A state of emergency was fully lifted in Japan at the start of the October-December quarter and economists say this should give a much-awaited boost to the nonmanufacturing sector, especially service providers that have lagged in a recovery led largely by exporters such as Toyota Motor Corp.

Still, Japan's major airlines are expected to stay in the red for a second year in the 12-month period through March 2022. Train operators are also predicting net losses for the fiscal year and travel agency H.I.S. Co. expects a record net loss of 53 billion yen ($467 million) in the year that ended in October, highlighting the severity of the blow from the pandemic.

Ideas:

The earnings recovery most likely will continue to be uneven for most of November and into December. But at the same time there might be a spike in the recovery related to service businesses due to the December holiday period including the week long New Year holiday period. But then again after the New Year holiday period, the recovery might decrease as consumers and families take a break after the long holiday spending period.

While travel has improved somewhat it's not enough yet to see ANA, JAL, and the low-cost airlines return to a level of profitability just yet.

While some families and individuals are ready and willing to travel, most likely there are just as many who are not yet ready to travel. As such travel agencies probably will not see a return to the profitability level until the week long New Year holiday period, if even then.

International travel is still well below where it should be despite Guam Hawaii, and Australia now opening to Japanese tourists.

Article:

"What's most important for us is to become a smaller company and emerge from the coronavirus tunnel," Shinya Katanozaka, president and CEO of ANA Holdings Inc., said in late October. All Nippon Airways Co. operates as a unit of ANA Holdings.

While both ANA and its domestic rival Japan Airlines Co. are expected to see their earnings improve from a year earlier, when travel demand evaporated amid the pandemic, they still forecast net losses of 100 billion yen and 146 billion yen, respectively, in the business year to March.

Without running to layoffs, both will let their workforces shrink through retirement and by curbing new hiring to cut fixed costs.

"A return to profitability is a must in the next fiscal year," Katanozaka said, expressing hopes for pent-up demand as vaccinations progress.

Ideas:

Its encouraging the JAL and ANA are using the strategy of letting their workforce be reduced naturally instead of resorting to the US style of layoffs. The late Peter Drucker, who was always be popular in Japan, always praised Japan's style of doing business compared to the slash and burn style of some US businesses.

Relying on retirements and not hiring as many new employees seems a more humane way of doing business, as it shows, and it's a very good example for other companies, that ANA and JAL consider their employees as stakeholders and not just someone who can be used and then thrown away or layed off without any regard for them as humans.

Perhaps in the years to come, what JAL and ANA did during the pandemic will be written up in cases studies either in English or Japanese strategic management textbooks.

Yes, there is probably a lot of pent-up demand to travel, bu exactly when will that happen is the challenge. As unfortunately it seems and new virus has emerged globally.

Article:

The expected resumption of a government subsidy program to spur local tourism in Japan is set to serve as a plus for the transport and tourism sectors.

Still, it is expected to take longer for cross-border travel to return to pre-pandemic levels, aviation experts say.

Air travel demand is expected to recover to 40 percent of 2019 levels, or before the pandemic, in 2021 and to 61 percent in 2022, according to the International Air Transport Association.

The latest slew of earnings reports show the recovery has come sooner for manufacturers.

Ideas:

The Japanese government subsidy program is still a good strategy or incentive to increase domestic tourism, but how much will it get domestic tourism back to the pre-pandemic level?

Even if the program can get domestic tourism including transporting back to 50 percent or higher, that would be a good beginning, as it might not help every business back to profitability but it might get some back to some kind of profitability.

Unfortunately international tourism most likely is about the take another downturn as another wave of the virus is beginning globally. While Guam, Hawaii, and Australia nearby are opening to Japanese tourists, the same maybe now can't be said for the EU where the new virus situation as exploded.

But if international tourism can even get back to the optimistic view of 60+ percent in 2022, that will go a long way to reviving tourism.

The only challenge really is Japan going to continue with only few cases or is it like many countries going to be hit with the new virus?

Article:

The reopening of overseas economies has benefited Japanese exporters, especially automakers. Cars and auto parts account for about 20 percent of Japan's exports in value terms.

The yen's depreciation against the U.S. dollar and other currencies also provides a tailwind, as a weaker yen boosts profits earned overseas when repatriated and the price competitiveness of Japan-made products abroad.

A weaker yen has a negative side, too, raising prices of imported products. But shrugging off concerns about the negative impact, Bank of Japan Governor Haruhiko Kuroda said recently that the currency's recent slide against the dollar should serve as a "positive" factor for the Japanese economy.

Ideas:

Exports are always an important mix of the Japanese economy but must be remembered it is only part of the Japanese economy. And it interesting that cars and auto parts account for only 20 percent of Japan's export value, meaning there are still 80 percent more than just autos but Toyota et. al. seem to get the bulk of the news related to exports.

A weak yen usually is a positive for exporters and the Japanese current account as its put needed money into the current account, which the Japanese government can use to help businesses during the pandemic period.

Japanese-made products are always in competition with similar products from maybe China, South Korea and other countries.

