Is the sun set to rise again for Kiwi exports?

Back in Japan's glory days 20 or 30 years ago, an economic growth rate of 7.9 per cent would have seemed rather dull, barely justifying a mention.

But Thursday's news was electrifying: it had grown that fast - at an annual rate - in the first three months of this year. Was Japan, sidelined for so long by serious structural problems, suddenly striding down the road to recovery?

After the surprise, comes the scepticism. No, was the resounding answer of economists and exporters. At best, it might be showing the first glimmers of hope as its restructuring begins.

Massive Government spending has once again stimulated demand, giving a quick fillip to growth. But that was likely to fade in the months ahead while the Japanese tackled massive problems: a financial sector sunk by bad debts, industry by extreme over-capacity and consumer confidence by looming redundancies.

Nonetheless, Deutsche Bank New Zealand's chief economist Ulf Schoefisch sees it as a turning point, reinforcing the trend to revise upward Asian growth forecasts.

"We had already upgraded our forecasts for Japan in the 1999 year (from minus 1.2 to minus 0.3 per cent). Already with this number, it looks quite a bit stronger."

The weak upturn is reflected in our exports to Japan, our third largest market. In the first four months of this year, they have risen, but the average sales of $234 million a month is still lower than last year's average of $246 million. In the year to April, our exports were $2.88 billion, down 6.7 per cent from the previous year.

"Japan at the moment is the biggest brake on New Zealand's trade," Eugene Bowen, Trade New Zealand's senior trade commissioner for North Asia, said yesterday from Tokyo. " A drop of about $200 million is equal to our total trade with some Asian nations."

He sees a long road to recovery. "Demand is unlikely to recover in the next one of two years, because it is only in 1999 that Japanese companies are coming to terms with the need to restructure. We are seeing some good, positive restructuring announcements by companies but that process is going to take two to five years."

During the restructuring period, unemployment may go to double figures. "The issue is whether the Japanese government has the stomach to watch that happen or resort to the old interventionist methods. The rise in unemployment is necessary as people move from large industry to small.

"For demand, that means until people see a future they won't unzip their wallets. Their savings ratio is rising steadily because people know they might be restructured, and problems with pension funds will become apparent in 2001 with new accounting standards. 2001 will be the most painful year.

"All the top 10 import items are struggling, particularly wood products because of the fall back in the construction sector."

Aluminium, our biggest export, is still running behind last year's levels, at about $34 million a month in the first four months of this year, against an average of $39 million a year earlier. But there are signs that demand is bottoming out, says Kerry McDonald, managing director of Comalco NZ, and he hopes it will soon begin a steady recovery.

"We have continued to supply some major customers in Japan, but volume is down, as are prices," he says. "New Zealand is still a major supplier of metal to Japan, although the US market is stronger, and our trade is reduced, but reasonable, to other Asian countries."

The chief executive of the New Zealand Forest Industries Council, James Griffiths, says there has been no discernible pick-up in the major exports of forestry items such as logs or chips, but signs are encouraging in sectors such as MDF (medium-density fibre boards) and plywood. The March quarter saw a 50 per cent export rise in MDF and a 200 per cent rise in plywood to Japan.

Overall, forestry exports to Japan for the calendar year ended December 1998 dipped 15.2 per cent from the year before to $581 million - the third straight year of decline.

"Any recovery in Japan has got to be good for the industry which supports such a huge range of our products. But it would not be surprising that the recovery in Japan might be still fragile. We are not hearing that people are getting excited about Japan."

He said other markets such as Australia, Hong Kong, China, Taiwan, Thailand and Malaysia were showing more signs that things were picking up. The most encouraging news for many New Zealand companies is that consumer spending in Japan rose 1.2 per cent from the previous quarter.

Again, though, scepticism abounds about its durability. Peter Perkins, regional strategist for Japanese brokerage Daiwa Institute of Research, said the threat of high unemployment would keep the lid on spending.

That matters here in New Zealand to producers of consumer goods and to the tourism industry. Between 1992 and 1996, there was huge growth in the number of Japanese visitors travelling to New Zealand, leading to Japan becoming our second biggest market behind Australia. However, it has now fallen into third place behind the United Kingdom.

Over the past two months the trend has slowed, although the Tourism Board is not yet breathing a sigh of relief. It is estimated that last year, the average amount each Japanese visitor to New Zealand spent was $3594, or around $217 a day. Only the Americans spend more per day, and they don't tend to stay as long.

In the year ending June 1998, Japanese tourists are estimated to have poured $558 million into our economy. The Tourism Board's manager of marketing and operations, Tim Hunter, notes the Japan Travel Bureau, which is the largest seller of travel services in Japan, is predicting slightly more Japanese will travel overseas this year than last. "But it's a difficult call," says Hunter. "We just don't know how deep some of their financial problems are."

One company that has already noticed an increase in spending is Christchurch-based clothing manufacturer Snowy Peak. Chief executive Peri Drysdale admits she was surprised when retailers told her they had noticed a recent lift in spending. The company is also heavily reliant on the Japanese market for sales, and her contacts in Japan were also surprised by the good economic news.

"On the surface, they don't feel there's any sign of improvement. But the general feeling is fundamentally that they have reached the bottom and they're facing up rather than down." Drysdale strongly believes that niche companies like her own should be able to thrive in markets like Japan.

"Having said that, the Japanese are extremely security conscious and that good news I imagine will loosen their wallets in terms of general spending, so anyone who is already in the market and in a fairly saturated position would see an upturn," she says.

Alastair Macfarlane, general manager of trade and information for the Seafood Industry Council, is similarly sceptical. The Japanese economy has been depressed for so long, it seems as though "they stopped having fun sometime in about 1994," he jokes. Ten years ago, 40 per cent of all our seafood was exported to Japan. Now it is more like 20 per cent.

Particularly noticeable has been Japan's waning appetite for one of our premium products, live chilled rock lobster. As the economy has worsened, Japanese consumers have been buying smaller and smaller lobsters. It has got to the point where New Zealand may no longer be able to meet orders, because our lobsters are too large, he says.

In the areas of future demand, there are huge opportunities coming out of restructuring for services, particularly computer-based, says Mr Bowen, the senior New Zealand trade commissioner in north Asia.

"For instance, the scope for electronic commerce to take off is huge. As companies restructure, they'll need to get on to better electronically-based systems.

"It's a huge opportunity for companies wanting to set up here because the entry costs will never be lower - the cost of real estate, setting up an office, the obstacles, the opportunity to buy existing assets."

But very few NZ companies are taking the opportunity. "Essentially we are staying with traditional trade, which is to put the product on board [a ship] and let others take it over. The exception is dairy foods, meat and kiwifruit. They made the investment in establishing here, and are getting the benefit."

Trade for all those products remains weak, but the exporters are still nurturing their Japanese presence for when the recovery begins in earnest.

* Reporting team: Dita De Boni, Brian Fallow, Yoke Har Lee, Karyn Scherer and Philippa Stevenson.