Japan R&D investments to stay resilient despite recession amid pandemic

Author: Pearl Bantillo

2020/08/18

SINGAPORE (ICIS)--Japan’s investments in research and development (R&D) are expected to stay resilient despite a deep economic recession induced by the coronavirus pandemic.

“Covid-19 [coronavirus disease 2019] is putting significant downward pressure on business investment in Japan. But despite a sharp deterioration in demand and profits, we think R&D investment by large manufacturing firms will show resilience,” Oxford Economics said in a research note on Tuesday.

“We expect Japan to maintain its high levels of R&D spending,” said Shigeto Nagai, head of Japan economics at the Oxford Economics said.

The world’s third-biggest economy is projected to maintain an R&D investment ratio to GDP of 3.2% - higher compared with fellow G7 members, namely, the US (2.8%), UK (1.7%) and Germany (3.0%), the research firm said in a note.

“As [Japanese] firms pursue globalization strategies, we think they will need to maintain R&D investment to keep high-value adding processes and global headquarters onshore,” Nagai said.

Developing next-generation auto technology and digitalizing businesses require that high investments in R&D be maintained for years.

“We expect this will mitigate the decline in fixed investment, at least in 2020,” Nagai said.

R&D has a 15% share in Japan’s gross capital formation in GDP, the third-largest contributor next two machinery and equipment (34%), and non-residential buildings and structures (30%).

About three-quarters of R&D investments in Japan come from the manufacturing sector.

Domestic capital spending in fiscal 2020 by large firms is likely to fall for the first time in nine years, Oxford Economics said citing a survey conducted by the Development Bank of Japan (DBJ).

But the DBJ report noted that investment in 2020 will be supported by continued “robust investment for the development of next-generation automobile technology” and “the rising demand for digitalization”.

For the automobile industry, in particular, pursuing connectivity, autonomous vehicles, sharing, and electrification or CASE requires large R&D expenditure.

The same will be true for a “wide range of industries in the sector’s long supply chains, such as various machinery, chemicals, steel, and non-ferrous metals”, Nagai said.

The automotive industry is a major global consumer of petrochemicals, which account for more than a third of the raw material costs of an average vehicle.

Based on 2018 data, R&D contributes 15% of gross fixed capital formation in GDP – the third-largest after machinery and equipment (34%), and non-residential buildings and structures (30%).

In total, 75% of R&D investment comes from manufacturing.

The Japanese economy posted a record 27.8% annualized contraction in April to June 2020 due to pandemic-related restrictions on businesses and people movement.

Private consumption, which makes up more than half the Japanese economy, fell by 8.2% in the second quarter, while exports slumped 18.5% year on year, reflecting overall weakness in external markets.

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