Japan Industry Outlook / 38

Japan Industry Outlook / 38 2012 No.1 Table of Contents

1, Comprehensive Industry - Japan 2, Iron and Steel - Japan 3, Non-ferrous Metals - Japan

15, Broadcasting (Japanese only) 16, Marine Shipping (Japanese only) 17, Logistics - Japan

4, Paper and Pulp (Japanese only) 18, Electric Power - Japan 5, Cement - Japan 19, City Gas (Japanese only) 6, Chemicals - Japan 20, Retail - Japan 7, Pharmaceuticals - Japan 21, Food and Beverage - Japan 8, Petroleum - Japan 22, Food Service Industry - Japan 9, Automobiles - Japan 23, Construction (Japanese only) 10, Shipbuilding (Japanese only) 24, Real Estate and Housing - Japan 11, General Machinery (Japanese only) 25, Travel and Tourism - Japan 12, Electronics - Japan 26, Nonbank (Credit Cards & Credit) (Japanese 13, IT Services - Japan only) 14, Telecommunications - Japan 27, HR Service Industry (Japanese only)

Contact: Industry Research Division Mizuho Corporate Bank, Ltd. [email protected]

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

COMPREHENSIVE INDUSTRY OVERVIEW Summary

■ The Japanese economy was weaker mainly in exports in FY2011 as it saw declining production activities caused by supply side restrictions that were the result of the Great East Japan Earthquake and tsunami, and the massive flooding in Thailand, followed by a global decline in demand caused mainly by the European financial crisis and monetary policy tightening in China. ■ In FY2012, the European financial crisis is expected to take a turn for the worse, fueling concerns over a global economic slowdown. While, in Japan, despite reconstruction demand and personal consumption boosting the economy to a certain extent, economic recovery is expected to be limited overall. ■ Increased sales and increased operating profit are expected in FY2012, as corporate performance swings back from the levels of FY2011. Sales comparable to FY2010 are expected, while operating profit will remain at 90% compared to the levels of FY2010. ■ Raising the Total Factor Productivity (TFP) is imperative for supporting Japan’s growth, and particular focus should be placed on the TFP of the non-manufacturing sector. In order to raise the TFP, the enhancement of the competitive environment, through deregulation and other means, is required, in addition to the implementation of strategic M&As and the expansion of IT investments

I. INDUSTRY TRENDS 1. Despite casting off the effects of the disaster, Japanese industry conditions have only made a moderate recovery due to the slowdown of the overseas economy. The sluggish overseas economy is a factor for a depressed domestic economy.

Although the Japanese economy has been bouncing back at an unimaginable pace from the Great East Japan Earthquake, the floods in Thailand in October and the European financial crisis stemming from the situation in Greece have cast a damper on the momentum for economic recovery. Negative growth is expected for the real GDP in FY2011, as it fell 0.4% from the previous fiscal year. Meanwhile in FY2012, despite predictions for prolonged financial turmoil in Europe, growth of 1.9% is expected, as negative factors accompanying the disaster dissipate and as reconstruction-related demands become manifest. The greatest risk factor for the Japanese economy in FY2012 is the overseas economic environment. Examples of such risks include: (1) the effects of the European financial crisis spilling over into the emerging countries, mainly Asia, through the reduction of the assets of European financial institutions; and (2) the rapid downturn in demand on the back of monetary tightening in China. If risks (1) and (2) were to materialize, it would not only have a

1

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

negative impact on the Japanese economy but also cause a downward swing in the growth rate for FY2012. The expansion and deepening of the European debt crisis is a cause for concern for the manufacturing sector.

Although the non-manufacturing sector continues to recover after the earthquake, current growth has flattened out.

Although production activites in the manufacturing sector had been making a strong turn-around since the Great East Japan Earthquake, they are beginning to lose some of their momentum as a result of the slowdown in exports precipitated primarily by the current surge in the Japanese yen. In the future, global demand may weaken even further as a result of the declining overseas economies, and thus recovery by the manufacturing sector is predicted to be limited, at best. The business environment surrounding the non-manufacturing sector, which had suffered the effects of negative rumors and the mood of voluntary restraint following the earthquake, began to recover around summer and managed to reach pre-earthquake levels by October; however, it is currently flattening out. In the future, steady growth is predicted for personal consumption in conjunction with improvements in the employment and income environment, which, in turn, will boost the activities of the non-manufacturing sector. Figure 1-1: Production and demand levels by sector (FY2005 = 100)

160 150 140 FY2011 Estimate

130 120

FY2012 Forecast

FY2010 Actual

110

Production/demand levels by sector are shown as candlesticks (FY2005 = 100) Left: FY2009 ⇒ FY2010 levels Center: FY20010 ⇒ FY2011 levels Right: FY2011 ⇒ FY2012 levels * Sectors displayed from left to right according to FY2012 levels

100

FY2005=100

90 80 70 60 50

Ce ll ph o Tr a m ne s ub p sc ca rib rg o er Fo Co m s od ov nv se e en m rv ie en ice nc t s e in st o du re str sa y Cr sa le s le ud sg es ro In te w fo el th rm pr od at io uc n tio se n rv ic es sa le Po s M M ac we r etr hi op ne sa le ol ry s ita or n de ar rs ea Fo of od fic s El e v pe n ec a c din t ro an ni cy g cd ra ev te ice Cr pr ud od es uc te tio el pr n A od dv uc er t io N ti s n om in g Su in m al pe ar co rm ke ns ar t tru ke ct t sa io n le in s ve stm Tr en uc t Et k hy to nn len D a e om ge p ro Pa es du ti c pe cti r/ p ca on rp ap er r o bo du ar cti d on pr od Fu uc el ti o oi D l n pr om Ce od es In m uc ti c du en t D i str co on tp ep ns ia ro ar le um du tm le ct er en ct io ts ro ele n ni to ctr cs re on N pr sa ic ew od l es sp uc ap ro ti o ar du tm n ct (e en io x tb n cl N .d ui ew ld ev in ic ho gs es us ) in in g m etr st a op rts ol Le ita n as ar et ea ra ns ac ti o ns

40

Source: Compiled by Mizuho Corporate Bank （MHCB） Industry Research Division

2. The European debt crisis and other phenomena are holding back production 2

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

activities, despite systems of production having returned to normal.

Although the effects of the Thai floods are temporary, exports are turning into downward pressure.

Inventories are on a rising trend since the Great East Japan Earthquake.

The slowdown in exports is due to the European debt crisis pressing down on production.

The floods in Thailand occurred just as the systems of production were being restored, and thus, the “Index of Industrial Production” currently remains at approximately 95% of the levels prior to the earthquake (see Figure 1-2). While said flood primarily impacted the transport machinery and electronics industries, the indices of the “Survey of the Production Forecast” (overall) for January and February predict production to increase and the effects of the flood to slowly diminish. However, even more serious than the floods in Thailand is the decline in exports. The slowdown in demand, mainly in exports, which stems from the slowdown of the overseas economy, has put a brake on the acceleration of production. Inventory levels after the earthquake (April through December 2011) have increased by approximately 7% compared to before the earthquake (April 2010 through March 2011). Such inventories are thought to be a mixture of both “planned inventories,” which have been stocked in preparation for contingencies such as disasters, and “unplanned inventories,” which have resulted from the decline in exports. Future inventory trends will be closely observed (see Figure 1-4 and Figure 1-5). While reconstruction-related demand, which is expected to peak in FY2012, will boost domestic production on the supply side, there is no denying the fact that the European debt crisis will have even sharper and more broad-ranged repercussions on the demand side. Thus, the further deceleration of exports has become the greatest risk for the recovery of production activities.

