Honda is building a full-sized assembly plant (200K units per year) as is Mazda; Nissan is adding a 3rd plant. Part of that is driven by the strength of the yen, at ¥81.3 per US$ on 17 November; the US is the biggest source of profits for the auto industry, so sourcing vehicles for the US market from a non-yen location is important. [The Euro is also strong, to which anyone who has traveled there on a dollar budget can attest.]

But why Mexico? Logistics costs are high, because most vehicles will likely be exported and because the local supplier base is not as deep as in the US midwest (hence parts must be imported). So while quality is high and wages are competitive, it’s not a natural a priori.

The answer lies in free trade agreements: Mexico has been more aggressive on that front than the US (and Japan). As a result not only can vehicles be shipped tariff-free to the US–0% from Mexico versus 2.5% on cars and 25% on trucks shipped from Japan. Ditto Europe–tariffs are 0% from Mexico versus 10% on vehicles shipped from the US or Japan. (I have not researched whether Mexico has similar aggreements in Latin America.)

Now Japan could offset some of this were it to negotiate more free trade agreements. (It has one with Mexico.) But that’s an awkward process, and has yet to join the biggest pending agreement (TPP, Trans Pacific Partnership). The reason: farmers, whose political clout is disproportionate to their share of the economy, and whose clout over time has led to subsidies and tariffs that allow rice farmers to remain in business despite costs that are multiples of those in other large producers. So removing protection for rice would drive most farmers out of business. In Japan, it’s the “3rd rail” of electoral politics.

How does the state of the market for certain goods reflect on our overall economy. This question is explored in the beginning line of Cheers, Japanese Beers by Hiroyuki Kachi: “If the country’s thirst for beer is anything to go by, Japan is back in the groove.”

http://blogs.wsj.com/japanrealtime/2011/08/10/cheers-japanese-beers/

Beer consumption is up by .4% over last year in the same month to 47.37 million cases. This is the first year to date gain since 3/11.

It is unclear whether in Japan beer is a normal good, whose consumption should decrease during a recession, or a vice-good that is immune to  recessions in Japan. For comparisons sake, in America the evidence points to beer being a vice good. Durring the height of the great recession, the consumption of beer was down less than 1% in Nevada and Utah according to a study by Donald G. Freeman at at http://www.beeronomics.org/papers/1A%20Freeman.pdf

~Anton Reed

Data on Monday suggests that japan might already be in the early phases of a recession. Japan’s GDP shrank 3.5% from July-September, marking the biggest drop since the Tohoku earthquake. This also poses a risk to government plans to raise the sales tax to help offset the large debt Japan has incurred. Main reasons stated in a WSJ article for the steep drop in GDP include (see second article):

1. 5 percent slowdown in exports amid the global economic downturn
2. Personal spending, accounts for about 60 percent of GDP, also declined 0.5 percent
3. Automobile sales were slow as purchases of eco-friendly cars did not increase
4. Corporate capital spending also declined 3.2 percent

The slowdown in exports can be attributed the high appreciation of the Yen causing exports to look less favorable. As for personal spending, this is the second consecutive quarter it has posted a loss. Automobile sales were expected to increase before the end of the government subsidy program, but with personal spending down it was not the case. The fall in corporate capital spending can be attributed to the households spending less along with the fall in exports making companies feel that holding their assets is a better use of funds.

It will be interesting to see how Japan handles this situation moving forward, seeing as they did not fair well after the asset bubble burst in the late 80’s and early 90’s.

http://professional.wsj.com/article/SB10001424127887323894704578114732775620520.html?mg=reno64-wsj

http://www.yomiuri.co.jp/dy/business/T121112004305.htm?from=rss&ref=dyolwsj

Japanese manufacturers and investors are increasingly moving their operations and investments to Southeast Asia in the wake of Japan and China’s tense economic relations. The move has also been prompted by motivations to diversify investments and a strong yen and a weak domestic economy.

“Japan’s net foreign direct investment (FDI) into the 10-country Association of Southeast Asian Nations (ASEAN) more than doubled last year to a record ¥1.55 trillion ($19.5 billion), data from Japan’s Finance Ministry shows. Japan’s net FDI into China is still rising, jumping 60 percent in 2011 to a record ¥1 trillion.”

The ASEAN composes 600 million people and this too is a justification for continued Japanese investment. As the middle class grows thanks in part to Japanese investment there should be an increased demand for Japanese cars and electronics. Depending on how quickly the ASEAN region grows we should look to see Japan to continue to focus investments in the Southeast. A strong relationship with this region may also be a strategic way to limit China’s strength in Asia.

http://www.gmanetwork.com/news/story/281104/economy/business/as-china-risks-heat-up-japan-firms-turn-to-booming-southeast-asia

I found this blog post outlining Suzuki’s plans to exit the US auto market after 27 years of selling cars here. The Japanese auto maker plans to use a Chapter 11 bankruptcy filing to “effectively call it quits on American car sales,” while continuing to sell motorbikes, ATVs, and boats in the US. The blog cites poor sales and unfavorable exchange rates as the reasoning behind the exit. The Reuters article the blog references states that “Suzuki models did not catch on in the US and the company suffered from a lack of investment in new vehicles. It also struggled from the strong yen that makes it more expensive to export products from Japan.”

