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News Release

The Risk of Electronic Devices Entering an Adjustment Phase

August 20, 2004

Overview

The electronic components and devices sector, which until now has been leading Japan's current economic recovery, has been recording "unintentional" inventory growth since about the spring of 2004, and inventory adjustments are now a certainty. However, the reason for this inventory growth is a fall in demand for cellular phones and some digital consumer electronics, and conditions differ from those seen in the second half of 2000, when the decline in demand for electrical machinery was general.

Looking ahead, on the domestic front, there is little prospect of a recovery in demand for cellular phones and some digital consumer electronics in the short term. However, because (i) the digital consumer electronics market, centering on flat-panel TV sets, is expected to see steady overall growth and (ii) the corporate sector is taking an increasingly positive stance on investment in computerization, the recovery is likely to hold steady. Foreign demand is also likely to remain firm, as production of electrical machinery in Taiwan and Korea, important centers of electrical machinery production, continues to grow. However, the growth of investment in information technology in the United States, a key source of final demand, has started to show signs of slowing, and a watch will have to be kept on its future trend.

On the supply side, although production capacity has recently seen rapid growth both in Japan and overseas, the growth of orders for semiconductor production equipment has already started to slow and the risk that production capacity will expand too far is small. Indeed, a survey of prices, which reflect the supply-demand situation, reveals no sign that the decline in demand is accelerating.

The above analysis suggests that, in the second half of fiscal 2004, against a background of inventory adjustments and growing supply capacity, production of electronic components and devices is highly likely to enter an adjustment phase. However, firm domestic and foreign demand and a degree of restraint in the expansion of capacity to supply mean that the adjustment is likely to be slight and completed in a short space of time, and from about the second half of 2005, production of electronic components and devices is likely to turn upwards once more.

For more information on the content of this report, please contact
Hideki Matsumura
Economics Department

Tel: 03-3288-4245
E-mail:matsumura.hideki@jri.co.jp

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