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THE

JAPAN

JOURNALVol. I No. 1

1st week of September

Sony shares hit by Vaio laptopsafety recall

Financial Times

Shares in Sony were knocked

yesterday after the Japaneseconsumer electronics group wasforced to recall thousands ofdefective laptops because of a riskthat they could overheat and causeburns.

The recall affects 440,000laptops in Sony's Vaio TZ series thatwere sold across the world betweenMay 2007 and July 2008.

Sony has heard of 209 cases oflaptops overheating, including sevenin which the users suffered minorburns.

A design flaw means that wires

near the hinge that connects the bodyof the laptop to the display arewrongly positioned and can short-circuit and overheat after prolongeduse.

"The problem takes time toemerge, so we didn't catch it in ourquality control tests," Sony saidyesterday.

Sony's image was tarnished afew years ago when it was forced torecall almost 10m laptop batteriesused by makers including Sony, Delland Lenovo after it emerged that, incertain circumstances, the batterycould overheat and catch fire.

That incident led to a Y51.2bn($480m) provision for the Japanesegroup.

Sony said yesterday that it didnot expect the latest laptop problemto have much financial impact,because no other companies wereaffected and the faulty computerscould be quickly repaired andreturned to customers.

However, the group yesterdayfaced criticism for being too slow toinform regulators about the issue.

The consumer electronicsgroup first became aware of theproblem a year ago, but did notreport it to the Japanese regulatorsuntil last month.

"It is not appropriate, givenhow big the issue is," ToshihiroNikai, Japan's economy, trade andindustry minister, told reportersyesterday.

Vaio computers are animportant - if low margin - part ofSony's electronics business whichhas struggled for profitability inrecent years.

The group is keen to make Vaioa Y1,000bn business by its 2010fiscal year in terms of annual sales.

The laptop business sufferedfalling profits in the first quarter of

this year, however, as it was hit by acombination of fierce competitionand falling unit sales prices.

Most analysts felt that the recallwould have little immediate effect onSony's financial results.

Sony's shares fell by 4.2 percent to Y3,880, their lowest foralmost three years, affected by a risein the yen against the dollar and theeuro as well as the laptop recall.

Nomura mulls investing inLehman -paper

Reuters

Nomura Holdings Inc isconsidering acquiring a stake in U.S.investment bank Lehman Brothers,the Japanese daily Yomiuri Shimbunreported on Saturday.

Nomura has a pool of fundsexceeding 200 billion yen ($1.86billion) for investing in or acquiringU.S. and European financialinstitutions, the brokerage's chiefexecutive, Kenichi Watanabe, told

Yomiuri in an interview.Watanabe said Lehman was oneof several candidates and Nomurawould decide whether to make aninvestment offer after confirming itsbusiness results, which could comeas early as next week, and afterchecking share price moves.

The state-controlled KoreaDevelopment Bank has also said thatthe subprime mortgage-hit Lehmanwas a possible acquisition target.

Mitsubishi UFJ FinancialGroup earlier this week denied amedia report that it might bid for astake in Lehman.

Japan Bonds Have Weekly Loss on

Low Yields, Fukuda ResignationBloomberg

Japan's government bondscompleted the first weekly decline intwo months on speculation yieldsnear the lowest in four months areunattractive given that the Bank ofJapan is unlikely to reduce interestrates this year.

Ten-year yields climbed thisweek by the most since July onconcerns government borrowing willincrease should Taro Aso becomeJapan's prime minister after Yasuo

Fukuda quit on Sept. 1. The BOJ willprobably keep the overnight lendingrate at 0.5 percent this year,according to a Bloomberg survey ofeconomists.

``Aso has been saying that wecan forget about the fiscal target,which is bad for bonds,'' said StefanLiiceanu, a Tokyo- based seniorfixed-income strategist with BarclaysCapital Inc., the U.K.'s third-largestbank. `For 10-year yields to fallbelow 1.4 percent, we either need aBOJ cut or the BOJ talking about it,which we don't have yet.''

The yield on the benchmark 10-year bond rose 3 basis points thisweek to 1.435 percent in Tokyo atJapan Bond Trading Co., the nation'slargest interdealer debt broker. It wasthe biggest gain since yields climbed3 basis points in the week ended July4. Five-year yields added 5.5 basispoints, or 0.055 percentage point, to1.025 percent this week.

