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Cablegate: Central Japan Economic Outlook Falls From Very Good to Good

VZCZCXRO6789
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHPB
DE RUEHNAG #0019/01 1150832
ZNR UUUUU ZZH ZDK
R 240832Z APR 08
FM AMCONSUL NAGOYA
TO RUEHC/SECSTATE WASHDC 0223
INFO RUCPDOC/USDOC WASHDC 0016
RUEHKO/AMEMBASSY TOKYO 0230
RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHNAG/AMCONSUL NAGOYA 0240

UNCLAS SECTION 01 OF 02 NAGOYA 000019

SIPDIS

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD PGOV JA
SUBJECT: CENTRAL JAPAN ECONOMIC OUTLOOK FALLS FROM VERY GOOD TO GOOD


NAGOYA 00000019 001.4 OF 002


Summary
------------
1. (SBU) The pace of growth in Japan's manufacturing heartland
has begun to level off. Regional producers are facing a
stronger yen, higher prices for inputs, and a slowdown in demand
in the U.S. market. Increasing demand from the "BRICs" (Brazil,
Russia, India and China) is balancing those negative factors,
though, and while less overwhelmingly positive than it has been
since about 2003, the overall economic outlook for Central Japan
remains good. One impact of the weak dollar may be an increase
in exports of American-produced, Japanese-make autos. End
Summary

Overall Economic Outlook
---------------------------------

2. (U) Economic growth in Central Japan appears to be leveling
off. On April 21 the Finance Ministry's Tokai Region Bureau
lowered its outlook for the region for the first time in five
years, saying "the expansion to date has begun to slacken."
Although the Ministry saw capital investment, housing
construction, and corporate profits continuing strong, it sited
weakness in some segments of consumer demand and declining
public works as negative factors. Meanwhile, the Ministry said
the high rate of manufacturing production would continue but
would level off and exports would continue to increase, but not
as rapidly as in the recent past.

3. (U) Manufacturing expansion in Central Japan is generally
considered one of the key drivers of Japan's current economic
growth, so a slowdown in the region could have an impact on the
broader economy. As of February (the most recent month for
which METI statistics are available), the industrial output
index for Central Japan stood at 135.0 (on a base of 100 equal
to year 2000 output), down for the fourth consecutive month from
its recent peak of 144.9 last October. In comparison, the
nationwide index was at 108.2.

Auto and Other Production
--------------------------------
4. (SBU) Central Japan produces about half of all autos
nationwide. Auto production in the region has been mixed, up
just one index point in February to 139.1 (on a year 2000 base
of 100). Many observers view prospects for the sector as weak,
and Toyota's stock has fallen nearly 20 percent since the start
of 2008, in part due to concerns about decreased sales in the
U.S. market. Beyond slowing American demand, Toyota and other
Central Japan exporters are confronted with the yen's strength
relative to the dollar. Toyota Americas Division General
Manager Shunichi Nakanishi told us Toyota so far focused on
sales volume over per-vehicle profits and thus refrained from
raising prices in the American market. According to Nakanishi,
Toyota initially projected an overall 2008 American market of 16
million vehicles but has revised the figure to 15.3 million.
That drop would represent about 100,000 less U.S. sales for
Toyota if the company maintains its 16 percent market share.
Nakanishi said Toyota hopes to absorb that drop by decreasing
imports from Japan rather than cutting U.S. production.
However, Toyota has already reportedly begun to cut production
of pickups in Texas, minivans in Indiana, and trucks in
California.

5. (SBU) Toyota Corporate Auditor Chiaki Yamaguchi told us
that, despite the negative influence of the strong yen on import
sales in the U.S., concerns in the press about the impact of
exchange rates may be overblown. Yamaguchi says he believes
even at 100 yen to the dollar, the Japanese currency is not
particularly overvalued, especially in light of trends in
consumer prices over the past two decades in the U.S., Europe
and Japan. One significance of the weaker dollar, according to
Yamaguchi, is that at current exchange rates Toyota vehicle
exports from the U.S. to third countries, particularly in Latin
America, are becoming economically feasible. Nakanishi told us
Toyota sells Tundra pickups produced in Texas in six Latin
American countries, but has been unable to do so in Venezuela,
one of the most promising markets, due to a thicket of
regulations, especially on transactions involving U.S. dollars.
Likewise, exports to Brazil are hampered by a 35 percent tariff
and a variety of other taxes on imported vehicles.

6. (SBU) The rapid increase in fuel and other commodity prices
has weighed heavily on Central Japan manufacturers as a whole.
Steel prices are up about 25 percent this year on a 200 percent
increase in the price of coking coal and a 60 percent rise in
the cost of iron ore. Nevertheless, Mitsubishi Trading Nagoya
Branch General Manager Yoshikuni Kanai told us Nippon Steel
recorded record production in March on strong orders from
manufacturers. Surging economies in the BRICs have had both
positive and negative impacts on Central Japan. The same demand

NAGOYA 00000019 002.4 OF 002


from China and India that's driving up the prices of inputs for
regional manufacturers is also pushing increased demand for
their products. Nagoya Customs District exports continue to
increase, despite a consistent decline in exports to the U.S.
since last July. That decrease has been overshadowed by a
strong expansion in exports to Asia, up 15.7 percent
year-on-year in February. Machine tool makers, a key sector for
the regional economy, are reporting particularly strong results.
Orders from the EU have risen 30 consecutive months and from
Asia are up 13 of the past 14 months.

Comment
------------
7. (SBU) Most of our interlocutors continue to express greater
concern about the lack of workers, a shortage in good land for
factory construction, and infrastructure issues than about weak
external demand as constraints on regional growth. The
just-in-time Toyota Production System used by many Central Japan
manufacturers both inside and outside the auto sector mandates a
constant flow of parts to suppliers further up the production
chain. Concerns that road construction may not keep up with
demand from industry may thus translate into political support
for the Fukuda government's efforts to reinstate the gasoline
tax to help support continuing road construction.
ROCHMAN

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