Abe shakes up business torpor to invest at home Shinichi Okada suddenly feels brighter about the state of the world. The big fall in the yen since the end of last year has made JFE Holdings, Japan's second largest steelmaker, a more formidable challenger to the likes of Posco of Korea and China's Baosteel, says the board member in charge of planning and finance. The decision by Shinzo Abe, Japan's prime minister, to join discussions on the Trans-Pacific Partnership, a free-trade bloc, is good news, too. But that doesn't mean that JFE is about to tear up its investment plans. The world's third-largest economy still suffers from high taxes - a 36 per cent effective average tax rate, the highest among big countries - tight labour and environmental laws and curbs on energy consumption. That's four of the roku juku, or "six woes," that big businesses have long complained about, says Mr Okada. So if customers such as carmakers head to Thailand or Indonesia to open new plants, JFE will have few qualms in going with them. In our last medium-term plan, our capital expenditure budget was 75 per cent Japan, 25 per cent overseas. From now on, we'll do 50/50," he says, adding that the money spent at home will be on replacing old equipment in the two major steelworks, rather than expanding capacity. Companies" reluctance to plough funds into new plant is a problem for Mr Abe. Part of the prime minister's plan to shake Japan out of its torpor is to lift domestic private-sector capex by 10 per cent to Y70tn a year by 2016, thus feeding a virtuous cycle of demand. "We will lower taxes on investments, incentivising companies to take risks and invest in facilities and equipment," Mr Abe said during a recent speech in London. After six months in office, the prime minister has seen some success. Stocks have completed their best three-quarter rally in more than 40 years, while economic growth of a little more than 1 per cent between January and March was among the strongest of developed countries. But capex has not kept up. Private-sector investment fell by a price-adjusted 2.6 per cent, the fifth quarterly fall in a row. Monday's survey of business sentiment from the Bank of Japan offered some encouragement. While non-manufacturers said they plan to spend slightly less in the fiscal year that began in April, manufacturers revised their capex projections to a rise of 6.4 per cent, from a drop of 1.2 per cent in the previous survey. The BoJ does not ask, however, where the cash will be invested. The fact that companies expect supply and demand conditions to remain tighter overseas, suggests that a good chunk will find its way there. Some say more money could be spent in Japan if Mr Abe's Liberal Democratic party follows through on the dozens of measures outlined in the "third arrow" of his reforms, following fiscal and monetary stimulus. "Mr Abe needs to convert a growth strategy into a growth policy," says Yoshimasa Maruyama, chief economist at the Itochu Economic Research Institute. But for Toshihiro Uchiyama, a board member in charge of strategy at NSK Corp, the prime minister's reform efforts do not go far enough. One of the main reasons why the manufacturer of bearings wants to lift its share of overseas production to 50 per cent by 2016, from about 40 per cent now, is the lack of flexibility in the labour market back home. "In order to make a major restructuring, we'd have to go through very painful procedures," says Mr Uchiyama, whose company supplies automakers and manufacturers of complex machinery such as wind turbines and high-speed trains. Even these days, when our profit is supported by our overseas operations, we'd find it hard to justify reduction [in] our domestic workforce to the union. They'd resist very strongly. One company stepping up domestic operations is Kao Corp, the consumer products group, which said last month it would spend Y5bn developing a new nappy factory on the northwestern coast. Yet this is Kao's first new site in Japan since 2001, built to meet strong demand in China and Russia, which was causing bottlenecks back home. Most of the company's Y45bn of investment last year went into building new plants in China and Indonesia, and expanding a chemicals plant in the Philippines. When looking to build new facilities, you generally go where the growth is, says Ken Hashimoto, head of finance, information systems and procurement. We all want the situation to improve [in Japan], but if you look at the state of day-to-day business, it is hard to act differently.