Akio Okawara

Executive Director
Sumitomo Shoji Research Institute, Inc.

I would like to offer a cheery column to start the new year, but it is hard to find bright news these days. In the first half of 2008 we saw the impact of high prices for resources, but the latter part of the year brought even tougher times as the financial crisis turned dire and spread rapidly to the real economy. No bottom is yet in sight for the US housing market, and the world faces a simultaneous downturn as we enter 2009.

Among the sectors of the real economy, the automobile industry has been hit especially hard by the crisis, and it is now supplanting housing as the biggest source of negative fallout for global economic activity. Just yesterday (December 18) the evening papers in Tokyo led with stories about Chrysler halting production for a month and reopening merger talks with General Motors and about auto sales in Japan falling below the 5 million mark for the first time in 31 years.

Here in Japan auto sales peaked at 7.78 million in 1990, at the tail end of the economic bubble, and have since declined by about 40%, partly because young people are becoming less interested in cars. The Japanese auto industry has thus come to rely increasingly on exports. But car sales have been plunging in countries all around the world, with the contraction of credit making it harder for would-be buyers to get financing. This has caused Japanese automakers' exports to fall off, and they have been forced to slash production.

Automobile manufacturing is one of Japan's core industries, with many supporting industries, and decreased auto production has a broad impact, leading to decreased demand for products including steel, chemicals, electronic parts, and machine tools. Automobile-related employment totals about 5 million people, accounting for around 8% of the entire working population. Also, the auto industry's share of gross domestic product is 3.2% in Japan, compared with 0.8% in the United States. In simplified terms, therefore, Japan's auto manufacturers are four times as important to the Japanese economy as the Big Three are to the US economy.

The auto industry's condition is serious, and the cycle of pessimism will not be easily broken. But the prospects are not all bleak. Though demand for cars is unlikely to grow fast in Japan or other developed countries, emerging economies like China are now on the verge of fullscale motorization, offering the hope of tremendous future car sales. Concerns about global warming are leading to calls for improved public transportation, but the automobile exerts an unmatched appeal, offering freedom of movement to individuals and also serving as a status symbol, and it seems certain that car civilization will continue in the twenty-first century.

Japan's car makers and companies in related fields are especially well positioned to meet global demand with their leading technologies for production, pollution control, and energy efficiency. Full-fledged sales of electric vehicles are expected to start here this summer, and I sense that this may be a year in which the auto industry reemerges as a star—the vehicle for a different new dream. Auto development of course requires funding, but it also draws on the human power to innovate, which has limitless potential. As long as economic activity continues, the auto industry will never die.