Apple store in Tokyo

Demand-side economics concern over Japanese quake aftermath

Japan's consumption of electronics and knock-on effects on global sales are worrying analysts

Analysis of the economic implications of the Japanese earthquake has focused on supply-side economics – and with good reason. There are plenty of concerns about shortages of electronic components and raw materials used by high-tech industries.

Automotive OEMs worldwide are closing lines because they cannot source chips used to monitor airflow and drive in-car infotainment systems. Japan's importance in producing wafers for semiconductor manufacturing – the shuttered Shin-Etsu plant in Nishigo Village, northern Japan, normally supplies 20 per cent of the entire industry's requirements – and materials for printed circuit boards may affect all products that integrate electronics.

However, as time passes, attention is also encompassing demand. Shortly after disaster struck, Apple put the Japanese launch of the iPad 2 on indefinite hold. Coupling this to concerns about securing parts for the tablet, financial markets disregarded its glowing reviews and marked down Apple's shares by more than 5 per cent.

Why Japan matters

Japanese consumption still counts hugely in consumer electronics (CE). The country makes up 6 per cent of Apple's sales worldwide and a still greater share for domestic giants such as Sony, Toshiba and Panasonic. According to the European research firm GfK and the US Consumer Electronics Association (CEA), Japan has 8 per cent of the global CE market.

Its recent CE growth rate – flat in 2010 – has been a concern given long-term stagnation in the Japanese economy, but 2011 was supposed to be better with sales forecast to rise by 8 per cent to $77bn.

Perhaps more importantly, Japan has historically been fundamental to the introduction of technologies, functions and applications: it has fostered many innovations in gaming, HDTV and mobile computing from design right through to purchase. Analysts draw a distinction with headline-capturing growth in emerging economies such as China (forecast by GfK/CEA at 15 per cent this year) because their product mix is more focused on a trickle-down integration of features already launched in more mature markets.

Apple is right to assume that Japanese consumers will have little time for new gadgets while their country strives to recover. For many, the priority today is quite literally rebuilding their lives. But there will be future implications for the national economy and disposable income.

CI Investments is a Canadian financial group operating Asian funds with Japanese holdings. William Priest, one of its fund managers, released an atypically gloomy assessment in late March.

'We continue to be concerned that the country's severe structural issues – falling population, shrinking labour force and [a] rising government debt-to-GDP [ratio] (the highest in the world) – have no evident solution,' he said. 'The reconstruction needs will only add to the debt burden facing the country.'

In another note, Citigroup Global Markets set out its concerns. 'Given the host of unprecedented issues, including ongoing nuclear plant problems, a power shortfall and supply chain bottlenecks, we think the market will continue to be highly volatile,' it said.

Global consequences

Beyond that, there is the impact of the disaster elsewhere in the world. Intervention by other leading global economies has helped to stabilise the value of the yen, aiding exports, and the Nikkei stock indices have showed signs of recovery following initially precipitous falls.

However, it is not just Japan's challenges that are leading consumers to think twice about CE purchases. Sharp rises in fuel prices as a result of ongoing instability in the Middle East are set to have an additional depressing effect, creating a 'Scylla and Charybdis' for buyers to navigate.

On one side, there is the prospect of High Street CE inflation resulting from component shortages pushing up retail prices for both Japanese products and those that depend on raw materials or parts from Japanese sources (as well as the prospect of higher freight costs being passed on). On the other, as it seems to cost ever more to fill up the car or heat the home, people may conclude that it is be better to delay discretionary purchases.

Independently, the CEA conducts a monthly analysis of US consumer sentiment and the March data suggests this is already happening. Its Index of Consumer Expectations, which measures sentiment about the overall state of the US economy, fell by more than 10 points from February to 161.4. This was its steepest monthly decline in more than two years and came at a time when things were expected to be turning the corner.

Its allied Index of Consumer Technology Expectations did rise from February's 76.2 to 78.5, but there were some troubling details: specifically, falls in both 'expectations to buy' CE products (down to 46.3) and 'expectations to spend more' on CE (at 32.3).

Shawn DuBravac, the CEA's chief economist, acknowledged the likelihood of a strong global component to the March result. 'Increasing geopolitical concerns around the globe and weak results for [US] housing markets, coupled with the tragedy in Japan, have kept consumers on edge,' he said. 'Consumers are still adjusting to higher gas prices, for example, which affect spending on the remaining categories, including technology.'

Still far from clear

Any comprehensive assessment of the Japanese disaster has been severely hampered by the fact that information is emerging piecemeal.

Sir Howard Stringer, CEO and president of Sony, has assured the markets and global partners about the fundamental strengths of his company's business, electronics overall and his belief that a stronger Japan will emerge from this tragedy. By contrast, Fumio Ohtsubo, president of Panasonic, had declined all requests for interview at time of going to press.

This contrast is in many ways cultural. In the West, Sir Howard's Anglo-American roots naturally make him more likely to address the investment community following such an event; in the East, the traditional response is first to address internal concerns. Nevertheless, the differences illustrate how hard it is to see the big picture.

On the demand side though, the feeling persists that the consequences of Japan's tragedy could persist for as long as, if not longer than those attributable to shortages. The year began amid great optimism for a robust recovery. Some recovery is still possible, but expect earlier double-digit expectations to be reined in. *

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