Figure 1-2: Index of industrial production by sector

Figure 1-3: Index of industrial production by goods

125 115

150 140

105

130 120

95

110

85

100 90

75 65

80 70

55

60

45

50 Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Electronic components/devices

Chemicals

Transport machinery

General machinery

M ining & manufacturing

Iron & steel

Jun-11

07/12

Dec-11

08/06

08/12

09/06

Capital goods Consumer non-durables

3

09/12

10/06

Construction goods Production goods

10/12

11/06

Consumer durables

Mizuho Corporate Bank, Industry Research Division

11/12

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-4: Inventory-shipment balance Shipment growth > Inventory growth

80% 60% 40% 20% 0%

-20% Inventory growth > -40% Shipment -60% growth -80% Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

General machinery Iron & steel Source: Figure 1-2 and Figure 1-3 wereMcompiled by MHCB Industry Research Division based on the Ministry of ining & manufacturing Transport machinery Electronic components/devices Economy, Trade & Industry’s “Index ofChemicals Industrial Production.”

Note: Indices are seasonally adjusted three-month moving averages. FY2005 = 100

Source: Compiled by MHCB Industry Research Division based on the Ministry of Economy, Trade & Industry’s “Index of Industrial Production.” Note: The inventory-shipment balance is calculated as “shipment index growth rate – inventory index growth rate.” Figure 1-5: Inventory cycle 10%

Inventory

Industry

Source: Compiled by MHCB Industry Research Division based on the Ministry of Economy, Trade & Industry’s “Index of Industrial Production.” Note: Both “Shipment” and “Inventory” in the inventory cycle are year-on-year comparisons

5% (December 2008)

0%

(December 2011)

-5%

-10%

-15% Shipment -20% -40%

-30%

Greater recovery is seen in personal services than in business services.

The “Indices of Tertiary Industry Activities” is more or less remaining the same.

-20%

-10%

0%

10%

20%

30%

40%

In the non-manufacturing sector, the “Indices of Tertiary Industry Activity” for the latest three months has more or less been the same (see Figure 1-6). What is characteristic though is that personal services have recovered to a greater extent than business services. Personal services have the firm support of personal consumption performing strongly, particularly in the telecommunications, travel and medical/welfare sectors. In the business services, the temporary cessation of production activities due to the Thai floods is thought to have taken its toll. Although personal services are expected to continue performing strongly, substantial growth is not anticipated from business services, as the recovery of production activities in the manufacturing sectors has been somewhat limited. Consequently, the “Indices of Tertiary Industry Activity” is expected to remain more or less the same overall.

4

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-6: Tertiary industry activity indices 116 114 112

Transport Information & telecommunications

110 108 106

Retail

104 102 100

Real estate Hotel/restaurant business

98 96 94

Lifestyle support services (excluding entertainment)）

92 90 88

Professional/technical services, advertising Health care, welfare

86 84 82

Overall

Nov-07

May-08

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

108 106

Overall

104 102 100 98 96

Personal services

94

Business services

92 90 Nov-07

M ay-08

Nov-08

M ay-09

Nov-09

M ay-10

Nov-10

M ay-11

Nov-11

Source: Compiled by MHCB Industry Research Division based on the Ministry of Economy, Trade & Industry’s “Indices of Tertiary Industry Activity.” Note: Three-month moving averages

5

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-7: Production/activity index trends by sector (month-on-month)

M aterials m anufacture

Metals Chemicals Petroleum & coal Paper & pulp General machinery

Fabrication/processing

M anufacturing 2005＝ 100

Iron & steel Non-ferrous metals

Transport machinery Precision machinery Electric machinery Information & telecommunications machinery Electronic devices

Electricity, gas, heating, water

N on-m anufacturing 2005＝ 100

Information & telecommunications Transport

FY2011

FY2010

Key industries

Passenger transport Freight transport Wholesale Retail Real estate Leasing

Professional/technical services, advertising

Hotel/restaurant businesses Lifestyle support services (excluding entertainment) Health care, welfare Broadly defined personal services Broadly defined business services

Dec + 1.3% -0.6% 1.3% -1.3% 0.6% 0.8% + -0.4% 1.6%

Jan + 1.8% 1.6% -10.3% + 2.1% 2.1% 2.5% 0.3% -0.2%

Feb 1.8% 1.1% + 1.8% 0.5% 1.5% + + 0.9% 2.4%

Mar -10.2% -16.5% -10.7% -2.3% -12.3% -8.3% -14.5% -46.7% -12.9% -10.2%

Apr -2.2% + 2.1% -0.1% -0.4% -0.4% + -1.9% + +

May -2.1% 1.9% + + 1.0% -1.5% + + 1.8% 2.4%

Jun 1.0% + + -0.3% + 1.9% -0.8% + + +

+

-8.9%

+ 0.0% 0.0% -1.9% 1.5% 0.2% -5.1% 0.3% -1.2% -1.4% 1.7%

+ + -1.0% -2.9% -0.1% -1.0% 2.5% -0.3% 1.1% 1.0% -0.8%

-11.3%

-8.0%

0.4% -1.7% -0.5% -2.8% 0.6% + 1.5% 0.7% -0.9% + 1.3%

-6.6% -3.5% -9.4% -19.4% -8.0% -9.6% -7.6% -2.1% -1.4% -4.1% -12.9%

-16.7%

+

-12.6% -2.7% + -12.6% -4.4% 1.9% + -0.1% 0.5% + +

-0.6% 0.2% -0.6% -6.7% -2.0% 1.8% + 1.6% + -2.6% +

1.1%

0.9%

-1.0%

-9.6%

+

1.6%

+

0.2% -0.4% -0.3%

1.3% 0.5% -0.1%

0.8% 0.6% 1.1%

-0.7% -6.1% -5.3%

0.2% + +

-1.7% 1.4% -0.3%

1.4% 1.9% 1.9%

2005=100

Jul -0.7% 1.2% -2.4% -6.3% 1.3% -2.2% 0.5% + + -0.2%

Aug 2.4% 2.5% 0.2% 0.6% -0.5% 1.8% 1.0% + -2.2% 0.8%

Sep -2.9% -2.3% -4.4% 0.0% -4.3% -1.5% -6.1% -5.9% -1.3% -7.4%

Oct + + + -0.4% 1.3% + + + 2.0% 0.2%

Nov -1.2% -2.5% 0.7% -1.5% -0.9% 0.5% -0.3% -10.0% -3.7% 0.2%

Dec -0.8% 2.4% -0.1% #N/A 0.2% -0.2% 0.9% + + -1.1%

FY2010 FY2011 81 94 84 89 80 83 99 100 90 90 88 89 63 86 84 90 89 106 83 95

+

+

-10.6%

-7.8%

-6.8%

-23.7%

+

88

87

+ 0.1% 1.5% -2.7% -0.7% + + -1.1% -0.4% + 0.5%

-3.4% -0.9% -0.7% -1.1% -1.0% 0.3% -0.5% 1.0% -2.5% -2.4% 1.9%

1.2% -1.0% 0.3% -2.0% -0.6% 0.2% -2.8% 0.5% -0.3% -0.4% 0.2%

-2.3% 1.1% -2.7% -2.1% -1.1% -2.4% -1.4% 0.2% -2.6% + 1.4%

-5.6% 0.3% + + -1.1% 0.1% 1.8% -0.4% 0.9% -2.7% 1.0%

0.5% 0.0% 1.1% 0.7% -0.9% -1.3% -3.1% 0.6% -0.4% -1.6% -0.5%

+

112 100 106 96 96 84 102 98 105 96 101

127 103 107 95 99 86 104 98 102 94 102

1.4%

0.9%

-1.6%

0.7%

-0.7%

92

87

0.1% 0.4% -0.2%

0.5% -0.2% -0.1%

0.4% -0.2% -0.7%

0.2% 0.9% 0.3%

-0.3% -1.0% -0.6%

108 99 95

112 101 96

Source: Compiled by MHCB Industry Research Division Note: + 2.5% or more month to month, □: 0% - +2.5% month to month, ▩: -2.5% - 0% month to month, ■: -2.5% or less month to month

Figure 1-8: Production/activity index trends by sector (year-on-year)

M aterials m anufacture Fabrication/processing

M anufacturing 2005＝ 100

Manufacturing 2005＝100 Iron & steel Non-ferrous metals Metals Chemicals Petroleum & coal Paper & pulp General machinery Transport machinery Precision machinery Electric machinery Information & telecommunications machinery Electronic devices