But all is not well with the weak Japanese yen and the Japanese economy. There are always positives and negatives in a market economy. As such a weak yen doesn't benefit importers who prefer a strong yen. A weak yen usually means importers now have to pay more for what they bring into Japan from other countries.

As importers now have to pay more for the imports, that could mean supplier costs have now increased which means their profit margins might be less now. But many suppliers are reluctant to pass on their increased costs to those next in the supply chain. 

So as profits margins are decreased companies might instead of passing on costs might have to reduce spending related to investments or even delay salary increases for their employees.

But yes, the weak yen, could still turn out to be more of a positive than a negative for the Japanese economy?

Article:

Toyota on Thursday upgraded its net profit outlook to 2.49 trillion yen for the current business year, matching a record high seen in fiscal 2017.

But Toyota Chief Financial Officer Kenta Kon said at a press conference that it would have been a downward revision without the positive impact of the weaker yen and that the world's No. 1 automaker by volume still needs to improve its profit structure.

Parts shortages and surging raw material costs are increasingly clouding the outlook for the auto sector, the backbone of the Japanese economy. Senior officials at Japanese automakers say it is still unpredictable exactly when the chip crunch will end.

Ideas:

Whatever Toyota is doing compared to other Japanese automakers must be working if its able to match its record set in 2017. Whether is strategy, logistics, brand name or a combination of factors, its working during the pandemic despite the chip challenges.

The weaker yen certainly has helped Toyota and other exporters. But even though the auto exports and parts supplies might be only 20 percent of total Japanese exports, overall the 20 percent might be more than any other kind of export, so in essence its very large part of the Japanese export mix.

The outlook for the future will continue to be cloudy as the parts shortages and raw materials cost will continue to be a challenge. And even for small manufacturers more than large companies like Toyota as Toyota might have the resources and funds to overcome or wait out the parts shortages and raw material cost increases while the smaller and medium size manufacturers might not have the resources like Toyota.

And yes, confirming what was said by a German auto CEO in a BBC article the chip shortage might not end anytime soon.

Article:

Honda Motor Co. on Friday slashed its global sales target for a second time in fiscal 2021 to 4.2 million vehicles from 4.85 million, leading to a 17.2 percent cut in the net profit outlook to 555 billion yen.

Smaller automakers, too, have taken a hit. Subaru Corp. trimmed its full-year sales goal to 830,000 vehicles, down around 13.5 percent from its previous plan of 960,000.

Mitsubishi Motors Corp., part of the tripartite alliance with Nissan Motor Co. and France's Renault SA, plans to sell 903,000 units, down from 967,000 planned earlier.

"We made up for lost opportunities to sell our cars due to the semiconductor impact thanks to (favorable) foreign exchange rates" in the first half, Mitsubishi Motors President and CEO Takao Kato told a briefing on its second quarter earnings results Thursday.

Ideas:

Instead of a survival of the fittest mentality that is prevalent in some industries, and globally, the Japanese auto industry gives the image of a "live and let live" mindset. 

Instead of Toyota taking a win at all costs strategy its seems to be content that there are eight auto companies in Japan doesn't see the need to drive out other companies in the market in Japan.

I see that as a sign of a humane way of doing business and the idea there is room for many players in the market, the Japanese market, and globally.

If you examine the number of vehicles manufactured by the smaller automakers its evident that they are able to produce a lot of cars for Japan and the global markets they are in.

And yes the weak yen not only benefited Toyota but all auto exporters and they met their orders globally.

But how long can the weak yen last and what if there was not the weak yen and the chip situation continues on and the parts shortage continues on, and then what will be the condition of the smaller automakers compared to Toyota who might have the resources to overcome a stronger yen along with all of the other challenges?

Article:

"The situation is expected to remain severe until the year-end and it is unlikely that it will turn around suddenly and semiconductors will start coming in at the start of next year," Kato said.

A strong earnings recovery is a requisite for companies to raise wages for employees. Prime Minister Fumio Kishida, under his slogan of distributing wealth, has said he will call for wage hikes.

Still, Toru Suehiro, a senior economist at Daiwa Securities Co., said only companies that see robust earnings will be able to reward employees with higher wages.

"The gap in recovery between manufacturers and nonmanufacturers is expected to become narrower as the state of emergency was removed," Suehiro said. "After large production cuts by automakers, however, exports will likely fall in the October-December quarter and on balance the economy will likely grow but at a moderate pace."

Ideas:

Prime Minister this week, the week of Nov 22-26 just said he wants companies to increase wages by more than 3 percent.

But he emphasized if companies earnings can get back into the black companies should increase wages.

Employees/consumers are not going to feel good about their wages if they can't see or feel and increase in wages.

And then you add in the increase in energy costs for homes for families and others and it becomes even more complicated as families have even less disposable or extra income to spend in the economy on trip, or restaurants, shopping at malls or places like LandMark Tower in Yokohama and so on. 

So the need for increased wages. But then add in the raw material costs that are increasing and the increased costs for importers, and they will be reluctant to increase the wages of their employees asd they are reluctant to pass on the costs to those next in the supply chain.

So it's a very complicated situation for consumers/employees and companies at the present time and maybe in April 2022 when the new fiscal year begins in Japan.

Have a nice day and be safe!