http://www.smartplanet.com/blog/bulletin/japans-suzuki-throws-in-towel-on-us-auto-market/4764

http://www.guardian.co.uk/business/2012/nov/06/suzuki-pulls-out-us-car-market

I think this is the exact problem that the Japanese auto makers are facing that the professor outlined in his comment on the “More Bad News for Japan’s Auto Industry” post. Suzuki sold the most cars it has ever sold in the US only six years ago at 100,000 vehicles. While this was not at all a large share of the market (0.6% of total auto sales that year), it was a 23.4% improvement and represented a peak for Suzuki. That was the year the company redesigned one of its signature models–the Grand Vitara–and introduced two brand new models –the SX4 and XL7–all to much fanfare and acclaim.

http://www.autointell.com/News-2007/May-2007/May-1/may-02-07-p13.htm

http://www.theautochannel.com/news/2007/01/04/032967.html

Despite this, Suzuki “grew complacent” as the professor says and fell behind after years of producing boring and limited model choices at the same time the traditional Japanese giants were turning out new and innovative models such as the Prius. It’s too bad, my Dad’s second car was a Suzuki.

http://www.businessweek.com/news/2012-11-05/toyota-raises-profit-forecast-after-sales-in-u-dot-s-dot-japan-gain

http://www.japantimes.co.jp/text/fl20120306ad.html

According to this article, Japan has a history of baiting illiterate foreigners with promises of prosperity to  contribute to the Japanese economy. Then, as their best years fade, their visas are not renewed due to their illiteracy and an institutional perception of them as the “others.” This seems to be a short-term problem to Japan’s long-term economic woes. However, the end of the article notes that such false promises are no longer as alluring as they once were and such workers have begun decreasing.

This leads to many questions of mine. If these people have been contributing to an already troubled Japanese economy, how much worse can things get? As this source of income and service dries up, will the situation deteriorate even more? Does this population contribute in any significant way to the Japanese economy?

Looking past this rather suspicious practice, it does seem that immigration may vital to Japanese economic prosperity. If talented immigrants can be brought in at a young adult wage, they have a lifetime of work to perform, decrease the age of the workforce, and the state only contributes towards their post-retirement benefits rather than also their childhood benefits, it would be a win-win for both parties.

Quick answer:

1. labor economics work suggests that old and young workers are not perfect substitutes, indeed they may be complements (though that’s hard to check empirically as common shocks can produce both lower old-age and lower young-age employment). this is termed the “lock box” effect.
2. measures are for headcount — employed — versus hours worked. since older workers tend not to work full time, my calculations may understate the retirement effect. however, at present there are also many underemployed (and not just unemployed) youth, so by focusing headcount I overstate employment levels at the young end, too.
3. the data! — I basically need to recheck my spreadsheet from beginning to end as I made many changes as I went along. my calculations may simply be wrong! so graphs to follow…

• graphs need to be added!!

I found some remarks made by Ambassador Shin Bong-kil, Secretary-General of the Trilateral Cooperation Secretariat, regarding signs of growing unity and shared responsibility in East Asia despite increasing tensions between China, South Korea, and Japan. In the remarks, which were made during a roundtable discussion at the Center for Strategic and International Studies in early September, the Ambassador claimed that the “deepening economic ties and booming people-to-people exchanges are driving the three countries towards a greater integration than ever before.” Specifically, he pointed to a recent agreement between the three countries to discuss the “Trilateral Free Trade Agreement (FTA)” which he equated to an East Asian version of NAFTA as evidence of this dynamic. In addition, he cited the overwhelming amount of aid from China and South Korea to Japan in the wake of the 3/11 earthquake as evidence of deepening ties.

http://csis.org/publication/japan-chair-platform-trilateral-cooperation-ushering-new-era-cooperation-and-responsibil

However, these remarks were made well before the anti-Japanese riots in China and the ROC, as well as the increase of Chinese maritime presence in the Senkaku/Diaoyu Islands. While the Ambassador did mention the dispute between China and Japan (as they stood at the time) in the remarks, it was only in a passing reference and he provided little to no explanation as to why this serious disagreement would not impede any progress on such an economic union.

http://www.chinadaily.com.cn/china/2012-10/27/content_15851312.htm

While the economic ties between Japan and China in particular have become a huge source of revenue for both countries–China is Japan’s biggest trading partner, Japan is China’s third–that trend has shown signs of decline recently. According to recently released economic data (cited in the New York Times), Japanese trade has decreased by 1.4% in the past 8 months after an increase of 14.3% last year. According the the NYT article, Japanese officials blamed both the global economy but also “concerns over political issues.” Officials added that growth of investment from Japan to China has slowed to 16% growth in the most recent 8 months, with the same period last year showing a 50% growth. This news comes despite Japan’s “near-total reliance” upon China for rare earth minerals, as “Japanese companies seek out countries with even cheaper work forces and less-touchy diplomatic relations.”

Despite the incredible volume of trade and dependence China and Japan share with one another, it does not appear to be enough to smooth over these “concerns over political issues,” nor is it a situations that many Chinese citizens support, as protests in China have exposed a segment of the population that does not appreciate the amount of trade done with Japan. Still, both countries seem to need the other for the near future, as both economies are very fragile, still weathering a tenuous global recovery.

http://www.bbc.co.uk/news/business-19632047

http://www.nytimes.com/2012/09/21/world/asia/japan-china-trade-ties-complicate-island-dispute.html?pagewanted=all&_r=0