By Yasuhiko Seki

TOKYO (MNI) – The Japanese economy may face long-lasting challenges
as an emerging exodus by Japanese firms in the aftermath of the March 11
earthquake disaster may dampen already-low annual growth potential
estimated at around 0.5%, economists warn.

While the government and the private sector are trying to fix the
quake-ravaged social infrastructure and production facilities in
northeastern Japan, some companies are contemplating a different
approach to restoring supply chains in the longer term.

Hoya Corp, Renesas Electronics Corp and other manufacturers of
sophisticated parts are looking to shift some production outside of
Japan in an effort to appease overseas customers burned by quake-damaged
supply chains, the Nikkei reported on Thursday.

“While a defensive move by Japanese firms has so far been limited,
the fallout from the March earthquake and nuclear disaster is likely to
accelerate the shift of production from Japan,” said Takeshi Minami,
chief economist at Norinchukin Research Institute.

“And from the long-term viewpoint, an unabated production shift
abroad may pose a major downside risk to the growth potential in Japan,
if such a move expands to include areas or products in which Japanese
firms have technological advantage,” he said.

Hoya, which commands 80% share of the global market for mask
blanks, a part vital for fabricating semiconductors, has decided to make
them overseas for the first time ever, the Nikkei said, adding the
company is now selecting a location.

The company has so far churned out mask blanks at a single plant in
Yamanashi Prefecture, in central Japan, due to concerns about leaks of
its proprietary technology.

In a related move, Hoya is also considering overseas production of
glass used for camera aspheric lenses, a market in which it has an
approximate 30% global share, according to the report.

Meantime, Renesas will draft plans by July to redistribute
production of its microcontrollers among a number of factories at home
and abroad, the Nikkei said.

Renesas has decided to ramp up outsourcing to U.S. and Taiwanese
companies after its main plant in northeastern Japan was shut down due
to quake damage. This severely disrupted output at automakers and other
clients who rely on Renesas components, the business daily said.

But analysts downplayed the impact on the domestic economy from
the emerging shift of production to overseas locations.

“The reported moves are unlikely to cause a serious hollowing-out
(of manufacturing production) in Japan, as such moves form only a part
of the ongoing shift of production to countries where local demand
exists,” said Junichi Makino, chief economist at SMBC Nikko Securities
Co.

“However, the situation may change if the yen resumes appreciating
and settles around Y70 (to the dollar) for an extended period,” he
warned.

Suzuki Motor Corp Chairman Osamu Suzuki has warned that his company
may not increase production in Japan because the strong yen is eating
into the profitability of the nation’s top-ranked mini-vehicle maker.

Meantime, economists also charged that the government has been slow
in rebuilding disaster zones and drafting a longer-term plan to cope
with power shortages caused by the nuclear crisis at the quake-hit
Fukushima Daiichi power plant.

“Whether Japan can achieve a V-shaped recovery following the quake
depends on how quickly the government can take policy action,” said
Mitsuru Saito, chief economist at Tokai Tokyo Securities.

“If the government wastes time in formulating a second
supplementary budget and in helping restore supply chain networks, it
will reduce the chances of a V-shaped recovery led by the private
sector, and weaken the market position of Japanese firms in the global
marketplace,” he warned.

The government of Prime Minister Naoto Kan is considering putting
together a second extra budget of more than Y1 trillion ($12.2 billion)
to finance reconstruction projects, according to newspaper reports.

Opposition parties have criticized the government’s position that
after the first supplementary budget was passed May 2, the second budget
package can wait until at least August. The current 150-day
parliamentary session ends on June 22.

To help alleviate downside risks stemming from the disaster, the
government’s first supplementary budget increased spending for fiscal
2011 totalling Y4.015 trillion.

The extra budget is being financed by slashing outlays planned in
the initial FY2011 budget, without issuing new debt.

The Cabinet Office estimates the Y4 trillion quake-response package
will push up Japan’s real gross domestic product by 0.6 percentage point
over a 12-month period. It is designed to create 200,000 jobs and
support firms to maintain 1.5 million existing positions.

The Yomiuri Shimbun newspaper has reported that the ruling
Democratic Party of Japan is considering hiking the sales tax rate by
three percentage points from the current 5% as a means of funding future
supplementary budgets for quake reconstruction.

“From a macro-economic viewpoint, it is not a good idea to
implement a tax hike at a time when the economy — including the
household and corporate sectors — needs a boost,” warned Minami at
Norinchukin Research Institute.

Critics have said the government lacks a long-term vision as to how
Japan should meet its energy consumption needs while relying less on
nuclear power generation, which has proven to be disaster-prone in a
country sitting on major earthquake fault lines.

In response, Kan has said that Japan plans to have 20% of its
electricity come from renewable sources, more than double the current
ratio, and reduce the cost of generating solar power to a third of the
current level by 2020, and to one-sixth a decade later.

Meanwhile, on government request, Chubu Electric Power Co has
suspend all operations at its Hamaoka nuclear power station in Shizuoka
Prefecture, about 180 kilometers west of Tokyo, until safety measures
against earthquakes and tsunami are fully in place. The process is
estimated to take a few years and is thus causing jitters about power
supply in central Japan.

Kan said he singled out Hamaoka out of many other nuclear power
plants in Japan because the government predicts an 87% chance of a
massive earthquake in the Tokai region in the next 30 years.

Critics say nuclear stations heavily concentrated in Fukui
Prefecture on the Japan Sea Cost should also be closed.

In the region served by Chubu Electric, leading automakers such as
Toyota Motor and Suzuki Motor operate their key assembly plants. The
Hamaoka plant accounted for 15% of Chubu Electric’s total output in
fiscal 2010.

The economy has already been hit by power shortages in the first
weeks of the disaster as Tokyo and its neighbouring cities rely heavily
on electricity generated in Fukushima.

Tokyo Electric is trying to meet peak demand in the summer months
by increasing thermal power generation while the government is urging
businesses and households to slash energy consumption.

In light of power shortages, production outages and disrupted
supply chains, the Japanese economy is now poised for a third
consecutive contraction in the current quarter.

The economy contracted 0.9% quarter-on-quarter in the January-March
quarter, worsening from the downwardly revised 0.8% drop for the
October-December quarter (from -0.3%).

“As domestic private demand stagnates and exports are dwindling, I
wouldn’t be surprised if real GDP contracted at an annualized pace of
more than 5% in the current quarter,” predicted Junko Nishioka, chief
economist at RBS Securities Co, the unit of Royal Bank of Scotland.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4835 **

[TOPICS: M$J$$$,M$A$$$,MAJDS$,MT$$$$]