Japan's Carry Trade in Vietnam
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
More than one year after the earthquake/tsunami that devastated northern Japan and their faith in nuclear power it is more obvious now than it was then that Japan needs Vietnam and vice versa. Everyone knows that Japan is saddled with both a debt bomb and an age bomb that are set to explode. That day will likely come when they have to actively seek foreign investors for their bonds for which, I believe, there is not much of a market.
Japan has been able to run up a debt that is more than twice their annual GDP because of a number of factors, among them the social capital for having invested in the homeland which is a very powerful motivator culturally. But with the Bank of Japan now openly monetizing government bonds and their large current account deficit this is a harbinger that that day when the Japanese public reaches their fill of JGBs is coming soon, if not already here.
The Debt Tsunami
Japan is looking at a version of Quantitative Easing that amounts to more than $867 billion over the next 14 months as they attempt to again drive down the price of the Yen on the open market to support their flagging export industries.
Enter Vietnam. We have what Japanese companies need:
- Very low labor costs which is rapidly getting the professional training it needs after a decade of investment
- Geographic proximity to Japan in the face of structurally high energy prices.
- Markets for their products which are growing at the fastest rates, ie. electronics, cars and computers.
Japanese foreign investment has totaled more than $23.6 billion USD total and the rate of investment is increasing.
In 2011 Japanese companies invested more than $1.8 billion in Vietnam, more than twice what they invested in 2010 and ~60% more than they ever had in any other year.
So far in 2012, through the end of March they have spent $2.3 billion, an acceleration of more than 500% over 2011. Bridgestone signed a contract to build a $575 million tire factory near Hai Phong. Japan is actively assisting in building the new Lach Huyen port at Hai Phong to upgrade its capacity. Vietnamese rubber companies like Phuoc Hoa Rubber will be the obvious benefactors here. Panasonic (NASDAQOTH: PCRFY) has a division in Vietnam that is building a printed circuit board plant in Hanoi. The iShares MSCI Japan ETF (NYSEMKT: EWJ) holds a number of companies that have significant presence here in Vietnam, including not only Bridgestone and Panasonic, but also Tokyu Corp, who is building a suburb northwest of Ho Chi Minh City. Toyota was one of the first Japanese companies to embrace Vietnam while Suzuki broke ground last week on a new plant to produce cars and parts for distribution across SE Asia.
I’m not necessarily bullish on Japan because of this thesis but I am bullish on its effect on Vietnam and the rest of the Greater Mekong Sub Region (GMS). The size differential between the two economies is why this is such an intriguing situation. The VN Index is worth roughly $30 billion. The Bank of Japan is set to monetize more than twice that in bonds this month alone.
The China Syndrome
Part of their reason for all of this investment is to blunt China’s growing influence over the whole GMS. China is facing in the near future the same demographic issues that Japan is experiencing right now. With both enjoying strengthening currencies they have their opportunity to build up their neighbors that they need as much as their neighbors need them.
Signs of Japan moving out from their island are everywhere. They recently forgave $3.4 billion in loans due by Myanmar and then immediately pledged more than $2 billion in investment. Cambodia’s Prime Minister recently went to Tokyo to improve trade and investment relations between the two countries. Japan is open for business around the Pacific Rim.
Former manufacturing giants like the U.S., Japan and much of Europe all have the same problems of too much debt, too much social and military welfare (the U.S. in particular) and the wrong demographics for generating the income internally to finance it all. This is why the search for lower cost production is so acute and why China was able to grow so quickly over the past 20 years. But their one-child policy among other factors has slowed their birthrates creating a similar problem in the near future (2030) that Japan is facing now.
Chinese investment in oil and gas pipelines, hydroelectric power, rubber and rice plantations have been massive relative to the economies of their neighbors like Laos, Cambodia and Myanmar. Petrochina (NYSE: PTR) has been a heavy investor in Myanmar building a strategically-important pipeline that will run from the Bay of Bengal to Kunming in the southwest as well as developing a number of drilling projects around the GMS. Japan is just now, beginning to play catch-up.
Japan’s first move in this war of against their numbers was to invest in China. But, even China is becoming too expensive for Japan, especially in the face of an appreciating Yuan and hence the move to broadening their investment base. Currency interventions are double edged swords, the depreciation of the dong over the past 3 years has created a huge arbitrage opportunity for Japanese businesses to relocate production to Vietnam but it is also a consequence of that credit-induced inflation that has created holes in the infrastructure where it is needed now by Japan to effect its transitions.
The Labor Arbitrage
That said, the labor costs in Vietnam are so compelling they more than offset the infrastructure issues. The average Vietnamese worker costs 1/30 of a comparable Japanese worker. That cost savings is what is going to pay for that Japanese worker’s retirement, or what’s left of it after the Bank of Japan inflates it away.
For Vietnam this represents the opportunity to begin the transition from a commodity-export driven economy to an industrial powerhouse like Japan itself or South Korea. As the effects of structurally high energy costs begin to eat away at the global nature of trade into more regional blocs the investments made today by Japan will have a long reach into the future of Southeast Asia as a whole, not just for Vietnam.
Hence, this is one of the reasons why Japan is deploying its strong currency with almost reckless abandon around the region. Another reason is that they are trying to blunt the influence of China on their emerging neighbors. One has to think of all of this from an ASEAN+3 perspective, not just from a bi-lateral one. As ASEAN continues moving, and rapidly, towards integration under the rubric of the Asian Economic Community the big brothers of Japan, China and South Korea will play a huge role in making that integration a success.
For American investors, options for investing directly in Vietnam are very limited. The Market Vectors Vietnam Index ETF (NYSEMKT: VNM) is 70% exposed to a number of large cap Vietnamese companies focused mostly on financials and energy, which comprise nearly 70% of the allocation. Of the 25% that is allocated to energy, more than half of is it in foreign companies such as Talisman Energy (NYSE: TLM) who have significant investments here. Even though the ETF does not track the VN Index directly, the returns YTD have been similar with the ETF outperforming the VN Index currently 42% versus 34%.
Peter Pham has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.