Electricity, gas, heating, water

N on-m anufacturing 2005＝ 100

Information & telecommunications Transport

Passenger transport Freight transport Wholesale Retail Real estate Leasing

Professional/technical services, advertising

Hotel/restaurant businesses Lifestyle support services (excluding entertainment) Health care, welfare Broadly defined personal services Broadly defined business services

FY2010

FY2011

Dec + + + + 0.2% 0.3% + + + +

Jan + -0.1% 0.8% -2.4% -0.4% + + -4.3% + +

Feb + 0.6% + -6.7% 1.5% 1.8% + -0.2% + +

Mar -7.4% -16.3% -7.0% -7.0% -10.0% -6.1% + -47.6% -10.9% -5.5%

Apr -8.0% -12.5% -5.4% -8.2% -12.9% -6.8% + -47.9% 1.5% 0.4%

May -9.3% -10.5% -3.0% + -9.9% -6.9% + -27.9% 1.8% 1.5%

Jun -6.1% -6.2% 1.2% + -0.8% -3.7% + -11.1% + +

-2.3%

-10.3%

-19.2%

-24.8%

-35.0%

-28.0%

+ 1.2% 2.5% -1.9% 1.5% + -0.7% 0.9% -4.7% 0.2% +

+ + -0.2% -2.9% -0.1% + -0.3% 0.3% -3.3% -1.4% 2.0%

+ 1.0% -0.1% -2.8% 0.6% + 0.5% 1.2% -4.3% 2.1% +

-2.8% -2.3% -2.8% -19.4% -8.0% 0.7% -8.0% -1.1% -5.2% -0.3% -10.8%

-15.5% -5.7% -1.3% -12.6% -4.4% -2.7% -3.3% -1.5% -4.6% + -5.5%

-15.9% -3.5% -2.1% -6.7% -2.0% 0.0% 1.4% 0.3% -1.9% 1.3% -0.6%

-3.3%

-3.9%

-1.4%

-28.9%

-16.8%

-6.0%

+ 2.2% +

+ 0.9% 0.4%

+ 2.1% 2.0%

+ -5.0% -1.6%

+ -2.6% -1.3%

1.4% -0.2% -1.2%

2005=100

Jul -3.3% -3.4% -1.2% -1.4% -2.7% -6.9% + -5.1% + +

Aug 0.1% -1.2% -1.9% -2.4% -4.2% -4.3% + 1.5% + +

Sep -3.2% -2.3% -4.5% -2.0% -9.0% -5.7% + -2.0% + -2.3%

Oct -0.1% + -1.5% -5.4% -5.5% -0.8% + + + -2.4%

Nov -2.4% -2.3% -1.9% -7.6% -7.7% -0.5% + 2.0% + -2.6%

Dec -7.5% -1.3% -1.5% #N/A -6.2% -1.2% + + + -5.1%

FY2010 FY2011 81 94 84 89 80 83 99 100 90 90 88 89 63 86 84 90 89 106 83 95

-16.5%

-2.8%

-13.9%

-23.5%

-27.3%

-42.6%

-26.1%

88

87

-10.0% -4.2% 0.7% -2.7% -0.7% 2.3% + -1.4% -1.9% + 0.3%

-11.8% -6.1% -1.0% -1.1% -1.0% 1.6% + -0.2% -4.3% -2.6% -0.3%

-10.5% -9.5% -0.6% -2.0% -0.6% 1.5% -1.4% 0.2% -3.8% 0.9% -0.1%

-9.9% -6.5% -1.8% -2.1% -1.1% -0.8% -0.4% 0.5% -6.1% + 1.5%

-13.0% -3.7% 0.6% + -1.1% -1.7% 2.4% 0.2% -4.4% 1.5% 1.8%

-15.3% -3.9% 1.2% 0.7% -0.9% -4.6% -3.3% 0.8% -4.6% -1.3% +

-14.0%

112 100 106 96 96 84 102 98 105 96 101

127 103 107 95 99 86 104 98 102 94 102

1.1%

0.7%

-1.3%

-1.3%

+

1.6%

91

87

2.3% 0.8% 1.1%

2.4% 1.0% -0.1%

+ 0.1% 0.1%

+ 0.5% -0.4%

+ 1.9% -0.5%

2.4% 0.4% -1.7%

108 99 95

112 101 96

Source: Compiled by MHCB Industry Research Division Note: + 2.5% or more year-on-year, □: 0% - +2.5% year-on-year, ▩: -2.5% - 0% year-on-year, ■: -2.5% or less year-on-year

6

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

3.

Exports are expected to weaken in the wake of the European debt crisis and the floods in Thailand.

Negative factors exist both on the supply and demand side due to the effects of the European debt crisis and the Thai floods.

Exports, which had been showing signs of recovery in conjunction with the restoration of the systems of production since the Great East Japan Earthquake, have been gradually losing momentum in the second half under the effects of the protracted European debt crisis and monetary tightening by China, and exports in December dropped by approximately 6% from the post-earthquake peak in exports, which was reached in September (see Figure 1-9). By destination, exports mainly to Europe and Asia have begun to decrease, which may be said to be a direct effect of the European crisis and the slowdown of growth in China. According to November trade statistics, exports to Asia, which account for over 50% of total trade, decreased by around 5% from the post-earthquake peak in September, and exports to China (which account for 35% of total exports to Asia) also decreased by approximately 4%.

Exports to Europe and Asia are weakening.

By item, the export of electronics and transport machinery has decreased, and compared to the latest peak period, the former has decreased by 18.9% and the latter by 12.0% (see Figure 1-10). Figure 1-9: Index of export volume by region

Figure 1-10: Index of export volume by item

180

150 160 China

130

140 ASEAN

110

120 World 100 NIES

70

EU

80 US 60

40 Dec-07

90

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

50 Nov-07 M ay-08 Nov-08 M ay-09 Nov-09 M ay-10 Nov-10 M ay-11 Nov-11

Dec-11

Iron & steel

T ransport equipment

Chemicals

Overall

General machinery

Electric machinery

Source: Figure 1-9 and Figure 1-10 were compiled by MHCB Industrial Research Division based on the Ministry of Finance’s “Trade Index of Trade Statistics.” Note: Indices are seasonally adjusted three-month moving averages. Japan is almost certain to record a trade deficit for the full year.

In terms of the trade balance, Japan has recorded a trade deficit for nine consecutive months since April 2011, against the backdrop of increased LNG imports from the summer onward, and the cumulative deficit during this period has reached approximately 3.3 trillion yen (seasonally-adjusted figure) (see Figure 1-11 and Figure 1-12). Japan is almost certain to record a trade deficit for FY2011, which would be the first time since FY2008—the era of

7

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

the Lehman crisis. As far as the future is concerned, while the domestic systems of production are pulling out of the effects of the series of natural disasters, exports are expected to weaken as a result of the repercussions of the European debt crisis spilling over into the Asian region via the international financial systems and as a result of sluggish demand, as well as the decelerated growth of the Chinese economy—Japan’s greatest export destination. Additionally, the rising tide of overseas expansion by the Japanese companies spurred on by the current climate of the strong yen will also become a factor that will weigh down on exports.

Repercussions from the European debt crisis are the greatest risk factor.

Figure 1-12: Balance of trade (seasonally adjusted)

Figure 1-11: Growth rate of mineral fuel imports (year-on-year) 8

40% 30% 20% 10%

Crude oil, raw oil

6

LNG

4

Coal

JPY trillions

JPY trillions

1

0.5

2

0%

0

-10%

-2

-20%

1.5

0

-0.5

-4

-30%

-1

-6

-40% Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

-8 Dec-07

Jun-08

Dec-08

Export amount (left axis)

Source: Compiled by MHCB Industrial Research Division based on the Ministry of Finance’s “Trade Index of Trade Statistics.”

