Komatsu Ltd., the nation's top construction machinery maker, could have been hit hard by the collapse of the housing boom in the U.S., but it is busy ramping up production to meet strong demand in the BRIC countries of Brazil, Russia, India and China.

The company's plant in Tennessee, which produces hydraulic shovels for the North American market, is now shipping 10% of its output to Latin America, where booming development of natural resources is stoking demand for heavy machinery.

Komatsu has decided to increase its capital spending budget for the three years through fiscal 2009 by 30 billion ¥ to 150 billion ¥, betting that market growth in the BRIC economies will more than offset any weakening of the North American market, which accounts for 20% of its construction machinery sales. Komatsu President Kunio Noji said he will maintain his "bullish stance" next year as well.

The Japanese steel industry is also on a roll, with domestic plants operating at full capacity to supply other prospering manufacturing industries, such as shipbuilding and automaking.

JFE Steel Corp. will start purchasing large amounts of scrap iron next year to boost its production of crude steel. Since its blast furnaces for melting iron ore are already operating at full capacity, the company has decided to pump up output by mixing in molten scrap iron during the production process.

Strong demand is expected to push up domestic production of crude steel this year to the first record high in 34 years. "Emerging countries are the main driver of growth," said Kiichiro Masuda, executive vice president of Nippon Steel Corp. "The impact of the economic slowdown in the U.S. on global demand has weakened."

The recent turmoil in the financial market and slackening of growth in the U.S. do not pose serious threats to the earnings prospects of major Japanese companies, at least for now. The pretax profits of 348 leading firms will rise 12% in fiscal 2007 for the fifth consecutive year of record-breaking results, according to forecasts by Nomura Securities Co.

After years of scrapping excess capacity, many large Japanese manufacturers are in good financial shape and have enough cash on hand to fund expansion. They are boosting domestic production and exports, mainly of high-value-added products, while at the same time maintaining high levels of overseas production.

The exports-to-sales ratio of the manufacturing sector is projected to hit a record 22.6% in fiscal 2007. But not all large manufacturers are performing brilliantly. And the picture in the nonmanufacturing and household sectors is much less rosy.

Hitachi Ltd. plans to spend 8 billion ¥ to expand production of small LCDs for cell phones and car navigation systems. But the heavy burden of investment and fierce competition from South Korean and Taiwanese manufacturers forced Sanyo Electric Co. to pull out of the market late last year. Asahi Glass Co. is also considering withdrawing.

Capital investment growth in the nonmanufacturing sector is disappointing at 6.7%, compared with a 12.1% spike on the manufacturing side, according to the Bank of Japan's latest tankan survey of business confidence.

Household spending remains sluggish as well, as reflected in the real estate market. While the office vacancy rate in central Tokyo stood at 1.6% at the end of September, suggesting the market is very tight, housing starts posted a year-on-year decline in August for the seventh consecutive month.

Small and midsize companies are also struggling to generate profits amid rising materials costs. "Large companies are benefiting from growth in exports to other Asian markets, and higher material costs will widen the performance gap with small and midsize firms," said Hideo Kumano of the Dai-ichi Life Research Institute.

The Japanese economy can count on continued support from competitive large manufacturers, but not very much help from other sectors.

Source: Nikkei Report