© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
February 10, 2014 7:04 am
As a symbol of Japan’s reinvigorated economy, the hulking grey box that is GLP-MFLP Ichikawa Shiohama lacks the sex appeal of a crowded luxury-goods store, a thrumming car factory or a gleaming office tower.
But the new five-story mega-warehouse on the eastern outskirts of Tokyo – with floor space equal to 17 football pitches and docking bays for 160 delivery trucks – is the latest example of a trend that is transforming parts of Japanese commerce and, economists say, could ratchet up the country’s overall growth rate.
Constructed at a cost of Y20bn, ($195m) the facility is just the sort of project that Shinzo Abe, the growth-minded prime minister, says Japan needs more of: a sizeable private-sector investment that draws partly on foreign capital and should improve productivity in sectors – retailing and wholesaling, in this case – that have suffered years of decline.
One of the central goals of “Abenomics”, the growth strategy that Mr Abe launched a year ago, is to coax businesses to spend more – on everything from payrolls to factories, equipment and infrastructure. Spending is something that many have been reluctant to do during the country’s 15 years of deflation, preferring instead to hoard cash, refocus on foreign markets or both. If that does not change, experts say, Japan’s recent recovery is likely to be shortlived.
There are tentative signs that companies are responding. Orders of factory equipment, considered a leading indicator of overall capital expansion, surged to a five-year high in November. And, unusually in a country where export-focused manufacturers are the traditional drivers of such growth, it is the more domestically orientated services sector that is doing much of the investing.
“About two-thirds of the total increase is coming from retail, wholesale and transportation,” says Tomo Kinoshita, chief Japan economist at Nomura, pointing to everything from ageing inventory-management systems to the belated embrace of e-commerce by many brick-and-mortar chains.
In the normally unglamorous field of warehousing, he says, a “distribution revolution” is under way in which companies are abandoning small, scattered facilities in favour of massive modern complexes like Ichikawa Shiohama. In addition to the money spent putting up the buildings, the shift requires “substantial” investment in the information technology systems needed to track their vast, fast-moving flows of goods.
The December figures show the current account gap was Y639bn ($6.2bn), the biggest decline on record and the third monthly deficit in a row. The November imbalance had previously been a record, at Y593bn.
Economists’ optimism about this sort of investment is real but cautious. Many expect capital spending to pick up this year, in large part thanks to non-manufacturers, but the overall scale of the expansion is predicted to be smaller than in past recoveries. Machinery orders remain about 20 per cent below their pre-financial crisis peak, notes Masayuki Kichikawa, Japan economist at Bank of America Merrill Lynch.
“Capex will recover, albeit moderately,” he says.
One reason the services sector is being counted on so heavily to propel the recovery is the relative weakness of manufacturers, which are less willing or able to invest than they once were. In spite of a cheaper yen, which makes producing goods in Japan more economical, those that are expanding are doing so mostly overseas, where demand is growing faster than at home and the cost of labour, energy and other inputs is still mostly lower.
But there is also a cautionary tale for Japanese industrial bosses in the spate of new television factories built by the likes of Panasonic and Sharp during the last cyclical upswing, in the early-to-mid 2000s. Constructed at huge cost, their value was quickly destroyed when the yen rose and global TV prices plunged. Production lines have since been shut or sold to Taiwanese competitors.
Mr Abe is doing his part to encourage investment by increasing incentives. According to the government’s calculations, tax breaks and other sweeteners contained in a Y5tn stimulus package announced late last year will help generate Y1tn in private-sector capital spending in 2014.
The main incentive gives companies a choice between a special depreciation allowance or a tax credit: they can depreciate in one go any “productivity-enhancing” equipment bought by March 2016 or apply 3-5 per cent of the purchase cost against their taxable income.
Mr Abe also wants to double Japan’s low rate of foreign direct investment by 2020, through additional tax cutting and changes to Japanese corporate governance rules that could give shareholders more power.
He is also engaged in efforts to reverse the long decline in Japanese consumer prices, and on this front the “distribution revolution” may be as much a foe as a friend. Yoshiyuki Chosa, the Japan head of Global Logistic Properties, the Singapore-based group that owns half of the Ichikawa facility, says clients can cut distribution costs by a third by scaling up, savings that can be passed on to consumers. Rakuten, Japan’s largest online retailer, will soon move in as anchor tenant; a similarly large centre already operating next door is leased by the US group Costco.
“The Abenomics recovery is giving us an extra boost,” Mr Chosa says, though he lists other developments such as the expansion of e-commerce as bigger drivers of demand. GLP invested Y70bn on Ishikawa Shiohama and other Japanese projects last year, and plans to spend a similar amount this year.
The other half of the partnership, Mitsui Fudosan, one of Japan’s largest property groups, is spending heavily too: it intends to build three to four large distribution centres a year over the next several years and has an investment budget of Y200bn through 2017.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in