Jun-09

Dec-09

Jun-10

Dec-10

Import amount (left axis)

Source: Compiled by MHCB Industry Research Division based on the Ministry of Finance’s “Trade Statistics.” Note: Indices are seasonally adjusted

According to the Bank of Japan’s December Tankan Survey (large enterprises), capital investments for both the manufacturing and the non-manufacturing sectors are expected to grow by 7.6% and 3.5% year-on-year, respectively. However, in light of the fact that in the September Tankan Survey, capital investments had been predicted to grow by 11.8% and 4.0%, respectively for the same period, it is worth noting that a somewhat cautious stance toward domestic capital investments has begun to take hold, particularly in the manufacturing sector (see Figure 1-13). Despite being impacted to a certain degree by the floods in Thailand, machinery orders (total private sector demand excluding power and marine sectors), a leading indicator for private sector capital investments, are showing signs of moderate improvement as a whole. The main reason for this

8

Mizuho Corporate Bank, Industry Research Division

-1.5 Dec-11

Trade balance (right axis)

4. Moderate recovery for capital investments through the emergence of reconstruction-related demand in FY2012 onward The impact on the capital investment of special reconstruction-related demand will be limited.

Jun-11

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

is that the manufacturing sector expects to increase on domestic production to make up for the portion of production that was cutback due to the Thai floods, and the non-manufacturing sector anticipates stepped-up production accompanying the spread of smartphones (see Figure 1-15). In terms of reconstruction-related demand from the Great East Japan Earthquake, approximately 19 trillion yen has been recorded, if the FY2012 budget (proposal) is to be included. However, at the present time, most of it is being spent on clearing rubble, and actual reconstruction investments have yet to materialize. Capital investments are expected to gradually increase from FY2012 onward, once full-scale reconstruction demand emerges, and in the absence of any major recovery in exports, it is expected to be effective to a certain extent in propping up the domestic economy.

Full-scale reconstruction expected to begin in 2012 onward.

Figure 1-13: Annual capital investment budget growth rates (large enterprises) Non-manufacturing

Manufacturing 10 20

10

5

7.6%

FY2006

0

3.5%

FY2007

0

FY2008

-10

FY2009

-20

FY2010

-5

FY2011

-30

-10

-40 March survey June survey

September survey

December survey

March survey

Actual

June survey September survey

December survey

Actual

Figure 1-14: Capital investment amount trends (large enterprises) 45 40

Total

35

Manufacturing industry

30

Non-manufacturing industry

25

Excess

20 15 10

Shortage

5 0 -5 -10

Mar-07 07/03

Sep-07 07/09

Mar-08 08/03

Sep-08 08/09

Mar-09 09/03

Sep-09 09/09

Mar-10 10/03

Sep-10 10/09

Mar-11 11/03

9

Sep-11 11/09

Mar-12e 12/03e

Source: Figure 1-13 and Figure 1-14 were compiled by MHCB Industry Research Division based on the Bank of Japan’s “Short-term Economic Survey of Principal Enterprises in Japan” (Tankan Survey). Note 1: Figure 1-13 includes software; exclude land purchases. Note 2: Figure 1-14 estimates for March 2012 are advance indicators based on the December FY2011 edition of the Bank of Japan’s “Short-term Economic Survey of Principal Enterprises in Japan (Tankan Survey).”

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-15: Machinery orders (JPY billions)

1,400

1,200 (External demand)

1,000

Total private-sector demand

800 Non-manufacturing industry

600

400

Manufacturing industry

200

0 Nov-07

May-08

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

Nov-11

Source: Compiled by MHCB Industry Research Division based on the Cabinet Office’s “Statistical Survey of Orders Received for Machinery.” Note: Three-month moving averages; private-sector demand does not include figures for the marine and power sectors.

Figure 1-16: Total floor area of building construction starts (Million m 2 ) 7 T otal non-residential 6

Manufacturing industry Non-manufacturing industry

5 4 3 2 1 0 Nov-07

May-08 Nov-08

May-09

Nov-09

May-10 Nov-10

May-11 Nov-11

Source: Compiled by MHCB Industry Research Division based on the Ministry of Land, Infrastructure, Transport and Tourism’s “Statistical Data File on Construction Starts.”

10

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

5. Personal consumption will improve through economic stimulus measures and improvements in the income environment. Currently the income/labor climate is on a recovery trend.

Personal consumption will improve with the backing of government measures.

Since FY2009, employment-related indicators have been on a moderate recovery trend, and the latest unemployment rate stands at 4.5%, with the jobs-to-applicants ratio at 0.69 (see Figure. 1-17). In terms of the income environment, the rate of decline in the real wage index has been diminishing, and the income environment is thought to be gradually improving (see Figure 1-18). Additionally, the Consumer Confidence Index, which measures consumer confidence, has also been on a plateau in response to improvements in the employment environment (see Figure 1-19). As far as the future is concerned, current improvements in the employment and income situations and the incorporation once again of the 300 billion yen eco-car subsidy package in the 4th Supplementary Budget for FY2012 are expected to boost personal consumption. With the exception of automobiles, service expenditures toward hobbies and leisure rather than on durable goods are expected to become the main focus of increased consumption.

Figure 1-17: Employment indicators 1.8 5.5

1.6 1.4

5 1.2 1

4.5

0.8 4

0.6 0.4

Jobs-to-applicants ratio (left axis)

3.5

New job offers (left axis) 0.2

Total unemployment (right axis)

0

Source: Compiled by MHCB Industry Research Division based on the Ministry of Finance’s “Financial Statements Statistics of Corporations by Industry” and the Ministry of Internal Affairs and Communication’s “Labor Force Survey.” Note: 12-month moving averages

3

Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11

Figure 1-18: Income indicators 3.0% 2.0%

Source: Compiled by MHCB Industry Research Division based on the Ministry of Health, Labour and Welfare’s “Monthly Labour Survey” and the Ministry of Internal Affairs and Communication’s “Household Survey.” Note: Three-month moving averages

1.0% 0.0% -1.0% -2.0% -3.0% -4.0%

Real wage index (y-o-y)

-5.0% -6.0% Nov-07

Real growth rate of consumer spending (y-o-y)

May-08

Nov-08

May-09

Nov-09

May-10

Nov-10

May-11

11

Nov-11

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-19: Consumer confidence Index 50 45 40 35 30 Willingness to purchase durable goods Life circumstances

25

Consumer confident index Income growth

20

Employment 15 Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Dec-11

Source: Compiled by MHCB Industry Research Division based on the Cabinet Office’s “Consumer Confidence Survey.” Note: Three-month moving averages

12

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-20: Production & demand trend forecasts (on a half-yearly basis, y-o-y) Sector

Indicator

2001 FY

2002

2003

2004

2005

2006

2007

2008

2009

2010

2012 2011 (Estimate) (Forecast)

1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H Crude steel production

### ### ＋

Chemicals

Ethylene production

### ### ### ＋ ### ＋

Non-ferrous metals

Copper bullion production

### ### ### ### ### ＋ ### ### ### ＋

Paper & pulp

Paper/paperboard production

### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ＋ ### ### ### ### ###

Cement

Cement production

### ### ### ### ### ### ### ### ＋

＋ ### ### ### ### ### ### ### ### ### ### ＋ ### ### ###

Petroleum

Fuel oil production

### ### ### ＋

＋ ### ### ### ＋ ### ### ### ### ### ### ### ### ### ###

Automobiles

Domestic passenger car production

### ### ＋

Shipbuilding

Steel ship production

Manufacturing

Iron & Steel

＋ ### ### ### ### ＋

＋ ### ### ### ＋

＋ ### ### ＋ ### ### ＋

＋ ### ### ### ＋ ### ＋

＋

＋

＋

＋

＋

＋

＋

＋

＋ ### ### ＋

＋

＋ ### ### ### ###

＋ ### ### ### ### ＋ ### ### ### ### ### ＋ ＋ ### ### ### ### ＋

＋ ### ### ### ＋

＋

2012 93 91 102 83 78 83

＋ ###

82

85

＋

＋ ### ### ### ### ###

112

101

＋ ### ### ### ### ＋

＋ ### ### ### ### ###

＋ ### ＋

＋ ### ### ＋

＋ ### ### ＋ ### ### ＋

＋ ### ### ＋

73

70

Domestic production (excluding devices)

### ### ### ### ### ＋

＋ ### ### ＋ ### ### ＋ ### ### ### ### ### ＋ ### ### ### ＋

＋

66

72

Domestic production (devices)