``Growth will likely remainsluggish for the time being'' becauseof higher energy prices and a coolingglobal economy, BOJ GovernorMasaaki Shirakawa said on Sept. 2.``The current situation requires thebank to carefully monitor bothdownside risks to economic growthand upside risks to inflation.''

There was a 2 percent chanceyesterday the BOJ will reduceinterest rates to 0.25 percent by year-end, according to calculations byJPMorgan Chase & Co. using

overnight interest- rate swaps. Theodds were 9 percent two weeks ago.

Favorite SuccessorFukuda said Sept. 1 he would

step down after 11 months in office,citing political gridlock. Elections toreplace Fukuda as party president are

scheduled for Sept. 22.Aso ``is deemed to be a fiscalexpansionist,'' said TakashiNishimura, an analyst at MitsubishiUFJ Securities Co., a unit of Japan'slargest bank by assets, in Tokyo. Thismay lead to concerns of increasedbond issuance, he said.

Aso, 67, said last month thatthe government should considerpostponing its goal of balancing thebudget by 2011 because Japan maybe in a recession.

Fukuda's government on Aug.29 said it would spend about 2

trillion yen ($18 billion) on aprogram of measures to revive theeconomy. It also announced a one-offtax cut for low-income earners thatmay have to be funded by bond saleslater this year should tax revenue fallshort of projections.

Stock SlideGovernment securities

yesterday advanced the most in fourweeks after stock indexes slumpedand a report showed an unexpecteddecline in capital spending. Ten-yearbond futures advanced 0.31 to

138.68 on the week.``With ongoing equity

weakness, I remain bullish ongovernment bonds,'' said GuthrieWilliamson, portfolio manager inSydney at Principal Global Investors,which manages $244.9 billion inassets globally. `I remain long,'' hesaid, referring to holding bonds onexpectations they will rise.

The Nikkei 225 lost 2.8 percentyesterday and the broader Topixindex slid 2.6 percent.

Capital spending excludingsoftware fell 7.6 percent in the threemonths ended June 30, a fifthstraight quarterly decline, theMinistry of Finance said yesterday inTokyo. Profits fell 5.2 percent.

GDP RevisionThe government will use

yesterday's report to revise its grossdomestic product figures on Sept. 12.Japan's economy shrank anannualized 2.4 percent in the threemonths ended June 30, the CabinetOffice said last month.

``The upward JGB trend will

continue because of the fundamentalissue,'' said Tomohiko Katsu, deputygeneral manager of the capitalmarket division at Shinsei Bank Ltd.in Tokyo. The capital spending data``will give a big downward revisionon the GDP. Most of the people in

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the market think the slowdown willlast into next year.''

Next week, primary dealers,who are obliged to bid at auctions,are likely to sell bonds before anauction of five- year securities, toprotect against potential losses at thesale, according to Chuo Mitsui Trustand Banking Co.

``At the beginning of nextweek, there will be some hedge-selling for the five-year auction,''said Kazuya Seki, a deputy generalmanager at the unit of Japan'sseventh-largest publicly traded bankby assets. ``There is a highpossibility of a 1 percent coupon.''

The finance ministry will sell1.9 trillion yen in five- year notes onSept. 9.

Japan-led consortium buys powerfirm: Temasek

AFP

A Japanese-led consortium haswon the bid for Singapore's largestpower generation company beingsold by state-linked investment firmTemasek Holdings, Temasek saidFriday.

The deal is worth 3.65 billionSingapore dollars (2.5 billion US) incash, it said.

Temasek signed a share

purchase agreement with Lion PowerHoldings Pte Ltd, owned by aconsortium comprised of Japan'sMarubeni Corp and other firms, for100 percent sale of Temasek'swholly-owned power firm SenokoPower, a news release said.

Marubeni operates in Japan andglobally across a wide range ofsectors from food to power.

Lion Power will also assume323 million Singapore dollars worthof Senoko Power's net debt as ofMarch 31, bringing the total value ofthe deal to about four billion dollars,

Temasek said.The transaction is expected to

be completed by next Friday."The Lion Power consortium

partners are all established industryplayers with strong track records inpower investments globally," saidGwendel Tung, Temasek's director ofinvestment.

