Three major dilemmas facing Japanese manufacturing

Affected by the sharp drop in demand due to the global financial crisis, the appreciation of the yen and the fall in stock prices, Japan's manufacturing industry is experiencing a 'cold winter'. According to Japanese official data released recently, in January 2009, Japanese manufacturing production is expected to drop by 9.1% compared with the previous month and by 4.7% in February. Under the impact of the economic recession, Japan's manufacturing industry is currently facing three major difficulties: a surge in inventories, a credit crunch and an appreciation of the yen. Inventories of sheet steel, a staple of Japan's steel industry, used in automobiles and other consumer electronics, reached 4.5 million tons in November 2008, the highest in three years. At the same time, the capacity utilization rate of the steel industry has dropped to about 70% in 2009. Under the rapid increase in inventory, the inventory-to-sales ratio index of Japan's steel industry rose by 12.9% in November 2008 from the previous month, the largest increase since 1968. The sharp increase in inventories has caused Japanese manufacturing to reduce investment, and some steelmakers even decided to freeze capital expenditures for three consecutive years. The credit crunch has made the operations of Japanese companies even worse. Take Sony as an example. At the end of 2008, the company issued corporate bonds worth 50 billion yen, but only sold 37.5 billion yen, indicating a tightening of the bond market. This credit crunch is particularly acute among Japanese SMEs. In December 2008, a total of 1,362 Japanese companies went bankrupt, an increase of 24% from a year ago, and the number of bankrupt companies increased for the seventh consecutive month. The sharp appreciation of the yen also had a serious impact on Japanese companies. According to estimates by the Japan Economic Research Center, a private think tank in Japan, every 10% appreciation of the yen against the dollar will lead to the erosion of 6% of the pre-tax profits of Japanese companies. It is estimated that a 20% reduction in pre-tax profits of Japanese companies in the fiscal year 2008 (ending March 2009) would reduce Japan's economic growth rate by 2.5 percentage points. Experts pointed out that to revive the economy, the Japanese government's top priority is to solve the problem of credit crunch. The Bank of Japan has decided to purchase commercial paper issued by Japanese companies for 3 trillion yen in an effort to ease the credit market. But experts say authorities should also pay more attention to the plight of Japanese companies in foreign currency financing. At the beginning of the financial crisis, many countries were still envious of Japan due to its non-bubble real estate market and foreign exchange reserves of more than 1 trillion US dollars. However, since the beginning of 2009, major Japanese manufacturing companies have set off a series of layoffs. Following the Japanese electrical appliance manufacturing giant - Panasonic Corporation announced on February 4 that it intends to lay off about 15,000 jobs worldwide, Japan's third largest automaker - Nissan Motor Co. 20,000 layoffs. Japanese Prime Minister Taro Aso said earlier that Japan is expected to become the first country in the world to emerge from an economic slump. But some British media pointed out that this statement has now become a 'joke'. The International Monetary Fund estimates that Japan's economy may shrink by 0.3% in 2008. People in the industry generally believe that the current global economic recession will not improve in the short term, and the operating environment faced by Japanese manufacturing may become more severe.