That Sinking Feeling
Revised figures out today show that Japan’s economy shrank at an annualised rate of 7.1% in the last quarter. While contraction was expected after the Japanese government raised Japan’s VAT from 5% to 8%, and the decline followed annualised expansion of 6% in the first quarter as consumers bought ahead of the rise, the size of the contraction is very concerning.
Initially, pundits had suggested a contraction of around 3.5% – smaller than that caused by the Tohoku earthquake of March 2011 – but the figure has come in at double that, and this is eerily reminiscent of the last time the Japanese government raised the consumption tax (from 3% to 5%) in 1997, triggering a recession.
As Japan’s Central Bank continues its monetary easing, the effect might not be as dire as this. However, analysts are revising GDP projections downwards, and the Bank of Japan’s official projection of 1% growth this year looks very optimistic.
The government is supposed to increase the VAT again to 10% in October next year, and while the government has said it will delay implementation if the economy is judged not to be robust enough, Japan’s massive state debt will make holding off difficult.
It is anyone’s guess to what extent the economy will recover over the next two to three quarters. (The spread across the pundits is currently between 0% growth for the year and about 0.5%.) Of even more concern is the extent to which any recovery will translate into an improvement in consumer or retailer confidence.
The ultimate impact is difficult to predict but companies selling into Japan will face difficulties.
Most companies will have seen significant reductions in orders from Japanese customers (distributors or wholesalers) as they anticipated some downturn. However, the size of the downturn suggests that many will consider themselves overstocked – and that they may actually be in this position. Companies should expect pushback from their Japanese customers on purchases – requests for delayed delivery, or outright cancellation.
The key issue going forward is going to be working with Japanese customers to find the balance between an overstocked position and being short-stocked and missing opportunity. A number of western companies this writer has spoken with are suffering a double hit this year – not only are their distributors now postponing orders because of the downturn, but these companies were unable to capitalise on the growth in Q1 because over-cautious distributors refused to carry additional inventory into the period.
These same distributors will be even more conservative in the coming months. Companies should be looking at specific actions to encourage purchasing, but must be aware that direct sales pressure alone will be extremely counterproductive.
Instead companies should look to be very open in their communication and work collaboratively on forecasting – and specific measures to facilitate customers’ purchases and inventory holdings. Guaranteeing assistance with inventory clearance after trigger dates, joint approaches to retailers and adjusting payment terms are all solid options. Sensible companies will not want to over-commit to the market, but should also be very aware of the dangers of overly conservative distribution chains hindering sales opportunities. Above all, working collaboratively with the customer in Japan is critical – and being seen to “share the burden” of risk will allow stronger leverage as the economy improves. We’re certainly happy to help with practical advice in this area.