### ### ＋

＋ ### ### ＋

＋

＋

Order value

### ### ### ＋

＋

＋ ### ### ＋ ### ### ### ＋

Food

Food spending

### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ###

Electric power

Power sales

City gas

City gas sales

Marine transportation Tramp cargo traffic

### ### ### ＋ ### ### ＋ ### ### ＋ ### ### ### ＋ ### ### ### ### ＋ ### ### ### ### ＋ ＋ ＋ ＋ ＋ ＋ ＋ 1.6% ＋ ### ### ＋ ＋ ＋ ### ### ### ＋ ＋ ＋ ＋ ＋ ＋ ＋ ＋ 1.4% 1.9% -3.5% 2.3% ＋

Distribution

Truck tonnage

### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ###

81 94 97 96 120 120 86

94 96 97 99 123 123 87

Telecommunications

Cell phone subscribers (including PHS)

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

138

145

Broadband subscribers

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

＋

### ### ### ### ### ＋

＋

＋ ### ### ### ### ### ### ### ### ### ### ### ＋

### ### ### ### ### ＋ -0.4% -2.8% -2.3%

＋ ＋ ### ### ### ### ### ### ### ### ### ### ### ＋ -0.5% -0.7% -2.8% -0.2% -4.3% -10.1% -3.1%

154 101 80 81 88 104

160 103 82 88 98 111

Consumer electronics Domestic production

Industrial electronics General machinery

IT services

Informational service sales growth

Advertising/broadcastinAdvertising market size Department store sales growth

Non-manufacturing

＋ ### ### ### ### ### ### ### ＋

FY2005 ＝100

2011 93 88 94 84 77 86

Retail

Food services

### ### ### ＋

Supermarket sales growth

-5.2%

Convenience store sales growth

-1.7%

Food service expenditure growth per person

Credit card shopping billings Credit cards/consumer Installment billings credit Credit card cashing billings

＋

＋

＋ ### ＋

-1.8%

＋

＋

＋ ### ### ＋

＋

＋

＋

＋

＋

＋ ### ＋ ### ### ### ＋

＋ ### ### ### ＋ ＋

＋

＋

＋ ### ###

-2.1%

-1.0%

-3.2%

-3.5%

-2.6%

-2.7%

-1.4%

-0.7%

-4.3%

-2.6%

-0.8%

-0.8%

-2.1%

-0.7%

-2.2%

-2.4%

-1.0%

＋

-1.8%

-0.8%

＋

### ### ＋ ### ### ### ＋ ### ### ### ### ### ＋

＋ ### ### ### ### ### ### ### ###

＋

＋

＋

＋

＋

＋

＋

＋

-4.9%

-4.6%

-2.7%

-2.8%

-1.5%

-6.0%

-11.4%

-8.3%

-9.6%

1.3%

-5.3%

＋

＋

1.6%

-0.4%

0.9%

-1.5%

0.3%

-7.9%

-16.6%

-17.2%

-41.7%

-21.4%

-1.4%

-7.4%

-7.3%

-5.5%

-1.7%

-1.3%

-1.5%

-7.0%

＋

-17.0%

-3.0%

＋

＋

＋

＋

＋

1.0%

＋ ###

0.1%

97

99

162 66 29 83 67

163 65 28 86 67

Construction

Nominal construction investment

Housing

New housing starts

### ### ### ### ### ＋

New apartment buildings in metropolitan area

### ### ### ### ### ### ＋

＋

53

61

Office vacancy rate (Tokyo 23 wards)

### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ### ###

96

96 94 54 89

Real estate

Hotels

Hotel occupancy rate (nationwide)

Leasing

Lease transactions

Temporary staffing

Temporary staff on employment agency books

1.9%

0.5%

-1.2%

＋ ### ＋

＋

＋

＋

＋ ### ### ### ＋ ### ### ### ＋

＋

＋ ### ＋ ### ### ### ### ### ### ### ### ＋

0.4%

＋ ### ### ### ### ### ＋

＋

1.7%

1.1%

-0.4%

-2.2%

-6.2%

＋ ### ＋

＋

＋ ### ＋ ### ### ### ### ### ### ### ### ＋ ### ＋

＋

＋

＋

＋

＋

＋

＋

-4.8%

2.2%

-4.2%

-3.5%

92 56

-0.2%

108

＋ ### ### ### ### ### ### ###

Source: Compiled by MHCB Industry Research Division. Note:

十

=> +2.5% or more y-o-y,

=> 0% - +2.5% y-o-y,

=> -2.5% - 0% y-o-y,

=> -2.5% or less y-o-y

Figures for municipal gas, marine transport, retail, credit cards/consumer credit, construction, housing, and hotels are annualized. For a breakdown of sector-specific production and demand trends, refer to the sector-specific outlooks given in subsequent chapters.

13

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

II．CORPORATE PERFORMANCE 1. In FY2011, corporate performance witnessed a drastic decrease in profits due to the Great East Japan Earthquake, the floods in Thailand, and the soaring yen.

The effects of the earthquake, the soaring yen, and power generation costs weighed down on earnings.

Despite the early recovery of the systems of production, the manufacturing sector expects huge decreases in both revenue and profit.

The non-manufacturing sector expects increased revenue backed by the strong performances of personal consumption-related sectors.

In FY2011, Japan’s 160 leading companies expect a decline in both revenue and profit, as sales fell by 1.0% year-on-year and operating profit by 29.8% year-on-year. (Even if the electricity sector is eliminated, both revenue and profit decreased, as sales declined by 1.1% and operating profit by 18.0%.) Sales decreased mainly in the assembly and processing sectors due to the effects of the Great East Japan Earthquake and the Thai floods. Operating profits fell to around 55% of peak levels (FY2007) as a result of the soaring yen and increasing fuel costs in the electricity sector. However, the effects of the disasters, as reflected in corporate performance, are expected to run their course in FY2011. Japan’s 66 leading manufacturers expect decreases in both revenue and profit, as sales fell by 1.9% year-on-year and operating profit by 27.9% year-on-year. In the wake of the Great East Japan Earthquake and the floods in Thailand, the automobile and consumer electronics sectors expect a decrease in sales of approximately JPY 5 trillion. Operating profits are also expected to decrease due to the effects of foreign exchange, in addition to deteriorating market conditions, the fall in sales prices, and increased costs in dealing with the disasters. Japan’s leading 94 companies in the non-manufacturing sector expect increased revenue but decreased profit, as sales increased by 0.6% year-on-year while operating profit decreased by 32.0% year-on-year. (If the electricity sector is eliminated, then sales would increase by 0.5% while operating profit would decrease by 2.7%.) Strong performances by the retail, food services, telecommunications, and other personal consumption-related sectors are expected to result in increased revenue. Major decreases in operating profit in the electricity sector due to increased power generation costs and in the maritime industry reflecting deteriorating market conditions are expected to become the main factors for decreased profits.

2. In FY2012, both revenue and profits will increase, but operating profit will not reach FY2010 levels.

Both revenue and profits will increase in reaction to FY2011.

In FY2012, both revenue and profits are expected to increase, as sales will increase by 1.1% year-on-year and operating profit by 26.6% year-on-year. (Sales would increase by 1.1% year-on-year, while operating profit would increase by 17.0% year-on-year, if the electricity sector is eliminated.) Although increases in revenue and profits are predicted in reaction to FY2011, sales and profit levels will not reach the levels of FY2010, and the climate

14

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

surrounding corporate performance will continue to be harsh. Disaster-related factors will run their course, and structural reforms will result in increased revenue and profits in the manufacturing sector.

Electricity and telecommunications in the non-manufacturing sector will dramatically see increased profits.