Also part of the consortium areGDF SUEZ S.A, The Kansai ElectricPower Co. Inc, Kyushu ElectricPower Co. Inc. and Japan Bank forInternational Cooperation, Temaseksaid.

Senoko is the second of threelocal power generation firmsTemasek is unloading as part ofefforts to liberalise the domesticenergy market.

Temasek said in March that ithad signed a share purchaseagreement with SinoSing Power PteLtd, a wholly owned subsidiary ofChina Huaneng Group, to sell TuasPower Ltd for 4.235 billionSingapore dollars (2.96 billion US).

Temasek's third powergenerator is Power Seraya.

Last month Temasek reported arecord profit of 18.2 billionSingapore dollars for the year toMarch, and said its portfolio rose invalue to 185 billion Singaporedollars.

Temasek has controlling stakesin major regional firms and hasinvested billions of dollars in

troubled US investment bank MerrillLynch since late last year.It is one of two Singapore

government investment vehicles,along with the Government ofSingapore Investment Corporation.

Japan Business Spending Falls

Wall Street Journal

Japan's business spending fell forthe fifth-consecutive quarter duringthe April-June period, whilecorporate sales and profits alsotumbled, according to a governmentsurvey released Friday.

The Ministry of Finance'squarterly Financial Statements ofCorporations by Industry surveyshowed that capital expenditure inthe period declined 6.5% whencompared with the same period ayear ago. The drop followed a 4.9%decrease in the January-Marchperiod.

The results reflect companies'continuing reluctance to increase

spending as higher oil and materialcosts gnaw away at earnings andlower demand from overseas weighson sales.

In the April-June quarter, thesurvey showed that business profitsfell 5.2% from last year, while salesslipped 0.7%. Rising costs for rawmaterials weighed on themanufacturing sector, dragging downprofits by 12%.

Analysts say the latest datapoint to a likely downward revisionnext week in second-quarter gross-domestic-product figures.

Separate data showed thatJapan's foreign reserves fell $7.92

billion to $996.74 billion in Augustfrom the previous month, droppingbelow $1 trillion for the first time inthree months. The decline in the euroagainst the U.S. dollar was the mainreason behind the shrinking reserves.

Nissan launches first clean-dieselcar in Japan

AFP

Nissan Motor Corp launched

Thursday its first clean-runningdiesel vehicle in Japan in a bid toopen up a new market by re-brandingthe fuel as eco-friendly.

The X-Trail 20 GT sports-utility vehicle with an M9R engineoffers powerful acceleration whilecomplying with some of the world'sstrictest emissions standards that willcome into effect across Japan inOctober 2009.

The car increases fuel economyby 30 percent over a 2.5-litregasoline engine and cuts carbon-dioxide emissions by 20 percent,

Japan's third largest automaker said.It is the first diesel car in Japanin years for Nissan, which has beenless enthusiastic than its domesticrivals in developing eco-friendlyhybrid cars.

Japanese consumers have longsnubbed diesel-powered vehicles dueto the perception that they are smelly,noisy and sooty.

While diesel accounts forapproximately 60 percent of vehiclesales in Europe, the figure is in thesingle digits in the United States andJapan.

"From now on we will build theimage of diesel in Japan and aim toexpand our sales by communicatingthe diesel engine's appeal one by oneto customers," Nissan's chiefoperating officer Toshiyuki Shigasaid at a news conference.

"We need to transform eachcustomer's perception and idea intosomething positive," he said.

The launch is a test-case for thecompany, which targets annual salesof 1,200 units "to see what themarket response will be, and whetherit will catch on," said another Nissan

official on the sidelines of the event.

With a price tag of nearly threemillion yen (27,700 dollars)including consumption tax, it costsnearly 20 percent more than acomparable vehicle with a traditionalengine, the company said.

But the price gap can be offsetin fuel savings by driving an averageof 10,000 kilometres (6,200 miles)annually for three years.

If a hit among the public,Nissan will start developing a line-upusing the technology. It also plans tointroduce the technology in itsmodels in North America and Chinaby 2010.

Nissan said it hoped the dieselvehicle would attract customersduring a tough stretch for the carindustry, which is faced with highfuel costs and a sagging worldeconomy.

"The auto industry is feeling a

lot of different headwinds at themoment but making high-quality andattractive cars to get over thisdifficult period is our biggestproject," Shiga said.

