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Japan Market Brief March–April 2007

Japan Market Brief March–April 2007. John E. Peters Minister Counselor for Commercial Affairs U.S. Embassy, Tokyo. What’s Different ? . Performance Then Now Net Margins 0.2% (FY01) 4 . 8% (FY06e) Free Cashflow Y8.2trn (FY01) Y25 . 1trn (FY06e)

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Japan Market Brief March–April 2007

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  1. Japan Market Brief March–April 2007 John E. Peters Minister Counselor for Commercial Affairs U.S. Embassy, Tokyo

  2. What’s Different? PerformanceThenNow Net Margins0.2% (FY01) 4.8% (FY06e) Free CashflowY8.2trn (FY01)Y25.1trn (FY06e) Non-Performing LoansY86trn (FY01)Y4.2trn (FY06e) Valuations Price to Earnings68 times(1990s avg) 17 times (FY06e) Price to Cashflow15 times(1990s avg) 5.4 times (FY06e) Price to Book2 times(1990s avg)1.4 times (FY06e) Ownership Crossholdings Ratio51% (FY90) 20% (FY06e) M&A Cases 470 (per year, 1990s)1,700 (2002-2006 avg.) Courtesy of: Jesper Koll – Merrill Lynch Japan Securities U.S. Commercial Service - Japan

  3. Domestic Structural Up-Cycle:Capital Investment Capital Stock Vintage in Years – All Sectors Source: Cabinet Office ; Merrill Lynch Courtesy of: Jesper Koll – Merrill Lynch Japan Securities U.S. Commercial Service - Japan

  4. No Lost Decade Here Relentless Focus on Research & Development Spending (total R&D spending by public and private sector as % of GDP) Japan US Germany France Source: National Institute of Population and Social Security Research Source: NIPSSR Courtesy of: Jesper Koll – Merrill Lynch Japan Securities U.S. Commercial Service - Japan

  5. Japan: Highest Patent Filings by National/Regional Offices *These statistics are based on information provided by national and regional patent offices. Source: World Intellectual Property Organization U.S. Commercial Service - Japan

  6. International Patent Filings Source: World Intellectual Property Organization U.S. Commercial Service - Japan

  7. Yes, A Trade Surplus with China Japan Trade Balance With China (Peoples’ Republic + Hong Kong) Source: Cabinet Office Courtesy of: Jesper Koll – Merrill Lynch Japan Securities U.S. Commercial Service - Japan

  8. Japan is Back on Global Scene Strong Balance Sheets and Profits Trigger A New Global Investment Cycle: Outward M&A Accelerating Sharply Source: Thomson Financial, Merrill Lynch Courtesy of: Jesper Koll – Merrill Lynch Japan Securities U.S. Commercial Service - Japan

  9. Toyota Expects to Build Plants Toyota Motor Corp. is studying its projected 10-year growth in the U.S. to build plants. “All I know is compared to today it will be more,” said Jim Lentz, Executive Vice President of Toyota’s U.S. sales arms. Toyota could build as many as five new North American assembly plants in the next 10 years. • Toyota’s U.S. Sales • 12.5% increase to $2.54 million • 5.5% increase to $2.68 million (projected) • New Tundra and Hybrids will drive the growth Source: Detroit Free Press, January 17, 2007 U.S. Commercial Service - Japan

  10. One of the Largest ODA Contributors • Ranked as the world’s top ODA provider from 1991 ~ 2000 (net disbursement basis) • Assisted 185 countries and regions • Total amount disbursed until 2003: US$221 billion Source: Ministry of Foreign Affairs, Japan U.S. Commercial Service - Japan

  11. Cool Nippon Do You Think This Country’s Products Are “Cool”? Response By Consumers In Different Cities Source: Nikkei Note: China=Beijin, Shanghai, Guangzhou Courtesy of: Jesper Koll – Merrill Lynch Japan Securities U.S. Commercial Service - Japan

  12. Declining Population Population: 2006: 127.7 million (2006) 2030: 117.6 million (2030) Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, Japan Ministry of Health, Labor and Welfare, Japan U.S. Commercial Service - Japan

  13. The Most Aged Society 65 yrs old and over 2005 26.82 million (21%) 2040 35.0 million (35%) Total Population 2005: 126 million 2040: 100 million Source: Japan Aging Research Center U.S. Commercial Service - Japan

  14. Consumer Confidence Index(excluding one-person households, original series) Source: Economic and Social Research Institute, Cabinet Office, Japan U.S. Commercial Service - Japan

