EVEN good news, it seems, cannot chase away the gloom that is now engulfing Japanese business.

Last month, when the Finance Ministry reported that Japan’s trade balance for February had posted its first surplus in five months, nobody seemed particularly excited. Instead, observers merely noted the grim fact that the surplus amount was 85 per cent lower than that of February last year, and that imports of liquefied natural gas and other items had increased.

The results of a survey of Japanese manufacturers carried out by the Bank of Japan and released earlier this month reflected the general gloom. The main index for big manufacturers stood at minus 4 for the January-March quarter, unchanged from the last quarter of last year. A negative reading indicates greater pessimism than optimism among those surveyed.

The results were something of a surprise. After all, most companies had largely recovered from the supply chain disruptions caused by the widespread flooding in Thailand last year, the earthquake in Japan in March last year, and the resulting tsunami and nuclear disasters.

But the reality is that Japanese manufacturers are struggling with a range of problems that will not simply go away.

The stubbornly strong yen is just one problem. Survey respondents may also have had their eyes on other issues. Last month, a trade agreement between South Korea and the United States went into effect, putting Japanese-based companies at an even greater disadvantage. South Korea’s Hyundai Motor recently increased its presence in the US, becoming a powerful competitor to Japanese carmakers. South Korean manufacturers of flat-screen television sets, such as Samsung, also have a strong lead over Japanese firms.

Other issues facing Japan’s export-oriented manufacturers include the relatively high cost of labour, electricity, imported fuels and raw materials.

To some extent, of course, the nation’s manufacturers have themselves to blame. Former market leaders such as Sony are struggling to match the innovation of rivals such as Apple. Tough competition from South Korean companies is also forcing down prices.

It is little wonder that the mood among export-oriented manufacturers remains grim.

Taking advantage of the strong yen, Japanese companies have once again been scouring the globe for investment opportunities. Mergermarket, a financial information company owned by the Financial Times Group, said Japanese companies made 187 acquisitions overseas last year, with a total value of US$65.7 billion (S$82.8 billion). This was the highest since records began in 2001, by both value and number of deals.

The buying spree continued in the first quarter of this year, with companies such as Fujifilm and Mitsubishi making major purchases abroad.

A new wave of manufacturers are also shifting production overseas. Japanese electronics giant Panasonic Corp is expected to relocate all production of its mobile handsets abroad by mid-year. In doing so, it will become the first Japanese maker to produce all of its handsets abroad. Production is expected to shift to China and Malaysia.

All this, of course, is not new. The main driving force behind the surge in Japanese direct investment in the US and Asia in the late 1980s and early 1990s was the availability of inexpensive capital at home as the stock market rose and the value of the yen appreciated.

But what is different this time around is the extent to which Japanese businessmen are being forced to consider new solutions as international competition intensifies.

Recent moves by loss-making electronics firm Sharp have been telling.

Japan’s big electronics companies have traditionally been reluctant to sell large chunks of their business to foreigners. But last month, the electronics giant sold 10 per cent of its shares to a subsidiary of Taiwanese manufacturing company Foxconn.

Such agreements may soon become common. Taiwan needs Japan’s advanced technology, while Japan is looking for cheaper manufacturing capability. Significantly, the deal came not long after Japan’s struggling NEC Corp merged its PC unit with China’s Lenovo.

Sharp’s deal with Foxconn may also herald a major change in the way that Japanese companies do business.

When moving production offshore, Japanese firms have traditionally preferred to maintain a vertically integrated approach, in which all products are made in-house. But the model is increasingly being seen as involving high costs, particularly when firms are faced with competitors that outsource production.

On March 27, Sharp’s new president, Mr Takashi Okuda, told the media that “Sharp’s vertically integrated model has reached its limit”. Foxconn is primarily a contract manufacturer, with factories across China making components for companies such as Apple.

With politicians in Tokyo continuing to drag their feet over issues such as the Trans-Pacific Partnership free trade agreement, Japanese businessmen have little option but to adopt new mindsets to survive. But the accompanying changes to business models can be unsettling. The fact that the country’s manufacturers view the future with some trepidation is therefore entirely understandable.

(C) Singapore Press Holdings Limited