The 66 leading manufacturers expect increased revenue and profits through a 0.9% increase year-on-year in sales and an 18.0% increase year-on-year in operating profit. In terms of sales, despite the removal of restrictions on production caused by the disasters of FY2011 and the expectations of increased sales for the automobile and consumer electronics sectors, exports will be slow to recover, and consequently, overall sales for the manufacturing sector will remain more or less the same as FY2011. In terms of operating profit, while continuing to be affected by the soaring yen, the increase in sales mentioned above and the removal of cost-increasing factors such as personnel expenses, which were required in the early recovery from the earthquake, will contribute to increased profits. Additionally, in the consumer electronics sector, profits are predicted to increase fourfold year-on-year, as certain companies recorded costs in connection with structural reforms of the television business in FY2011. In the materials sector, while the effects of the disasters are expected to wear off and reconstruction-related demands are anticipated, sales are expected to decrease slightly against the backdrop of the decline in export volume. Operating profits are also expected to increase slightly, assuming similar foreign exchange levels as FY2011, along with efforts to aggressively cut costs. The oil industry, which is a materials sector based on domestic demand, expects decreases in both revenue and profits due to the effects of inventory assessment. In FY2012, the leading 94 companies of the non-manufacturing sector expect increases in both revenue and profits as a result of a 1.5% increase year-on-year in sales and 37.7% increase year-on-year in operating profit. (If the electricity sector is eliminated, then sales would increase by 1.6% year-on-year and operating profit by 15.8% year-on-year.) Assuming that the nuclear power plants will resume operations from around June 2012, the electricity sector, which expects to record a deficit in FY2011, will turn around and report a profit, despite sales remaining nearly the same as the previous year, as a result of massive reductions in power generating costs thanks to stepped up thermal power generation. In the telecommunications sector, which is second to the electricity sector in the size of sales, the spread of smartphones will contribute to raising corporate performance, and increases in both revenue and profits are expected. In the housing and real estate sectors, where sales dropped sharply during the several months immediately following the Great East Japan Earthquake, the backlash to said decrease is expected to appear in FY2012 onward, and thus, increases in both revenue and profits are expected. Meanwhile, in the sectors related to personal consumption, such as supermarkets, convenience stores, and food services, strong sales are expected, in addition to increases in profits reflecting efforts to thoroughly cut costs and close unprofitable stores.

15

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Although disaster-related factors will wear off, Japanese companies will be required to manage the risks related to the effects of the European debt crisis.

In summarizing FY2012, the following three points are expected to become the key factors for increases in revenue and profits: (1) the impact of the Great East Japan Earthquake and the floods in Thailand on corporate performance in FY2011, mainly in the assembly and processing sectors, will wear off in FY2012 (i.e., sales will increase as a result of rebuilding the systems of production, and there will no longer be increased costs such as personnel costs associated with reconstruction); (2) in addition to the major increases in profit planned for the infrastructure businesses such as telecommunications and electricity, the bottom line is expected to improve for the services industry, including retail and food services, backed by strong personal consumption; and (3) selection and concentration will proceed even further, and unprofitable businesses and stores will be re-examined. However, in terms of profit levels, operating profit is expected to remain at around 90% of FY2010 levels, which is approximately 70% of the peak levels reached in FY2007. Although Japanese companies are casting off the effects of the disasters, another element of global uncertainty, i.e., the European financial crisis, has emerged and is becoming more and more manifest. If the effects of the European financial crisis spill over into China and Southeast Asia, Japanese companies—which consider Asia to be at the center of their growth—will not be immune from negative impact. While companies become increasingly global, potential risks such as the vulnerability of supply chains and vulnerability to the repercussions of the financial crisis are also becoming inherent in the countries in which the Japanese companies operate. Consequently, risk management, particularly the ability to deal with risks when they materialize, will become crucial to these Japanese companies. These forecasts were based on the following data: currency conversion rates; first-half FY2011 = 80 yen/1 USD, second-half FY2011 = 77 yen/1 USD, first-half FY2012 = 75 yen/1 USD, second-half FY2012 = 77 yen/1 USD; crude oil prices (WTI); first-half FY2011 = 96.1 USD/bbl, second-half FY2011 = 97.3 USD/bbl, first-half FY2012 = 94.4 USD/bbl, second-half FY2012= 92.9 USD/bbl. However, it should be noted that if the yen rises more than expected due to the European financial crisis or other factors, then export-related companies and others may well see earnings coming under even greater pressure.

16

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-21: Corporate performance distribution (FY2012 forecast)

Operating profit growth rate

Manufacturing

40%

[Consumer electronics: 4%, 289%] [Cement: 3%, 49%]

35%

Automobiles

30% 25%

Manufacturing industry

Sales growth rate

Paper & pulp

20% Industrial electronics

15%

Iron & steel

10%

Non-ferrous metals

5%

Chemicals

Pharmaceuticals

Food

0% -5%

[Pertoleum: -11%, -49%] [Shipbuilding: -10%, -48%]

-10%

-5%

-3%

-1%

1%

3%

5%

Non-manufacturing

7%

[Electric power: 1%, into black]

Operating profit growth rate

25% 20%

[City gas: 1%, 97%] [Hotels: 2%, 62%]

Non-manufacturing industry average

Broadcasting [Tourism: 7%, 59%] [Marine transportation: 4%, into black]

Human resource services

15%

T elecommunications

Food services

Distribution

5% Supermarkets

Convenience stores

0% -5%

Housing Sales growth rate

Real estate

10%

Department stores

Leasing Consumer credit

Construction

-10%

Credit cards

-15%

-10%

-5%

0%

5%

10%

Source: Compiled by MHCB Industry Research Division.

17

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-22: List of Japan’s leading companies Sector Iron & steel Chemicals Pharmaceuticals

Breakdown 4 major integrated steel 7 major diversified chemicals 9 major companies

Non-ferrous metals 5 major companies

Companies Nippon Steel Corporation, JFE Holdings, Sumitomo Metal Industries, Kobe Steel Group Asahi Kasei Corporation, Ube Industries, Showa Denko, Sumitomo Chemical, Tosoh, Mitsui Chemicals, Mitsubishi Chemical Holdings Takeda Pharmaceutical Company, Astellas Pharma, Dainippon Sumitomo Pharma, Shionogi & Co., Mitsubishi Tanabe Pharma Corporation, Chugai Pharmaceutical Company, Eisai, Daiichi Sankyo, Otsuka Holdings JX Holdings (Metal), Mitsubishi Materials Corporation, Sumitomo Metal Mining, Mitsui Mining & Smelting Co., DOWA Holdings Oji Paper Group, Nippon Paper Group, Daio Paper Corporation, Mitsubishi Paper Mills, Hokuetsu Kishu Paper Company

Paper & pulp

5 major companies

Cement

2 leading manufacturers

Taiheiyo Cement, Sumitomo Osaka Cement

Petroleum

5 listed companies

Showa Shell Sekiyu, Cosmo Oil, Tonen General Sekiyu, Idemitsu Kosan, JX Holdings (excl. Metal)

8 finished vehicle Automobiles manufacturers 6 major Shipbuilding manufacturers Consumer 3 major electronics manufacturers 5 major Industrial electronics manufacturers Food

7 major companies

Toyota, Honda, Nissan, Mitsubishi Motors, Mazda, Fuji Heavy Industries, Suzuki, Isuzu Motors Mitsubishi Heavy Industries, Mitsui Engineering & Shipbuilding Co., IHI, Kawasaki Heavy Industries, Sumitomo Heavy Industries, JFE Holdings (Universal Shipbuilding Group) Sony, Panasonic, Sharp Hitachi, Toshiba, NEC, Fujitsu, Mitsubishi Electric Corporation Kirin Holdings, Asahi Breweries, Ajinomoto, Nippon Meat Packers, Maruha Nichiro Holdings, Yamazaki Baking Co., Meiji Holdings

Manufacturing industry subtotal (66 companies) Electric power

Hokkaido Electric Power Co., Tohoku Electric Power Co., Tokyo Electric Power Co., Chubu Electric Power Co., 10 power companies Hokuriku Electric Power Co., Kansai Electric Power Co., Chugoku Electric Power Co., Shikoku Electric Power Co., Kyushu Electric Power Co., Okinawa Electric Power Co.

Municipal gas

3 major companies

Tokyo Gas, Osaka Gas, Toho Gas

Marine transport

3 major companies

NYK Line, Mitsui O.S.K. Lines, Kawasaki Kisen Kaisha

Distribution

5 major companies

Nippon Express, Yamato Holdings, Seino Holdings, Hitachi Transport System, Fukuyama Transporting Co.

