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Mount Fuji looms over the Tokyo skyline. This week, Japan reported its first annual trade deficit since 1980, caused by the impact of the March 11 earthquake, tsunami and energy crisis and a decline in exports attributable in part to the strong yen.

Associated Press/Associated Press

As chairman and chief executive officer of one of Japan's signature companies, Fujio Mitarai knows a thing or two about how the soaring value of the yen is ravaging Japanese manufacturers.

Mr. Mitarai, who heads camera and photocopier giant Canon Inc., was dispatched to the accounting division of Canon USA as a 30-year-old in 1966 with the yen trading at 360 to the U.S. dollar (or about 0.28 cents to the yen). When he returned to Japan 23 years later, the currency had surged to ¥120 to the dollar (or about 0.83 cents to the yen).

"During my 23-year tenure, all the products we were importing continued to become higher in pricing" for the U.S. market he recalled. "So my stint in the United States was actually a battle against the hike of the yen and I'm still battling the yen appreciation."

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So are most of the country's exporters, whose ascension into global powerhouses in the 1980s and 1990s gave rise to the term Japan Inc. But it's a battle that many of them are losing as the yen now trades near its record high at about ¥77 to the U.S. dollar.

The companies that form Japan Inc. are under pressure as never before amid a domestic economy that has been stagnant for two decades, assaults by rivals from lower-cost countries, and a currency that has sent costs soaring.

Even Japan's auto makers, which have been expanding production offshore for years and are masters at squeezing waste and cost out of their factories, are warning of a "hollowing out" of manufacturing in the world's third-largest economy.

Getting Japan's economy rolling again is crucial to restoring the global economy to health. It's also important for several Canadian industries, and other countries that count Japan as a major market, particularly as the sovereign debt crisis grips Europe and the United States grapples with a weak recovery.

Japan is the largest overseas market for Canadian agriculture and seafood products. The potential renovation market of $50-billion is a key target for forestry and building products exporters from Canada.

There are few signs, however, that a major turnaround in Japan's economy is imminent, despite massive public and private spending in the effort to recover and rebuild after the March 11 earthquake and tsunami.

"Japan's economic activity has been more or less flat, mainly due to the effects of a slowdown in overseas economies and the appreciation of the yen," the Bank of Japan said this week in its monthly summary of the state of the economy.

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Behind the dry words of a central bank report, however, the yen is forcing a transformation of the Japanese economy. As one phrase popping up more and more goes, it is no longer "made in Japan," but "made by Japan."

The challenge is enormous. This week, Japan reported its first annual trade deficit since 1980, caused by the impact of the March 11 earthquake, tsunami and energy crisis and a decline in exports attributable in part to the strong yen.

Japan's changing reality was emphasized again Wednesday when Nissan Motor Co. Ltd. unveiled a $2-billion (U.S.) investment to build a new assembly plant in Mexico, which will boost its production there to 1 million vehicles annually. That's just short of the 1.2 million vehicles Nissan makes at home in Japan.

The new factory will come on-stream next year to make small cars, once the bread and butter of Japan-based auto plants that exported vast quantities to the United States and Canada.

"The fact is that Japan is facing a serious crisis," Carlos Ghosn, Nissan's blunt-speaking chief executive officer, told The Globe and Mail in an interview at the company's head office in Yokohama. "There will be a hollowing out, without any question."

Nissan divisions in other regions of the world don't want cars from Japan, he said.

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"They see the costs, they say: 'I can't compete.' They say: 'Give me a car from Mexico, give me a car from China, give me a car from Thailand.' "

The crisis is even more grave for Japan's electronics industry, which is beginning to understand how U.S. television and electronics manufacturers disappeared in the 1980s when the likes of Sony, Panasonic and Toshiba targeted the family rooms of America.

Japanese electronics giants are under fierce pressure from South Korea-based Samsung Electronics Co., LG Electronics and others that are assembling products in China, Indonesia, Thailand and other low-cost countries.

Panasonic is slashing its 42-inch television production to 7.2 million units a year from 13.8 million. It's halting plasma television output at a massive plant in Japan that opened just three years ago.

Procurement and logistics functions are being transferred to Singapore from Osaka in the 2013 fiscal year. Panasonic is projecting a loss of ¥420-billion yen ($5.5-billion) in the fiscal year that ends March 31.

Sony Corp., the maker of televisions, camcorders, computers and mobile phones, is also feeling the squeeze.

Moody's Investors Service Inc. downgraded the debt of both Sony and Panasonic earlier this month and slapped a negative outlook on both companies.

"The negative outlook represents Moody's concern on whether Sony will be able to restore earnings and cash flow, given challenging market conditions," the rating agency said in its report on Sony. "The latter include intense competition and sharp price declines in the TV business, the maturity of major digital products, and the rise of smartphones and tablets."

Game and console maker Nintendo Co. Ltd. said this week that it expects to post its first-ever loss in the fiscal year that ends in March, the same day NEC Corp. said it plans to slash 10,000 jobs. About 7,000 of those are in Japan, the technology and smartphone giant said.

TDK Corp., which makes sensors, capacitors and other components that go into these electronics devices, is slashing its global work force by 11,000 people as it deals with the rising yen and other problems.

"We are in a very difficult market situation and this situation is expected to continue," Takehiro Kamigama, TDK's president and CEO said on a conference call with investors in October. "I don't think we can be optimistic."

Mr. Mitarai of Canon said he is optimistic – in part because the company has taken long-term actions to insulate itself from the rise of the yen.

About 55 per cent of Canon's products are made outside Japan, he noted.

Canon opened its first Vietnam plant in 2001, has several plants in China, including one that opened last year to make laser printers and also has manufacturing operations in Thailand and Taiwan.

"I must say, for this year alone, the impact from the Great East Japan Earthquake and tsunami as well as the floods in Thailand had a larger impact than the exchange rate on our business," he said.

Part of his prescription for offsetting the rise of the yen is to retain production of high-value-added products such as single lens reflex cameras and high-end copiers in Japan.

Nissan takes a similar view, noted chief operating officer Toshiyuki Shiga, who pointed to the subcompact March model being produced in Thailand, while the leading-edge battery-electric car, the Nissan Leaf, is assembled in Japan.

But even the high-value-added vehicles assembled in Japan such as the Leaf and vehicles for Nissan's Infiniti luxury brand, now contain low-cost parts that are made in China, Thailand or elsewhere and imported to Japan for final assembly into the vehicles.

Toyota Motor Corp., Japan's largest auto maker, has promised to maintain production of 3 million vehicles in the country, but much of its growth is outside its home country and it's taking steps to reduce costs in Japan to offset the rise of the currency.

Its newest plant doesn't ship cars along a conveyor belt close to the ceiling before lowering them to the assembly line, which has become the standard method for putting vehicles together. Moving them instead along raised platforms allowed Toyota to reduce the height of the plant, which reduces its size and thus cuts the costs of heating and air conditioning.

It's the kind of relentless push for efficiency and cost-cutting needed if Japanese companies are going to survive the crisis.

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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