Japan orders recall of pesticiderice from China

AFP

A company in Japan soldpesticide-tainted rice from China tosnack makers, the farm ministry saidFriday, ordering a recall.

The incident came amid highconcern in Japan over Chineseproducts after frozen dumplings lastyear caused thousands of people tocomplain of sickness, with 10hospitalised.

The farm ministry said Osaka-based Mikasa Foods in 2006 and2007 sold a total of 295 tonnes ofimported rice, which was meantexclusively for industrial use due toits excessive level of pesticide.

The ministry ordered the

company to recall any pesticide-tainted rice still on the market. Thepesticide was methamidophos, thesame substance found in frozendumplings in last year s poisoningscare. The rice contained five timesthe allowed level of the pesticide,farm ministry official YasuhiroOkabe said.

The glutinous rice was sent tocompanies that produce Japanese ricecakes and other snacks.

Japan's August forex reservesdown for first time in three months

Thomson Financial

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Japan's foreign exchange reservesfell for the first time in three monthsin August, hit by declines by the euroagainst the dollar and falls in goldprices, the Ministry of Finance saidon Friday.

The foreign reserves fell to$996.74 billion at the end of lastmonth from $1.00 trillion in July, theministry said.

The euro stood at $1.4673 atthe end of August, against the end-July figure of $1.5603.

Japan's foreign reservesremained the second largest in theworld next to China, whose holdingsreached $1.81 trillion at the end ofJune, according to the latest availablefigures from the Chinesegovernment.

Japan's foreign exchangereserves reached a record $1.02trillion in March.

Foreign exchange reservesconsist of securities and depositsdenominated in foreign currencies,plus International Monetary Fund(IMF) reserves, IMF special drawingrights (SDRs) and gold.

At the end of August, Japan hadforeign currency reserves of $971.25billion, IMF reserves of $1.55billion, SDRs of $3.07 billion, goldreserves of $20.48 billion and otherforeign currency assets worth $368million.

Japan's reserves are closelywatched for evidence of how the

country is managing its foreigncurrency holdings. They are seen ashaving a significant impact onexchange rates and bond marketsaround the world, particularly theU.S. government bond market.

The biggest changes in Japan'sforeign reserves usually occur whenauthorities intervene in the currencymarket to prevent the yen fromappreciating rapidly. Monetaryauthorities have not intervened sincemid-March 2004.

Japan GDP outlook bleak aftercapital spend survey

Reuters

The outlook for Japans overalleconomic activity in April-Juneappears to be bleaker than initiallyestimated after an unexpected slidein corporate capital spending thatfuelled recession fears.

A Reuters poll found yesterdaythat economists see a median 1%contraction in the second quarter, as

a weak reading in a survey ofcompanies capital spending plansprompted them to revise down theirforecasts.

Japanese corporate capitalspending unexpectedly fell 6.5% inthe second quarter from a year

earlier, a survey by the Ministry ofFinance showed.

A deterioration in exportconditions has impacted the domesticeconomy and home demand-orientednon-manufacturers appetite forcapital investment is weakeningmore than expected, said TakumiTsunoda, a Shinkin Central BankResearch economist.

An early estimate of Japansgross domestic product (GDP)showed the economy shrank 0.6% inthe quarter. Revised figures are dueout on September 12.

Private capital investment isseen revised down sharply to a fall of2.5% from an initial estimate of a0.2% decline, the poll showed.

With pessimism over the healthof the global economy pervading infinancial markets, the dataunderscored the pain that high raw

material costs have been inflicting onJapans economy, which is alreadyseen as in or near a recession.

The capital spending figurescame out as the yen surged to a 13-month high against a sliding euroyesterday, with investors fleeingleveraged carry trades amid fallingshare markets and rising riskaversion.

The Nikkei share average slidnearly 3% while Japanesegovernment bonds soared asinvestors fled to the safety ofsovereign debt.

Economics Minister KaoruYosano, who plans to run in the racefor Japans next leader after outgoingPrime Minister Yasuo Fukudaabruptly quit on Monday, said theclouds over the Japanese economyshould clear once overseas economicconditions improve. We do not needto be pessimistic about the Japaneseeconomy per se, he said.

The sharp fall in capitalspending surprised market playerswho had forecast a 2.5% increase.A one-off change in accounting atleasing firms was behind the fall, a

finance ministry official said, withsuch firms no longer including thepurchase of equipment for leasingout.

