One long-term consequence of the earthquake, tsunami, and nuclear meltdown in Japan will be an acceleration of the hollowing out of Japan’s export manufacturing.
One criticism of Japan’s big exporters during the strong-yen period was that companies like Sony, Toyota, and Canon had been slow to move production out of Japan to lower-cost production platforms, such as China and Vietnam.
Part of that came from a reluctance to disrupt long-term relationships with suppliers in Japan. Another part of it came from the traditional—somewhat frayed, but still strong—commitment to lifetime employment for workers.
Whatever the reason, Japanese companies haven’t moved as aggressively as those in the United States to send manufacturing functions and manufacturing jobs overseas. And that left Japanese companies paying higher costs as the yen appreciated.
The destruction of factories at companies such as Toyota has garnered the bulk of the headlines during this disaster. But Toyota can relatively quickly shift production to overseas plants.
The thousands of smaller companies that make up supply chains for the big exporters don’t have that flexibility. Many are tied to a single plant—and right now, they’re looking at either the destruction of their own factories, or of the exporting giant they supplied.
Some of these plants will get rebuilt—but many won’t, or when they are, the operators of these factories will find that some of their work has fled overseas. That’s one reason why the Bank of Japan and the Japanese government is flooding the economy with money. They want to see Japanese factories rebuilt quickly to minimize job losses.
I doubt they’ll be very successful. After all, the off-shoring of Japanese manufacturing was a long-established trend before this disaster. It was only the pace of the transition that was at question.
Now I think that pace will pick up. Eventually, that will be good news for the profits of Japanese exporters. No way is it good news for Japanese workers or the Japanese economy.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX ), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Canon as of the end of January. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.
