Market Monitor - Focus on machinery - Japan

• Good growth prospects in 2015 and 2016
• Profit margins are expected to increase
• More caution advised for smaller businesses

Regarding global machinery sales Japan ranks fourth (behind China, Germany and the US), with and estimated turnover of EUR 222 billion in 2014. Japanese machinery sales have rebounded strongly since a large decrease in Q2 of 2014, which was due to a value-added tax increase. The sector benefits from higher machinery investments as the Japanese economic recovery is on track (GDP is expected to grow 1.0% in 2015 and 1.5% in 2016 after a modest contraction in 2014). Industrial production is forecast to increase 2.3% in 2015 and 4.4% in 2016. Machinery orders increased 2.8% in March 2015 and 3.9% in April over the previous month.

The highly export–oriented Japanese machinery sector also benefits from surging exports due to a weaker Yen exchange rate, which helps Japanese machinery manufacturers in their competition with European and US manufacturers (mainly for high-end products) and South Korean, Chinese and Taiwanese producers (for low-end products). However, the weaker Japanese Yen has led to higher prices for imported goods, which has a negative impact on some machinery wholesalers. That said, for manufacturers, lower energy prices mainly offset increases in raw material prices.

Due to on-going production and sales growth, profit margins of Japanese machinery businesses have increased over the past 12 months, and are expected to rise further in 2015. Japanese machinery businesses are, in general, highly indebted, especially
manufacturers and/or smaller and medium-sized enterprises (SME). But banks are generally willing to provide loans to the machinery sector with good financing conditions, which is helped by low interest rates. Additionally the Japanese government is encouraging banks to support companies with strong financing needs or in financial difficulties.

The average payment duration in the Japanese machinery industry is 60-90 days from invoicing date, depending on products and business type. Payment behaviour in this sector has been very good over the past two years. The number of protracted payments, non-payments and insolvency cases is very low, and it is expected that there will be no change in the coming months.

Due to the generally positive indicators we assess the credit risk and business performance of the machinery sector as good, and our underwriting stance continues to be relaxed, especially for well-established players in the industry. However, we have
adopted a more cautious approach for smaller business, which often have weaker financials than larger businesses, less transparent financial information available and are more vulnerable to sudden changes in the market sentiment.