Capital spending in April-Juneincreased 3.8% from a year earlier ifleasing companies were excluded,the official said, but analysts tookscant comfort.

Commodity prices were risinguntil mid-July so that will weigh oncorporate revenues until July-September. After that, the negativeimpact from high raw material costswill gradually ease, said Takeshi

Minami, chief economist atNorinchukin Research Institute.

But that doesnt mean troublesfor Japanese companies are over, asthey wont see sales increase muchwith weakness in the US and

European economies spreading toemerging economies.

Japan firms set sites on Internet

Variety

More and more Japanese viewersare tuning out TV for YouTube, thefourth-most popular website in Japanlittle more than a year after itsofficial launch in June 2007, incooperation with six local partners,including satellite platform SkyPerfecTV.

The site, however, has beenwrangling with copyright holders,

including such orgs as Eiren (MotionPicture Producers Assn. of Japan)and Jasrac (Japanese Society for theRights of Authors, Composers &Publishers), which demand YouTubecrack down on pirated clips."Legally, they are in the right, but it'sextremely difficult to find and takedown all the (pirated content)," saysYasushi Nozawa, deputy director ofthe Commerce and InformationPolicy Bureau in the Ministry ofEconomy, Trade & Industry.

Rather than fight YouTube,some local media companies are

embracing the Internet themselves.Kadokawa Holdings, a mediaconglom active in pic and toonproduction, linked with YouTube inMay to run ads on pages withuploaded Kadokawa contents, suchas its TV toons "Haruhi Suzumiya"and "Lucky Star."

Staffers search for Kadokawatoon clips on the site. The piratedones are taken down, while postersof those that display a more creativetake on the material, such asanime/music mash-ups called MADin Japanese, receive a request from

Kadokawa to allow its logo and ad toappear on the page. Kadokawa alsooperates a YouTube channel,Kadokawa Anime, where approvedclips appear.

"The business model is totallydifferent from television," saysFumiyuki Kakizawa, a Kadokawarep. "We can't expect to earn thesame revenue. But YouTube has aworldwide reach that we can use topresent our contents to a largenumber of people, so in that way itserves as a publicity tool."

Following in Kadokawa's

footsteps is major pic producer anddistrib Shochiku, which in Julystarted its own YouTube channel,with promotional clips from its newpics. The channel also displays clipsfrom Shochiku DVDs and made-for-Internet video content.

Another media conglom, theUsen Group, launched its own videocontents platform, GyaO, in April2005.

Unlike YouTube, GyaOcontents, including promotional clipsfrom upcoming pics, music shows,TV dramas, toons and sportingevents, are provided by GyaO and itspartners. In the beginning, GyaOoffered all its contents for free,planning to raise revenue from adsand sponsor fees.

"To be frank, we are still tryingto make the (GyaO) business modelpay, but we're confident we can doit," says Usen rep Akari Mano.

One problem is that, thoughGyaO has a large registered user base-- 20 million by the latest count --relatively few log onto the site withany frequency. To lure them in,GyaO has been beefing up its lineup,

including a new free Asian contentssub-site that streams entertainmentfrom South Korea, Taiwan, China,Thailand and elsewhere in Asia.

For TV viewers withbroadband, GyaO has opened GyaONext, a premium service with 30,000titles, including such recentHollywood pics as "Babel,""Perfume" and "National Treasure2."

Usen projects the Japanesemarket for all forms of Web-basedvideo, including GyaO's three mainservice areas -- free PC webcasts,

pay PC webcasts and IP television --will grow from $655 million in 2008to $1.56 billion in 2011.

Meanwhile revenues fromterrestrial TV, currently at $18.5billion, will decline slightly in thesame period, while satellite TV willgrow 2% from $3.42 billion andcable TV 9% from $3.18 billion.

"We expect GyaO to really takeoff from 2010," Mano says.

It had better -- Usen has shiftedthe focus of its visual media strategyfrom struggling subsid GagaCommunications, which announced

its withdrawal from the picproduction and distribution biz inApril, to GyaO.

Whether GyaO succeeds indrawing enough eyeballs fromYouTube -- and moving into theblack -- is still anyone's guess, butfor Usen and other media companiesin a rapidly digitizing market, the oldways are no longer an option.

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