Businesses await relief as Japan OKs reform plan

[June 15, 2013]  TOKYO (AP) -- As new orders for his hydraulic cylinders pile in, factory owner Kazushi Nomura says he is hopeful Japan's economy may be headed for a solid recovery.

Prime Minister Shinzo Abe's grand plans for getting Japan's growth back on track after two decades of stagnation, endorsed by his Cabinet on Friday, depend on convincing businessmen like Nomura to invest in that recovery.

Nomura's Nambu Co. makes cylinders used mainly to make auto engines and roll steel sheets. He's expanded into Thailand and China, where auto sales have boomed in recent years, and is considering setting up factories in India and Mexico. In Japan, he says, he hasn't bought new equipment in five years.

"The growth is all in overseas markets. The consumer base is shrinking here as society ages," said Nomura, 74, during a recent visit to his factory, a collection of tiny buildings crammed inside part of a city block in Tokyo's Ota Ward, a fading industrial district whose small workshops and factories are steadily giving way to apartments.

Abe's Cabinet approved a blueprint for reforms Friday meant to improve Japan's competitiveness and shore up long-term growth in the world's third-largest economy as its population ages and shrinks.

"At last the time for action has come. Without action there can be no growth," Abe said in a video message released Friday after the Cabinet meeting.

Abe has claimed early progress in countering the stagnation that has hobbled growth for more than 20 years through an onslaught of monetary and fiscal stimulus, after the economy grew 4.1 percent in January-March. But economists say deeper, more far-reaching changes are needed to ensure the economy keeps growing.

At a weekend meeting of the Group of Eight industrial countries, Abe plans to explain his growth strategy to fellow leaders and perhaps seek to calm the wild gyrations that have rocked financial markets over the past few weeks.

Share prices soared beginning in late 2012 as the Japanese yen weakened in anticipation of aggressive monetary easing, which has raised corporate profits in yen terms and made Japan's exports relatively cheaper in overseas markets.

So far, the benchmark Nikkei stock index has lost about 20 percent of the 70 percent it had gained since late last year. On Friday, buoyed by an overnight rally on Wall Street, the Nikkei gained 1.9 percent.

The monetary easing by the Bank of Japan and heavy government spending are meant to flood the economy with fresh cash and thus push up prices and end a long spate of deflation that has discouraged companies from investing or hiring workers.

But many question Abe's ability to deliver a sustained economic recovery and push through with sweeping reforms intended to boost productivity and help Japanese companies compete against nimbler foreign rivals.

So far, consumer prices have not yet stopped falling. Costs for imported energy and other goods, meanwhile, have surged thanks to a weakening in the value of the Japanese yen -- a trend that Nomura says has hurt rather than helped businesses like his own whose overseas dealings are not dollar-based.

According to figures from McKinsey & Co., Japanese companies are holding some 187 trillion yen (nearly $2 trillion) in cash and equivalents, or 5.7 times the average annual capital investment of all Japanese corporations.

Abe's reforms include a plan to cut taxes for companies that restructure or that invest in factories or equipment, aiming to halt a decline in such spending and meet a target for 70 trillion yen ($737 billion) in annual capital investment over the next three years.

Other priorities include subsidies to encourage more hiring, setting up "special zones" to promote deregulation and globalization of businesses, services and education and promotion of online drug sales.

Few of the reforms endorsed Friday are new. Most were proposed by previous governments but were quashed by powerful vested interests or simply were left undone thanks to the chaos that has dominated Japanese politics for the past decade.

Various government ministries are already feuding over the proposed investment tax cuts and online drug sales.

Most reforms will be on hold until after an election in July for the upper house of parliament, when Abe's Liberal Democratic Party expects to win a mandate that would enable him to pursue a wider agenda that includes revising the constitution.

Among the toughest decisions will be on whether to push ahead with promised sales tax hikes needed to help reduce Japan's huge public debt and dismantling protections for inefficient industries as part of market opening commitments under a regional trade arrangement called Trans-Pacific Partnership.

Others, such as an appeal to get more women into the workforce by improving access to childcare, will require support from private industries that so far have appeared reluctant to change.

Small companies like Nambu pride themselves on hiring female workers, but say that even if they do have fresh business coming in, Abe's proposal for allowing up to three years maternity leave is out of the question.

Down the road at a metalworking factory, Material Inc., workers were busy polishing and inspecting, even by microscope, various shiny and intriguingly shaped parts used in aircraft and the defense industry.

"Japanese products have high quality but it's not just high quality. Our customers are very severe with us because they are operating in a very harsh environment," said Yuji Otsuka, a factory manager.

His boss, Junichi Hosogai, is leading an effort by factories in Ota district to develop a made-in-Japan bobsled for the country's Olympics team -- hoping to help revitalize the area's small industries through innovation.

Hosogai, a lively man about half Nomura's age, says that while he's hopeful about Abenomics, "Up to now, the economy has not really budged. I expect it will go forward."

Companies like Material pride themselves on their technology, quality and speed of delivery -- some orders are received and completed within five or six hours, he said. But because they are beholden to big manufacturers like Toyota and Mitsubishi Heavy Industries, they have little say over pricing.

Asked how long he can hold on if his costs remain high and demand weak, Hosogai said, "We couldn't last a year like this."

[Associated Press; By ELAINE KURTENBACH]

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