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How Abenomics Fails

Japanese Firms Choose Salvaged Computer Parts Over Investment

by Tyler Durden

Zero Hedge (July 06 2016)

The fact that Abenomics has been a miserable failure has been well established {1}, and even the IMF felt the need to get involved and tell Japan what it should do next. One of the IMF’s recommendations to the Bank of Japan (“BoJ”) was for the inflation target to be scrapped entirely {2}.

To wit:


The Bank of Japan in February introduced a negative interest rate in part to support domestic demand. However, in the event that the IMF’s suggestions will not be implemented, Japan will lack growth and therefore would need a longer time to get its fiscal books in order. In that scenario, the IMF called on the bank to scrap its time frame for achieving its two percent inflation target, which the BoJ now sets at somewhere in fiscal 2017.


Inflation in Japan has now turned down again, and household inflation expectations have declined as well.

While we touched on one reason for Japan’s inflation headwind, namely that China has been and will continue to export deflation {3} as the yuan is devalued, there is also another reason of course, which is that businesses aren’t spending.

As Goldman notes, fiscal year 2016 business capital expenditure (“capex”) plans are the weakest in years.


Fiscal Year 2016 Capex Plans Weakest in Recent Years:

The fiscal year 2016 capex plan (all companies, all industries) calls for +0.4% year on year, an upward revision from the March survey (-4.8%). The Tankan capex plan tends to be particularly conservative in the March survey after which it is usually raised gradually through to year-end. Even so, it is the weakest plan in the past several years. We see a strong downside risk to capex, with the outlook for fiscal year 2016 recurring profits (all companies, all industries) calling for a drop of 7.2% and uncertainty growing with regards to domestic and external demand.


One of the most interesting examples of business sentiment on capital spending is that major Japanese manufacturers are buying salvaged computer parts from a small business owner instead of spending the money to upgrade. Those who picture Japanese manufacturing production lines as being on the cutting edge of the newest technology have the wrong impression.

Operating from a hilltop warehouse in the backwoods of Japan’s Izu peninsula, Tomoharu Iguchi makes a living by scavenging¬† parts from long obsolete computers and selling them to businesses. Not just a few businesses, as the Financial Times reports {4}, Iguchi’s customer base is a nationwide, 1,000 strong list of Japanese companies that includes major railway operators, auto-parts giants, drugmakers, retailers, and hundreds of small manufacturers.

As the FT explains {4}


Operating from a flimsy hilltop warehouse in the backwoods of Japan’s Izu peninsula, Tomoharu Iguchi is a highly successful technology cannibal. His existence is one of the country’s darker secrets: a necessary strut in a corporate edifice defined by decades of deflation.

For those who picture Japanese production lines at the bleeding-edge of modernity, Mr Iguchi’s business of disembowelling, scavenging and supplying parts from long obsolete computers, seems improbable. His stockroom – a precariously stacked jumble of grimy monitors, half-gutted 1990s-era PCs and spaghetti knots of yellowed keyboard and mouse cabling – should not logically be humming with activity in 2016.

But his customer base – a nationwide, 1,000-strong list of Japanese companies that includes major railway operators, auto-parts giants, drugmakers, retailers and hundreds of small manufacturers – reveals a rather more threadbare Japan. It cannot live without its creaking, underpowered, twenty-year-old computers. Or Mr Iguchi.

Mr Iguchi is hardly to be blamed for the phenomenon, but the corporate mindset and decision-making that keeps him in business are one of the main reasons that Abenomics is having such a hard time gaining traction.

Larger Japanese manufacturers, as reflected in the Bank of Japan’s most recent Tankan survey of business sentiment, are narrowly planning to raise their IT spending. But the less visible industrial heartlands are dragging their heels. Those managers and business owners who opt for Mr Iguchi’s services have spent a large part of their careers in the shadow of deflation. For them, cost-cutting – to the point of not replacing computers – has become a cherished corporate skill and guarantee of promotion.


PC-98 series computers was so successful in the 1980s that for years businesses never found a good reason to upgrade, and NEC even continued to make replacement parts until 2010. Iguchi’s business has blossomed due to the fact that PC-98s are still embedded in production lines, and firms simply aren’t willing to spend the capital to upgrade the systems. This sentiment speaks volumes to the fact that Abenomics simply hasn’t been able to convince businesses to open up spigot and spend money, thus creating yet another headwind for the failed policy.


Computer cannibalisation highlights the blockage. Mr Iguchi is entirely focused on the PC-98 – a famously workhorse-like series of computers first produced by the Japanese technology group NEC in the 1980s. A Japanese-made computer, it was suited to Japanese use at a time when Japan was buying. A decade later, the arrival of the internet and flatscreen monitors created hot demand for new computers across corporate Japan. As offices upgraded their desktops, manufacturing and other sectors took the same opportunity to embed a new generation of machines in production lines, points of sale and back-office operations.

But the PC-98 was rather too successful: the machines were so user friendly and so deeply embedded, says Mr Iguchi, that for years nobody could see any good reason to replace them. Until 2010, NEC was still making replacement parts. Many took the 2010 cut-off as the prompt to finally ditch their old machines, but thousands decided that the cost was simply too high.

As a result, PC-98s are still embedded in production lines. They cannot simply be replaced with something newer, and replacing entire production lines instead seems recklessly expensive when people like Mr Iguchi are around to replace the crucial burnt-out microchip for a few thousand yen.


* * * * *


This particular story should be used as a business case in every university in order to show that central planning simply cannot consider all the elements of an economy, no matter how intelligent those that are doing the planning may believe they are. We’re kidding of course, we realize that academia is a staunch supporter of central planning and stories that clearly display the failures of central planning will be forever hidden from those debt-laden students who believe they are being properly educated and prepared for the real world.


{1} http://www.zerohedge.com/news/2016-05-30/mizuho-ceo-warns-japan-sales-tax-delay-admission-abenomics-has-failed

{2} http://www.zerohedge.com/news/2016-06-20/imf-tells-japan-abenomics-miserable-failure-recommends-forcing-companies-raise-wages

{3} http://www.zerohedge.com/news/2016-07-02/morgan-stanley-explains-one-big-reason-why-central-planners-cant-generate-any-inflat

{4} https://next.ft.com/content/238c993c-427d-11e6-9b66-0712b3873ae1?ftcamp=published_links%2Frss%2Fcompanies%2Ffeed%2F%2Fproduct


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