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Strong yen forcing Japan’s small businesses to look abroad

Companies such as Kanehiro Electric and Winroader are tucked away near a back wall. Far from the limelight, they and about 4.7 million other small and medium-sized enterprises (SMEs) are the lifeblood of Japan’s economy, employing about 30 million Japanese, more than twice that of Japan’s 13,000 large corporations.

But SMEs are suffering as Japan’s currency soars. The yen is up 50 per cent against the U.S. dollar in the past five years and gained about 12 per cent in 2010, despite government interventions in currency markets in September. “The strong yen really hurts smaller companies in Japan,” says Isamu Tezuka, a senior manager of Kanehiro Electric, which has three factories and about 70 employees in western Japan. “It’s difficult to sell outside of Japan because our products are too expensive.”

Mr. Tezuka would love to export LED lights outside of Japan, but with the yen at about 82 to the U.S. dollar, a 15,600-yen LED light that cost $140 (U.S.) three years ago would now cost almost $200. “We cannot easily lower our costs to compete with exporters from China or [South] Korea, where salaries are much lower than in Japan. Japanese workers are simply too expensive.”

Supplying equipment to government offices and major corporations, Kanehiro Electric and other small firms at the lower end of Japan’s industrial food chain often have to bear the brunt of plant closings and job losses due to shrinking domestic demand in an aging society. “There are many small companies like us in Shimane prefecture,” where his company is based, Yoshiyuki Ishitobi says. He is one of 30 employees of Tsuchie Juki, which supplies energy-saving products to major manufacturers such as Komatsu and Hitachi. “We are really feeling a big effect of the strong yen in Shimane. We had to cut 10 employees and I’m worried about losing my own job.”

Banri Kaieda, Japan’s Minister of Economic and Fiscal Policy, says the government is grappling with how to deal with the strong yen, which he blames on market forces, not government policy. “SMEs are the hardest hit by the strong yen,” he said on Dec. 7 in answer to a reporter’s question at the Foreign Correspondents Club of Japan. “The major companies will be able to find a way around the strong yen. Some companies are already shifting their operations outside of Japan. But SMEs can’t do this.”

Mr. Kaieda says the rising yen – a situation known as endaka in Japan – creates a conundrum for his party, which took power in September 2009, when 93 yen bought one U.S. dollar. “SMEs account for 70 per cent of all jobs in Japan, and when they are sapped of vitality, it has a dramatic impact on Japan as a whole, especially in regions that host clusters of SMEs. Some SMEs would like to relocate bases overseas. The government should try to find a way to help them do this, but if they go offshore, it means Japan loses jobs.”

Japan’s Ministry of Economy, Trade and Industry has indeed helped groups of SMEs. In one initiative, it offered support to companies to go on “global passport road shows” this year to Dubai, India, Singapore, Bangkok and Hong Kong. But this aid is dwarfed by the efforts of global operations of large Japanese concerns, who are trying to take advantage of the strong yen by securing rights to raw materials that are scarce or non-existent in Japan. Toyota Tsusho said last week it will start building a rare-earth processing plant in India next year, and another in Vietnam in 2013. The country normally relies on shipments from China, but is seeking other sources after a recent dispute disrupted supplies. Sojitz Corp. has agreed to purchase rare earths from Australia, while Sumitomo and Mitsubishi have made deals with Kazakhstan and the U.S., respectively.

Japanese citizens, meanwhile, are increasingly shopping overseas, and they have also become net buyers of real estate abroad, according to Finance Ministry figures. The strong yen has aided the efforts of companies ranging from U.S. pizza makers to Australian beef importers to crack a notoriously protective market. Ken Simon, chief executive officer of Menehune Water, a U.S.-based exporter of “Hawaii Water” with 130 employees and an office in suburban Tokyo, says the weak dollar gives his company, and its local distributors, a “13-per-cent advantage” over Japanese water suppliers. “It helps us export our product. It’s better for U.S. companies trying to sell in Japan, though it’s still hard to get into.”

Mr. Simon says more Japanese companies need to seize the chance to expand overseas or buy up raw materials. “Most companies, big or small, don’t have the experience and comfort level to do international business. They don’t have the confidence to operate outside their own country. It really is a closed society in Japan.”

As Mr. Kaieda says, Japan “cannot afford to become complacent”, in light of China’s rapid rise. “If we just stay within our borders, this will lead to more pessimism. It is very important for Japan to open up to the world. If SMEs can become genki [healthy and vibrant], then Japan will become genki.”