Telecommunication4 major companies Broadcasting

Retail

Food service Credit cards, consumer credit

4 major commercial broadcasters 4 major department store houses

NTT, KDDI, SoftBank Mobile Corporation, SoftBank Telecom Corporation Nippon Television Network Corporation, Tokyo Broadcasting System Television, Fuji Media Holdings, TV Asahi Mitsukoshi Isetan Holdings, J.Front Retailing, Takashimaya, H2O Retailing

4 major supermarket Seven & I Holdings, Aeon, Daiei UNY chains 4 major convenience 7-Eleven, Lawson, Family Mart, CircleK Sunkus store chains McDonald's Holdings Japan, Zensho Co., Yoshinoya Holdings, Royal Holdings, Seven & I Food Systems, Saizeriya 8 major companies Co., Watami, Colowide Co. 4 major credit card Mitsubishi UFJ NICOS, JCB, Sumitomo Mitsui Card Company, Credit Saison companies 4 major consumer credit companies

Orient Corporation, Cedyna Financial Corporation, JACCS, APLUS

Construction

4 major general constructors

Kajima Corporation, Shimizu Corporation, Obayashi Corporation, Taisei Corporation

Housing

5 major companies

Sekisui House, Daiwa House Industry, Sekisui Chemical Co., Sumitomo Forestry Co., Asahi Kasei

Real estate

5 major companies

Mitsui Fudosan, Mitsubishi Estate Co., Sumitomo Realty & Development Co., Tokyu Land Corporation, Tokyo Tatemono

Hotels

4 major companies

Imperial Hotel, Royal Hotel, Fujita Kanko, Kyoto Hotel

Tourism

4 major companies

Temp staffing

8 major companies

Leasing

7 major companies

JTB, Kinki Nippon Tourist, Nippon Travel Agency, H.I.S. Temp Holdings, Pasona Group, Meitec Corporation, Human Holdings Co., World Intec, Outsourcing, Altech Corporation, WDB Fuyo General Lease, IBJ Leasing Company, Century Tokyo Leasing Company, Ricoh Leasing Company, Hitachi Capital Corporation, Mitsubishi UFJ Lease & Finance Company, NEC Capital Solutions

Non-manufacturing industry subtotal (94 companies) Total (160 companies)

Source: Compiled by MHCB Industry Research Division.

18

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-23: Company cash flow forecasts (on a consolidated operating profit basis) Sector

Breakdown 4 major integrated steel 7 major diversified chemicals

(Unit: JPY billions) FY2012 forecast Sales Operating profit

FY2011 estimate Sales Operating profit

0.8%

10,650.0

-50.9%

260.0

-1.2%

10,520.0

23.1%

320.0

2.6%

10,501.0

-4.1%

570.0

-2.5%

10,240.0

-3.9%

548.0

9 major companies

-0.3%

6,627.5

-10.8%

945.4

2.3%

6,783.2

3.1%

974.8

Non-ferrous metals 5 major companies

1.9%

4,039.8

-11.5%

201.0

-2.6%

3,934.7

5.1%

211.2

Paper & pulp

5 major companies

0.3%

3,125.9

6.2%

134.3

1.6%

3,175.1

27.6%

171.3

Cement

2 leading manufacturers

1.3%

940.0

54.8%

37.0

2.7%

965.0

48.6%

55.0

Petroleum

5 listed companies

11.5%

22,161.9

20.1%

740.7

-10.9%

19,736.9

-48.9%

378.6

-7.4%

43,009.0

-47.8%

1,002.4

6.3%

45,725.7

36.4%

1,367.0

-4.4%

1,143.2

-48.9%

29.7

-10.2%

1,026.2

-48.5%

15.3

-10.3%

16,950.0

-110.3%

-60.0

4.4%

17,700.0

-

485.0

-0.4%

26,890.0

-11.6%

980.0

2.5%

27,550.0

24.5%

1,220.0

-1.2%

8,670.4

-6.5%

410.9

0.3%

8,696.1

9.4%

449.4

-1.9% 154,708.6

-27.9%

5,251.3

0.9%

156,052.9

18.0%

6,195.6

Iron & steel Chemicals Pharmaceuticals

8 finished vehicle manufacturers 6 major Shipbuilding manufacturers Consumer 3 major electronics manufacturers 5 major Industrial electronics manufacturers Automobiles

Food

7 major companies

Manufacturing industry subtotal (66 companies) Electric power

10 power companies

0.7%

16,683.4

-140.9%

-522.1

1.1%

16,867.3

-

290.3

Municipal gas

3 major companies

9.7%

2,920.3

-31.8%

120.1

0.6%

2,938.2

96.7%

236.1

Marine transport

3 major companies

-11.2%

3,957.0

-116.8%

-51.2

4.2%

4,122.0

-

42.5

Distribution

5 major companies

5.2%

4,183.4

11.5%

153.1

3.4%

4,325.0

8.6%

166.2

Telecommunication4 major companies

1.2%

16,280.2

3.0%

2,197.1

2.4%

16,675.2

18.2%

2,596.1

0.1%

1,466.5

5.8%

80.0

2.4%

1,501.5

19.9%

95.9

0.1%

3,507.4

7.9%

64.8

0.5%

3,525.0

1.1%

65.5

-4.1%

11,740.6

13.4%

514.7

-1.3%

11,593.5

0.3%

516.3

8.0%

7,476.6

6.0%

298.3

1.8%

7,612.7

1.3%

302.1

8 major companies

-1.0%

1,367.7

5.9%

82.0

1.6%

1,389.7

7.7%

88.3

4 major credit card companies

-7.7%

870.0

7900.0%

120.0

-2.3%

850.0

-8.3%

110.0

4 major consumer credit companies

-11.4%

540.0

19.3%

21.0

-7.4%

500.0

-9.5%

19.0

Broadcasting

Retail

Food service

Credit cards, consumer credit

4 major commercial broadcasters 4 major department store 4 major supermarket chains 4 major convenience store chains

Construction

4 major general constructors

8.5%

5,400.0

21.8%

118.0

1.9%

5,500.0

-8.5%

108.0

Housing

5 major companies

1.8%

3,796.8

14.3%

230.9

5.6%

4,010.5

14.1%

263.5

Real estate

5 major companies

-2.6%

3,808.0

-12.4%

441.0

2.4%

3,898.0

13.8%

502.0

Hotels

4 major companies

-3.8%

167.1

-57.6%

2.1

1.5%

169.6

62.5%

3.4

Tourism

4 major companies

-6.2%

403.8

-40.5%

9.9

7.0%

432.0

51.4%

15.1

Human resource services

8 major companies

4.6%

640.4

21.3%

18.8

1.3%

648.7

11.2%

20.9

Leasing

7 major companies

-2.7%

2,580.7

6.3%

187.2

-2.3%

2,521.1

-1.2%

184.9

0.6%

87,789.9

-32.0%

4,085.7

1.5%

89,080.0

37.7%

5,626.1

-1.0% 242,498.5

-29.8%

9,337.0

1.1% 245,132.9

26.6%

11,821.7

Non-manufacturing industry subtotal (94 companies) Total (160 companies)

Source: Compiled by MHCB Industry Research Division. Note 1: These cash flow forecasts are based on the following yen/dollar exchange rates: 75 yen for the first half of FY2012; 77 yen for the second half of FY2012. Note 2: Convenience-store sales are chain-wide; operating profits are stand-alone figures.

19

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

III．TOPICS: Raising productivity will support the growth of Japanese industries. Raising productivity holds the key to economic growth.

