IMPORTS DEFY WEAK YEN:
Companies Produce, Buy More Abroad

OCTOBER 15, 1996

The yen continues to weaken, making foreign goods more expensive, but this has not slowed down the growth of imports. According to the Ministry of Finance, imports in the first six months of 1996 rose 23.4% from the previous year to 18.4 trillion yen­-the highest level since the 1980s.

Of the total, the proportion of manufactured goods reached 59.7%. The leading manufactured imports were computers and other office equipment, which reached 1.0 trillion yen. Next came semiconductors and other electronic components (758.2 billion yen), motor vehicles (617.7 billion yen), cameras and other optical equipment (347 billion yen), audiovisual products (345.2 billion yen), and telecommunications equipment (216.2 billion yen).

In comparison, Japan's exports managed to rise by only 6.9% to 21.5 trillion yen. As a result, the trade surplus for the six months stood at 3.1 trillion yen, down by around 40% from the year-ago figure.

Structural Factors Behind Higher Imports
In the first six months of 1995 the yen waxed strong, with its average value against the dollar rising to 86 yen. But in the same period of 1996, its average value glided down to around 108 yen, a 25% depreciation.

Normally, a weakening of the yen is accompanied by a fall in imports. That they have gone on rising in this period of yen weakness implies structural factors--the shift of production offshore by domestic firms, greater dependence on foreign-made parts, and advances into the Japanese market by competitive foreign firms.

These developments, which suggest that the structural lowering of Japan's trade surplus will continue for some time, are helping to correct the imbalance in world trade, eliminate trade friction, increase production and employment in the exporting countries, and promote sustained growth in the world economy.

Audiovisual and optical products, personal computers, and brand-name goods are particularly symbolic of these changes in the pattern of Japan's trade.

Rise in Reverse Imports
In audiovisual equipment, Japanese firms have won a large share of the world market. But imports continue to climb, marking a 46.8% year-on-year rise in the first half of 1996 to 345.2 billion yen. This is because reverse imports--goods made by the overseas affiliates of Japanese companies and exported to Japan--have been expanding.

In unit terms, reverse imports of TV sets rose by 21.3% year on year in the period January to May. The figure for videocassette recorders was 71.3%. In unit terms, reverse imports of these two items accounted for approximately 70% and 50%, respectively, of their markets in Japan in 1995. These shares should increase further in 1996.

Makers of household appliances led the way in transferring production abroad, seeking to cut labor costs and avoid exchange-rate risks. Recently, they have been setting up bases in Asia's growth markets based on a long-term strategy of switching to production in the target market and of selecting the most suitable of all locations. For example, one top VCR maker, which shifted all production of standard machines to Southeast Asia, is now also thinking of shifting the production of all VCRs, including those with high added value that have built-in cameras, overseas during 1997.

Camera makers are likewise moving production to Southeast Asia. Nearly all the companies producing the compact, easy-to-load cameras using the Advanced Photo System (APS) make them in Southeast Asia. Because of this, the value of optical equipment imports rose 55.7% in the first six months of 1996.

PCs Mostly Use Foreign Parts
Makers of personal computers, a major growth product, are notable for relying heavily on overseas suppliers for their key components. U.S. companies have the market cornered on microprocessors--the component claiming the biggest share of total manufacturing costs at 10%-15%. The United States is also overwhelmingly strong in operating systems, which control a computer's actions.

Taiwanese companies, moreover, have majority shares of world production in motherboards (the circuit board where the primary functions of a computer are clustered), keyboards, mice, and other items, and they are also strong in monitors.

Such being the state of the world PC market, 70%-90% of the manufacturing costs incurred by top Japanese makers are spent on purchasing foreign components. For this reason, imports of semiconductors and other electronic parts posted a massive 67.1% year-on-year jump in the first six months of 1996.

Brisk Sales of Foreign Cars, Apparel
The marketing offensive of foreign brands with a luxury image has also intensified. Imported vehicles, for instance, registered 14.9% growth to 213,307 units in the first six months of 1996. Especially popular were European models; Mercedes Benz of Germany registered sales growth of 28.3%, Volkswagen/Audi of 28.1%, and Sweden's Volvo of 29.5%.

These automakers lowered their prices in response to the high yen and did not raise them when the yen weakened. So a feeling has set in among consumers that they are getting top brands at moderate prices, supporting further growth.

Clothing, fashion apparel, and other luxury-brand items made by U.S. and European companies are also retaining their appeal. The drop in prices of imports when the yen was high has left consumers with a sense that the gap between domestic and overseas prices has narrowed and that such imports are reasonably priced. At specialty shops, department stores, and similar outlets, many luxury-brand goods continue to post double-digit growth. Some companies have raised prices in response to the current period of yen weakness, but the products have maintained their popularity, and there seems to be no sign of a dulling of consumer appetite for them.

(Billion yen)