  15. U.S. Top Trading Partners CY2006 Exports (Goods) CY006 Imports (Goods) Total U.S. Imports: $1,855.4 billion U.S. Imports from: Canada: $303.4 billion (16.4%) China: $287.8 billion (15.5%) Mexico: $198.3 billion (10.7%) Japan: $148.1 billion (8.0%) Germany: $89.1 billion (4.8%) Total U.S. Exports: $1,037.3 billion U.S. Exports to: Canada: $230.6 billion (22.2%) Mexico: $134.2 billion (12.9%) Japan: $59.6 billion (5.8%) China: $55.2 billion (5.3%) UK: $45.4 billion (4.4%) Source: U.S. Census Bureau U.S. Commercial Service - Japan

  16. Japan’s Economy World GDP (CY2005) Real GDP Growth Rate • World’s 2nd largest economy • 2006 GDP: $4,712 billion • Longest boom in postwar period: - 60 months ~ (Feb. 2002 ~ current) - 57 months (Nov. 1965 ~ July 1970) Source: World Bank Source: Japanese Cabinet Office U.S. Commercial Service - Japan

  17. Japan’s Top Trading Partners Total Japanese Imports: $ 577.8 billion Total Japanese Exports: $647.4 billion (December 2006 Data - Provisional) Source: Japan External Trade Organization U.S. Commercial Service - Japan

  18. U.S. Trade in Goods with Japan Number of U.S. exporters to Japan (2005): 26,933 Source: U.S. Census Bureau U.S. Commercial Service - Japan

  19. Top 10 U.S. Exports to Japan Source: U.S. Census Bureau U.S. Commercial Service - Japan

  20. CY2005 Service Exports Surplus$19.5 Billion 2005 Surplus: $19.5 billion Exports Up 17.6% 2005: $41.8 billion 2004: $35.6 billion Imports Up 14.4% 2005: $22.3 billion 2004: $19.5 billion Source: Bureau of Economic Analysis, U.S. Department of Commerce U.S. Commercial Service - Japan

  21. Major U.S. Service Exportsto Japan Source: Bureau of Economic Analysis, U.S. Department of Commerce U.S. Commercial Service - Japan

  22. U.S. Private Services Trade Balance with Japan Source: Bureau of Economic Analysis, U.S. Department of Commerce U.S. Commercial Service - Japan

  23. Japan's Inward FDI*Cumulative (from end of 1996 through end of 2005) *net international investment position US leads at 251,676 million US$, followed by France and the Netherlands at 61,225 million US$ and 57,635 million US$, respectively. Source: Japan External Trade Organization U.S. Commercial Service - Japan

  24. U.S. Firms in Japan 1,554 U.S. affiliated firms in Japan 1,554 1,451 390 83 (As of December 2005) Source: “Foreign Affiliated Companies in Japan 2006” published in May 2006 by Toyo Keizai U.S. Commercial Service - Japan

  25. U.S. Firms in Japan by Industry Manufacturing Total 381 U.S. firms Non-Manufacturing Total 1,173 firms 80 169 118 126 107 77 102 608 19 70 22 57 (As of December 2005) (As of December 2005) Source: “Foreign Affiliated Companies in Japan 2006” published in May 2006 by Toyo Keizai U.S. Commercial Service - Japan

  26. Regulatory Reform: Steady and On-track with Significant Progress • U.S.-Japan Regulatory Reform Initiative (RRI) established in 2001 as key component of U.S.-Japan Economic Partnership for Growth • The 5th RRI report (June 2006) noted 85 points of significant Japanese progress in the ten areas under discussion: Telecom, IT, Med/Pharm, Financial Services, Competition Policy, Transparency, Privatization, Legal Systems Reform, Commercial Law, and Distribution But there are still some lingering bilateral issues • The 5th RRI report underscores the need for continued efforts and progress in all areas • Extreme concern about postal privatization, and triangular mergers • U.S. beef imports: a major bilateral issue • Some of Japan's acknowledged critical challenges are: - huge public debt - low birth rate; rapidly aging population; and projected labor shortages - income disparities; protracted lack of income growth and weak consumer spending - agricultural reform U.S. Commercial Service - Japan

  27. Major Obstacles Faced by Foreign Firms in Japan Source: Invest Japan Department, Japan External Trade Organization U.S. Commercial Service - Japan