Japan’s real GDP in 2010 was approximately 510 trillion yen, which represented a roughly 3% decrease compared to the pre-Lehman crisis levels of 2007. According to the concept of growth accounting, economic growth may be divided into: (1) people (the input of labor), (2) goods (the input of capital), and (3) productivity (TFP1). In other words, in order to increase GDP, it is necessary to increase all three elements or any one of these elements. If we were to separate Japan’s GDP growth rate since 1970 into these three elements, it would become evident that: (1) in conjunction with the leveling off of the labor force growth rate and the prevalence of shorter working hours, the contribution by labor input has declined drastically; and (2) contribution by capital input is also diminishing against the backdrop of the pressure for stock adjustment, which has remained since the bursting of the economic bubble, along with the shifting of production centers overseas. Looking at the future trends in Japanese demographics, population decline and the further aging of the population are inevitable, and under such circumstances, increasing labor input would be an extremely difficult proposition. In terms of capital, an increasing number of Japanese companies are considering expanding their overseas businesses or moving their businesses overseas. Under such circumstances, it is not realistic to anticipate dramatic increases in domestic capital investment and capital input. Meanwhile, in terms of TFP, a comparison of the manufacturing sector with the non-manufacturing sector since the 1990s indicates that contribution by the non-manufacturing sector has become extremely small (see Figure 1-24). Additionally, when Japan’s TFP is compared to that of the major industrialized countries of U.S. and Germany, it has been lower than the TFPs of the two countries since the 1990s (see Figure 1-25). Considering these factors, perhaps it is not too far-fetched to consider that if we were to raise the TFP—especially the TFP of the non-manufacturing sector—then maybe it would become a major element in the revitalization of the Japanese economy. Therefore, we have decided to discuss the topic of TFP in this overview.

1

Total Factor Productivity: In growth accounting, TFP is the portion of GDP growth not explained by the input of capital and labor injection, and is calculated as the residual error of the two elements.

20

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-24: Contribution trends of GDP components 6.0% Contribution of TFP (Non-manufacturing)

5.0%

Contribution of TFP (Manufacturing) Contribution of increased capital input

4.0%

TFP (Non-manufacturing)

3.0%

Contribution of increased labour input

TFP (Manufacturing)

GDP growth rate

2.0% Capital 1.0% Labour 0.0%

(cy)

-1.0% 1970- 1975

1975- 1980

1980- 1985

1985- 1990

1990- 1995

1995- 2000

2000- 2005

2005- 2008

Source: Compiled by MHCB Industrial Research Division based on the Research Institute of Economy, Trade and Industry’s “JIP Database 2011.” Figure 1-25: Contribution trends of GDPs

110 Japan

108

US

106

Germany

104 102 100

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

96

1991

98

(cy)

Source: Compiled by MHCB Industrial Research Division based on EUKLEMS Note: 1995 = 100

IT investments and strategic M&As, which have correlations to the TFP growth rate, hold the key.

Needless to say, in order to raise productivity, companies will be required to make innovations on a micro-economic basis. Additionally, the optimum allocation of management resources through the appropriate transfer of labor and capital between companies and between industries is also indispensable. Particularly under current circumstances, where the manufacturing sector is relocating en masse, i.e., under the ever-increasing risk of the hollowing-out of the industry, the perspective of finding ways to utilize production elements that have become redundant in the manufacturing industry in other industries (including new industries) has become fundamental. M&As (cross-border) that utilize that benefits of the strong yen are expected to contribute to the smooth transfer of production elements. Moreover, the promotion of

21

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

technological innovation will also become crucial for raising productivity. In the U.S., the contribution of IT investments toward technological innovation is a well-known fact. In fact, a moderate correlation between TFP and IT investments can be seen (see Figure 1-26), and we will need to call attention to the importance of technological innovation based on the expansion of IT investments or the utilization of IT facilities. Furthermore, from the standpoint of policy support, the promotion of further deregulation will be required. When we examine the relationship between TFP and deregulation based on the regulation indices compiled by the Cabinet Office, we will be able to observe a moderate correlation between the two (see Figure 1-27). The enhancement of the competitive environment through deregulation is thought to not only create new industries but also lead to technological innovation associated with the improvement of the internal efficiency of companies and the changes in the input structure of production elements. We observed the TFP growth rate, the “market growth rate,” and the “market size” of major non-manufacturing sectors (see Figure 1-28). As is clear from glancing at the graph, there is an uneven distribution of the TFP growth rate even in the non-manufacturing industry. However, it is believed that the enhancement of the productivity of sectors that carry weight in the non-manufacturing industry (i.e., with a large “market size”) and of the sectors that are likely to expand market size in the future (i.e., with a high “market growth rate”) will become imperative for raising the TFP of the non-manufacturing industry as a whole. For example, “wholesale” and “transport” are typical sectors with a large “market size” and with low TFP growth rates; while “medical/welfare” is typical of sectors with high “market growth rates” and high expectations for market expansion but with low TFP growth rates. We believe that these are the sectors that require further the utilization of M&As, IT investments, and policy support through deregulation. IT investments and regulatory reforms are necessary for Japan’s economic growth.

Currently, Japan’s manufacturing industry, which had previously supported Japan’s economic growth, is facing a multitude of problems, including the dwindling of the labor force as a result of the aging of the population and low birthrate, and the hollowing-out of the industry through the relocation of production centers overseas; and the country is thus in danger of having its growth base undermined because of these problems. Under such circumstances, for the Japanese economy to get back on a powerful trajectory of growth, raising the productivity, particularly of the non-manufacturing industry, is indispensable. Further, in order to do so, micro-economic efforts by the companies, including strategic M&As and the expansion of IT investments, as well as the enhancement of the competitive environment through deregulation, is strongly called for.

22

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

0.06

Figure 1-27: Correlation between the TFP growth rate and the regulation index

Figure 1-26: Correlation between the TFP growth rate and IT investments growth rate TFP growth rate

2.0%

0.05

T FP growth rate Wholesale

1.5%

0.04 1.0%

0.03

0.5%

0.02

Air transport business

Wholesale

0.0%

Road transport business

Change in regulation index

0.01

Retail

0

-0.5% Road transport business

-0.01

-1.0%

-0.02 Retail

-0.03 -0.04

Medical Air transport business

-1.5%

0

0.1

0.2

Deregulation ←→Regulation

-2.0%

IT investments growth rate

-0.1

Medical

-1.0

0.3

Source: Compiled by MHCB Industrial Research Division based on the Research Institute of Economy, Trade and Industry’s “JIP Database 2011.” Note: The TFP growth rate is the average growth rate from 1995 to 2005.

-0.5

0.0

0.5

Source: Compiled by MHCB Industrial Research Division based on the Research Institute of Economy, Trade and Industry’s “JIP Database 2011” and the Cabinet Office’s “Structural Reform Evaluation Report 6.” Note: The TFP growth rate is the average growth rate from 1995 to 2005. The regulation index indicates changes from 1995 to 2005. TFP growth rate

1.5%

Telecommunications business

Figure 1-28: TFP growth rate and market growth rate (non-manufacturing)

Real estate business 1.0%

Electricity

Accommodation business

Market growth rate

Wholesale/retail business

0.5%

T ransport business

0.0%

Medical/welfare business

-0.5% -2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Source: Compiled by MHCB Industrial Research Division based on the Research Institute of Economy, Trade and Industry’s “JIP Database 2011” and the Ministry of Economy, Trade and Industry’s “Indices of Tertiary Industry Activity.” Note 1: Size of the bubble = weight of the index of tertiary industry activity. Note 2: The growth rate is the average growth rate from 1991 to 2005.

23

Mizuho Corporate Bank, Industry Research Division

4.0%

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Figure 1-29: Industry-specific Production & Demand Trends and Topics

24

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

25

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

26

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

27

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

28

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

29

Mizuho Corporate Bank, Industry Research Division

FY2012 Japan Industry Outlook (Comprehensive Industry Overview)

Source: Compiled by MHCB Industry Research Division Note: + 2.5% or more month to month, -2.5% or less month to month

□: 0% - +2.5% month to month, ▩: -2.5% - 0% month to month, ■:

The office vacancy rates for Tokyo's 23 wards do not indicate volatility but provide a mosaic in which the difference from previous-year figures is given as reverse sign values. A rise in vacancy rates is taken to indicate worsening industry conditions. Tomoki Nakamura [email protected] Planning & Administration Team Industry Research Division Mizuho Corporate Bank, Ltd.

30

Mizuho Corporate Bank, Industry Research Division