Readers of this page may recall our June report on the impact of the earthquake and tsunami on Japanese trade and manufacturing. We now inform you of ongoing efforts by the Japanese Ministry of Economy, Trade and Industry ("METI") to address concerns of overseas relocation of Japanese manufacturing and supply chain operations in key industries. Indeed, the Japanese Government characterized the earthquake and tsunami as a "crisis in the midst of a crisis," because it occurred when Japan already faced economic stagnation.

In a recent survey sent to domestic manufacturing companies, METI found that almost 70 percent of responding firms indicated the possibility of "accelerating" relocation of manufacturing and supply chain operations in full or in part, due to the earthquake and tsunami. The survey also indicated that ongoing power supply disruptions and shortages constitute another important factor in this decision-making process.

Because such swift and potentially irreversible outsourcing could have a substantial impact on the Japanese economy, METI is highlighting several government assistance programs. For example, METI took steps to expand the availability of facility and equipment fund loans offered in collaboration with prefectural governments. The measures include relaxation of loan conditions and ¥16.5 billion for facility and equipment restoration included in the FY 2011 primary supplementary budget. The program also includes funding for installation of energy equipment. Press reports further indicate that METI may examine ways to stimulate the standardization of automotive parts as a way to guard against future supply disruptions in the event of another natural disaster. Some commentators have argued that such a plan would actually harm Japanese auto makers in the long run by lowering barriers to entry in the field and inviting competition on price alone from elsewhere in Asia, especially China.

METI has also begun to examine the impact of Japan's regulatory regime on efforts to address outflows of Japanese manufacturing. For example, relevant government subcommittees are considering modification of the Factory Location Act, which includes certain environmental protection provisions. In doing so, METI noted "the current situation where hollowing out of domestic industries continues to advance," and that "barriers to the establishment of corporate factories and investments will be reexamined from the viewpoint of promoting a 'pro-growth' policy."

METI's efforts are consistent with recent policy pronouncements by the Japanese Cabinet, which has expressly identified the risk of "outflows of companies and human resources" as a result of the disaster. The Japanese Cabinet noted its intent to further develop "medium to long-term initiatives" (which it defined as the next three years) to address such outflows. In sum, it is clear that the Japanese Government sees outsourcing as a long-term problem that will require government attention and financial support for years to come.