  28. Insurance Market in Japan • Japan is the second largest market for insurance in the world after the United States. • $340 billion in JFY 2005 – direct net premiums • U.S. insurance companies earned over $40 billion in life and $2 billion in non-life premium income – a major portion of revenues outside U.S. Changes in Japan’s Insurance Market • Japan’s financial “Big Bang”: Removal of “convoy system” (maximum control, industry protection, administrative guidance, and before-the-fact adjustment); U.S.-Japan insurance agreements. 2. Establishment of Financial Service Agency: Rules-based regulatory approach, self-responsibility principle and ex-post checking. 3. Changes in consumer purchasing trend: Emerging focus on living-benefit products vs. death-coverage due to demographic changes in Japan. 4. Increasing sales of variable annuities and third-sector products, led by U.S. insurance companies. 5. Partial liberalization of bank sales - fueled variable annuity market. 6. Growth of the U.S. share through purchases of Japanese life insurance companies in the late 1990s. Major U.S. Players in Japan Aflac, AIG, Hartford, Prudential Sources: USTR National Trade Estimate, Life Insurance Association of Japan, Insurance Research Institute, industry sources U.S. Commercial Service - Japan

  29. Japan’s Environmental Market to Reach $560 billion by 2010 (METI forecast) • Current Market: $500 billion • Outstanding commercial opportunities in: - Asbestos abatement equipment and services: 40 million tons in older building; Japan plans removing a million tons/year - Soil remediation equipment and services - Industrial wastewater treatment technology - Renewable energy, including biomass technologies • US passed the “Superfund Act” in 1980 • Japan enacted a similar act: “Soil Contamination Countermeasures Law” in 2002 Source: Ministry of Economy Trade and Industry (METI), Japan Environment Information & Communication Network, Japan U.S. Commercial Service - Japan

  30. Major Projects in Japan In a horizon that stretches from the spring of 2007 over the next ten years, U.S. companies will have an opportunity to bid on construction projects with an aggregate value approximating $5.4 billion and on the supply of goods, equipment, or services in response to non-construction procurements valued at an aggregate of $18.16 billion.  The following summary highlights this $23.56 billon in aggregate opportunities for U.S. firms. U.S. Commercial Service - Japan

  31. Major Projects – recent news Govt To Seek Competitive Bids On 60% Of DiscretionaryContracts • Employ competitive bidding for some 60% of its discretionary contracts, or about 2.1 trillion yen (approx. $18 billion) • To raise the percentage of contested public contracts to about 80% in terms of value • With plans to fully implement the change in fiscal 2007 • For transparency of the process, the government is requiring ministries to disclose all contracts on their respective Web sites, as well as provide explanations for retaining discretionary contracts. • Nikkei News • January 27, 2007 U.S. Commercial Service - Japan

  32. World’s 2nd Largest Medical Device Market • The most important export destination for American medical devices • The sector has consistently enjoyed a sizable (approximately $4 billion) trade surplus with Japan • Approximately $5 billion worth of U.S. medical devices and supplies are sold in this market • American products have approximately 60% share of the total imports • The market for medical equipment in Japan remains strong, but • American companies will continue facing severe challenges in both pricing and regulatory matters Source: Country Commercial Guide Source: Ministry of Health, Labor and Welfare U.S. Commercial Service Japan

  33. World’s 2nd Largest Pharmaceutical Market • The most important export destination for American pharmaceuticals • The value of Japanese pharmaceutical market is approximately $60 billion • The market share of American companies is estimated to be 15-20% • Of the 99 leading global medicines, only 60 are available in Japan • GOJ intends to accelerate the drug approval process and to offer incentives to develop innovative drugs • Japanese market is increasingly promising for innovative pharmaceuticals, although American companies will continue facing severe challenges in both pricing and regulatory matters Source: IMH Health 31% still not available in Japan Average 5.2 years of delay Source:PhRMA U.S. Commercial Service - Japan

  34. U.S. Machine Tools Forge Ahead of Swiss Products, Reclaiming Lost Ground Source: Ministry of Finance, Japan U.S. Commercial Service - Japan

  35. Strong Exports of U.S. Aircraft and Aerospace Components Overwhelming U.S. presence attests to long-term partnerships (in million $) 2003 2004 2005 2006 Total Imports 7,573 7,637 8,618 9,652 (% CHG) 1% 13% 12% USA: 6,629 6,696 7,416 8,226 (% CHG) 1% 11% 11% U.S. 88% 88% 86% 85% Market Share: Source: The Society of Japanese Aerospace Companies (SJAC), Ministry of Finance, Japan U.S. Commercial Service - Japan

