SNS: Asia Letter: Q1 2023
A NEW ERA IN SEMICONDUCTORS
By Scott Foster
Introduction: Reiwa 4, COVID 3
As the year Reiwa 4 on the Japanese calendar draws to a close, the final months of the third year of COVID have brought a relaxation of restrictions and a general loss of interest in daily infection statistics in Japan. Tourists are once again being allowed to visit, and entry procedures facilitated by QR codes, vaccine apps, and facial recognition have become faster and easier than they were before the pandemic. Most people still wear masks, but they often pull them down on the street. Restaurants are crowded.
As techies, we note that QR codes were invented in Japan; almost everyone in Japan has received at least three vaccines, nearly all of them from Pfizer and Moderna; and the world's leading facial-recognition technology, from NEC, can confirm your identity even if you are wearing a mask.
But restaurants and bars have changed. Many of the old, poorly ventilated, elbow-to-elbow places are gone, replaced by new, spacious, and airy places. Underground dives have given way to bright, new wine bars. About half of the old back-alley feeding and watering holes and retail shops of trendy Shimokitazawa have been replaced, some on entirely new streets, including a long strip of shops and small parks where the railway was put below ground. Shimokitazawa station has been converted from an old, dark maze to a bright, new maze with restaurants on elevated walkways. Trouble Peach, an old vinyl rock'n'roll bar from the '70s, much worse for wear, is still standing.
Harajuku Station, at the top of a favorite local and tourist destination, has also been rebuilt, and the new Shibuya Station (now a bright, new, world-class maze) and buildings around it are so much bigger as to be unrecognizable to someone who hasn't been there for a while. "What's that!?" asked my friend Robert when we were half a kilometer away. Japanese real-estate developers and construction companies have been very busy for the past three years.
Will that come to an end now that interest rates have finally started to rise? Maybe. But with Bank of Japan governor Kuroda holding the line, rates haven't risen by much so far. The economic statistics are terrible, putting the country between a rock of high government debt and a hard place of stagflation. We will probably have to wait until Kuroda's successor takes office next April for monetary policy to change.
Gasoline prices, which are now lower here than they are in California, haven't risen by too much. Japan, South Korea, and Taiwan have all reportedly increased imports of Russian oil. Prime Minister Kishida and NHK, the government-controlled TV station, have strongly criticized the invasion of Ukraine, but after ExxonMobil withdrew from the Sakhalin 1 oil and gas project, the Japanese transferred their ownership stakes to the new corporate entity set up to manage it. The Japanese draw the line at shutting down their own factories and freezing this winter to spite Russia.
Japan put sanctions on semiconductor exports to Russia, and a great deal of Japanese corporate activity there was either shut down or put on hold but the fishing agreement covering the Sea of Okhotsk was renewed, and exports of used Japanese cars to Russia have more than tripled. The yen has dropped by 27% against the ruble over the past three years, making those cars very cheap.
The yen has dropped by almost as much against the US dollar, so outbound tourism has become very expensive, but manufacturing in Japan is once again an attractive proposition (see "Brutally Competitive Japan" in the last SNS Asia Letter). This is deliberate policy, not an accidental side effect of quantitative easing. As Japanese corporations diversify away from China, their top destinations are Japan, Southeast Asia, and India. Thanks to the Fed, they have also gained a large advantage in trade with the US.
Japan is compartmentalizing, not decoupling from, China. Most Japanese companies now produce in China for sale in China and outside China for sale everywhere else. This policy is not new; it originated about a decade ago. Investments in the Chinese electric-vehicle industry, for example, continue to grow. Japan is reluctant to sanction China, but Tokyo Electron said it would not take advantage of sanctions to grab market share away from Applied Materials and Lam Research.
Political relations between Japan and China are strained but civil. Xi Jinping's official visit to Japan, planned since 2020 but postponed by COVID, may take place next year. According to the Japan Times, China's ambassador to Japan said the visit would be "invaluable" for bilateral relations, so the pressure is on. Xi met with Prime Minister Kishida at the APEC summit in Bangkok in November, but a state visit, including a meeting with the emperor, would be of vastly greater significance.
Kishida, however, has become enmeshed in a scandal over the relationship between numerous members of his ruling Liberal Democratic Party (LDP) and the Unification Church ("Moonies"). As you may have read, the scandal erupted after it was revealed that former Prime Minister Abe's assassin was trying to get even with the church for fleecing his mother. Abe inherited and maintained relations with the church from his father, Shintaro Abe; and his grandfather, Prime Minister Kishi. Between this, his support for the unpopular idea of a rare state funeral for Abe, and the decline of real incomes due to inflation, voter support for Kishida has dropped to Trumpian levels. The people are plenty annoyed. If a general election were held today, the LDP might lose its majority.
With the Taiwan issue on the boil and the North Koreans firing more missiles in the direction of Japan, Kishida and his government want to double the defense budget. How they might pay for that is another prominent topic. Whatever happens and the Japanese say that one step ahead in politics is total darkness next year will be interesting.