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Manufacturing remains a dilemma for Koizumi

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Japanese Prime Minister Junichiro Koizumi has assembled a panel of 11 experts to address the decline...

Japanese Prime Minister Junichiro Koizumi has assembled a panel of 11 experts to address the decline in the Japanese manufacturing industry. According to John Millar, manager of the Martin Currie Pacific Trust, he is right to be concerned.

"The Prime Minister's concerns about the manufacturing industry are justified," he says, "because while other countries like the UK have been able to offset declines with growth in the service sector, regulation in Japan has impeded this."

Millar points to a decidedly mixed bag of manufacturing sectors in Japan. "Autos is one sector where Japan has shown it can maintain and even improve competitiveness, but we currently have zero exposure to consumer electronics for example," he says, pointing to a number of badly managed companies, such as Sony and Matsushita.

"Although the specific brands are highly regarded, the management of these companies have demonstrated they cannot get operating margins above 5%," he adds. "They would do well to get above 3%."

But Chris Burling, senior portfolio manager for Japanese equities at Gartmore, sees a more positive future with growth in the country's internal market for consumer goods.

"As Japan turns into a consumer society," he says, "the savings ratio will drop and demand for services will increase dramatically."

Another positive for Japanese industry is the return of a manufacturing base, with the desire for research and development operations to sit alongside production made easier by deflated real estate prices, which have fallen substantially over the past 15 years.

Burling sees a particularly positive future for Japan's high-end products. "Where the country's companies can add value is in higher-quality products whether that is consumer electronics, high-quality microchip semiconductors or even steel," he says.

"The quality is significantly superior to Korea for example and Japan needs to keep its edge in this area."

Millar concurs, believing there is a huge opportunity for Japanese companies to supply the rest of Asia with high-grade steel.

Looking more generally, he also believes Japanese companies are starting to restructure with long-term benefits. "With this change in management structure they are beginning to concentrate on the same factors we do in the West," he says.

"We used to visit Toyota a few years ago and it would consider market share rather than profits as an aim. Emphasising returns on equity will allow companies to reinvest and remain state-of-the-art."

The automotive industry is one area where he is particularly upbeat. "Toyota has been committed to a total improvement of its products," he says.

But while he sees signs of greater investment from Japanese corporate giants such as Toshiba and Matsushita, Millar believes such companies could be ripe for takeover in due course.

"In a couple of years' time, foreign firms may be able to make takeovers," he says. "Companies with very strong brands but poor earnings are obvious targets. It would be a blow but they only have themselves to blame."

bull points

Quality products and strong brands.

Consumer spending growth.

Return of home-based production.

bear points

Poor management of companies.

Squeezed operating margins.

Restrictive regulation.

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