  36. Boeing Country • 80% civil aircraft orders for the past 10 years went to Boeing. • ANA & JAL, first customers for Boeing 787s. 50 and 30 each beginning in 2008 (approx. $9.6 billion in total). • Boeing forecasts Japanese demand at 1,176 aircraft (approx. $147 billion) for the next 20 years. Airframes ($3,459 mil): USA, 90%; EU, 3% Afrm Parts ($1,427 mil): USA, 82%, EU, 13% Engines ($1,201 mil): USA, 92%; EU, 5% Egn Parts ($1,964 mil): USA, 90%; EU, 9% Source: The Society of Japanese Aerospace Companies (SJAC), 2005 Source: Boeing Japan U.S. Commercial Service - Japan

  37. Biotechnology (Million US$) (+3.0%) (+3.1%) Key Market Segments in Japan Pharmaceuticals (antibody therapeutics) and Diagnostics Functional Food Agriculture Bio-informatics Equipment for Biotech Research (DNA chips; reagents, etc.) Source: Nikkei Bio Nenkan 2007 U.S. Commercial Service - Japan

  38. Opportunity in Japan Event: USA Pavilion at BioJapan 2007 Dates: September 19-21, 2007 Venue: Pacifico Yokohama (Kanagawa) http://expo.nikkeibp.co.jp/biojapan/eng/ CS Contact: Tamami Honda, Commercial Specialist U.S. Embassy, Tokyo Phone: 81-3-3224-5876 Fax: 81-3-3589-4235 E-mail: tamami.honda@mail.doc.gov U.S. Commercial Service - Japan

  39. U.S. Chemical Business in Japan • U.S. chemical exports to Japan recovering • USD 5.3 billion in 2006 • Sales of Japan-based U.S. firms show underlying strength • USD 1.5 billion in 2005 Source: Dow Chemical Japan, Dupont Japan Source: Japan Tariff Association U.S. Commercial Service Japan

  40. Education: International Students in the United States Contribution of international students to US economy: $13.5 billion or $24K per student (Source: Institute of International Education http://opendoors.iienetwork.org) U.S. University Fair (IIE Fair in Japan ) for regionally-accredited U.S. colleges and universities: 2006 Fairs Tokyo: Nagoya: 76 schools 32 schools 1,328 visitors 308 visitors 2007 Fairs October 21 October 20 For details and on-line registration: http://www.iiehongkong.org/fair/ufair/index.htm U.S. Commercial Service - Japan

  41. 2005/06 Total Int’l students 564,766 = 100% 1 India 76,503 13.5% 2 China 62,582 11.1 3 Korea 58,847 10.4 4 Japan 38,712 6.9 5 Canada 28,202 5.0 6 Taiwan 27,876 4.9 7 Mexico 13,931 2.5 Education: Japanese Higher Education Abroad (Source: Diplomatic Missions in Japan) Note: US – F-visa, Australia-new enrollments on student visa, Canada-study permits for college/university/ESL (no permit required if duration is 6 mos or shorter) Source: Institute of International Education (http://opendoors.iienetwork.org) U.S. Commercial Service - Japan

  42. Education: American Students at Japanese Universities Source: Institute of International Education, Open Doors (http://opendoors.iienetwork.org) U.S. Commercial Service - Japan

  43. Japanese Outbound Travel 17,819 17,535 (+0.8%) 5,368 3,672 (-5.4%) Source: Office of Travel and Tourism Industries, U.S. Department of Commerce Japan National Tourist Organization U.S. Commercial Service - Japan

  44. Japanese Travel to the U.S. 5,368 3,672 (-5.4%) 2,217 1,374 (-9%) Source: Office of Travel and Tourism Industries, U.S. Department of Commerce State of Hawaii U.S. Commercial Service - Japan

  45. Japan & U.S. Outbound Travel 5,368 3,672 (-5.4%) 1,287 1,497 (+40%) Source: Office of Travel and Tourism Industries, U.S. Department of Commerce U.S. Commercial Service - Japan

  46. U.S. – Japan Telecommunications Equipment Mutual Recognition Agreement (MRA) Signed on Feb. 16, 2007 Telecom MRA will lower costs and speed up the marketing in Japan of innovative U.S. telecom products, which is the fifth largest export market for the U.S. U.S. Export U.S. Import Scope: Telecommunications terminal equipment and radio equipment subject to certification in Japan regardless of location of the supplier or country of origin of the equipment Source: U.S. Department of Commerce, U.S. International Trade Commission U.S. Commercial Service - Japan

  47. Software Market in Japan • Market Growth: • Strong at 4% and projected to reach • US$173 billion by 2010 • The amount of imported software was US$3.2 billion in 2005. • Within imported software, the share of U.S. products is • 90.3% and the amount has reached US$2.9 billion Software Market in Japan Includes customized software, packaged software, game software, data services, etc. (Billion US$) US$ 173 • Market Trends: • Enactment of Japanese SOX (Sarbanes‐Oxley act) • Growing corporate IT-related budgets • *46% of Japanese firms will increase IT • spending • *34.5% will increase their spending by more • than 20% US$ 147 Percentage of Software sales in Japan Others 2% Data Services 8% Game Software 8% 2005 2010 Packaged Software (Source: MIC Research Institute and Japan Information Technology Services Industry Association) 8% • Security Software Market: • Rising awareness of the importance of IT • security and related software • Tremendous growth at 21.9% • Current market size is $1.2 billion • Projected to reach $2 billion by 2010 at 11.2% growth Customized Software 74% (Source: METI/ Ministry of Economy, Trade and Industry) U.S. Commercial Service - Japan

  48. Electronic Devices Market in Japan (million US$) • U.S. plays a leading role in the • Japanese semiconductor industry. • Market share of U.S. electronic • devices in Japan has grown to 26% • and reached US$ 5.4 billion in 2005, • compared to 17% and $1.7 billion • in 1995. • Total amount of imported electronic • devices is US$23 billion. • Demand for electronic devices in • wireless applications, such as　 • WiMAX, UWB/Wireless USB, WiFi • and ZigBee is growing rapidly. • WiMAX, in particular, is projected • to reach US$827 million by 2010 • from less than US$1 million in 2006. Total Local Production Total Export Total Import Source: JEITA/ Japan Electronics and Information, 　　　　 Technology Industries Association U.S. Commercial Service - Japan

  49. Chart 2 Source: Mainichi Economist Current Status Chart 1 The market size of the Japanese security industry has been increasing over the years. The overall market (Chart 1) includes the sales and installation of security equipment and security services, such as guards. The total sales figures do not show a sharp increase as unit prices in general have decreased over the past few years due to stronger competition in the market. In security service contracts, there has been a tremendous increase (Chart 2). According to the National Police Agency the total sales of security service alone amounts to US $27 billion. Japan Market – Safety & Security $1=110.11 (ex.rate as of 2005) Source: Japan Security Systems Association Future Prospect According to a May 2006 Fuji Keizai survey, trends in the security industry are: • A projected market size of US $ 4.8 billion for security equipment by 2008 - a 34% increase since 2005. • Emerging new sub-sectors demonstrating drastic growth: • *School security US$ 57 million (350% increase since 2005) • *Town security 18 million (125% increase since 2005) • **Regional safety 22 million (5% increase since 2005 ) • (*Emergency alert system; ** Mass notification system) Sub-sectors expected to grow and 2008 projections: Home Security Unit US$ 78.6 million (50% up from 2005) Home Security Service 418 million (20%up) School Commuting Service 25.6 million (160%up) Community Security Service 4.3 million (600%up) Biometrics by Vein 132 million (300%up) on-Vehicle DVR 38 million (200%up) 2008 Projection for sub-markets by equipment type: Image/monitoring market US$ 1.2 billion (35% up from 2005) Sensor 1.36 billion (71%up) Home security (equip.& service) 755 million (17%up) Access control 920 million (11%up) Residential security service 464 million (19%up) U.S. Commercial Service - Japan

  50. Japan Market – Safety & Security Chart 3 Chart 4 Kidnapping, killing of a girl in Nara Prefecture Sharp rise in break-ins by lock picking Ikeda Elementary School slayings Setagaya family slayings $1=108.15 (ex.rate as of 2004) Source: National Police Agency Source: Asahi News Paper(June 8th, 2006) Chart 5 Source: Nihon Keizai Shimbun, Research conducted by Macromill(July 18th, 2005) Market Growth • Recent market growth is attributed to increased public concern for security: • Crime related • Sky-rocketing crime rate including burglaries, arson, and child murders (Chart 3). • New types of crime such as credit card and e-mail scams, and identity theft. There is a direct relation between major crimes and the number of security cameras installed (Chart 4). • Terror related • Fear of terrorist attacks is pervasive (Chart 5) while Mass Transportation Authorities respond by installing more cameras (Chart 6). Chart 6 -Safety and security has become an important factor in selecting products or services; -Central and local governments are making full efforts towards a safer society in response to public concerns. Source: Ministry of Land, Infrastructure and Transport U.S. Commercial Service - Japan

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