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News Release

The Decline in Electrical Machinery Business Results and its Impact
- A Comparison With the Recession of 2001 -

April 27, 2005

Overview

The pace of improvement in business results slowed in the October-December quarter of 2004, especially in the manufacturing sector. As a result, some observers have expressed concern over the future trend of business performance. This view is founded on the fact that (i) the electrical machinery sector is the main reason for the slowdown and (ii) the conditions surrounding the slowdown call to mind the early stages of the recession of 2001, after which business results recorded a severe slump. The results of a comparison of business results in the electrical machinery sector today with those recorded in 2001 can be summarized as follows.

First, the recent deterioration in business results in the electrical machinery sector has come against the backdrop of (i) a fall in sales volume reflecting a decline in both domestic and overseas demand, (ii) a deterioration in trade conditions (output prices/input prices) and (iii) a tailing-off in the effects of restructuring through the reduction of fixed overheads such as personnel costs. The basic features of (i) and (ii) are identical to those observed in 2001.

However, an important difference from conditions in 2001 is that the competitiveness of the electrical machinery sector is increasing. As a result of the shift towards products with higher added value, the "high valued added index" has risen sharply over the past few years. This has raised sales prices in spite of the continued deflationary trend and has bolstered business results.

An estimate of the effect of the shift towards products with higher added value on the electrical machinery sector, focusing on exports, suggests that the shift towards products with higher added value has gone some way towards boosting results. Therefore, even though the fall in sales volume and the deterioration in trade conditions must have a negative impact in the short term, the boost to business performance that comes from the shift towards products with higher added value means that business results in the electrical machinery sector will not deteriorate and, if anything, are highly likely to hold firm. If electrical machinery business results hold firm, it is likely that Japan's corporate sector at large will be able to avoid an outright slump in business results.

For more information on the content of this report, please contact: Hideki Matsumura, the Japan Research Institute, Limited.

Tel:03-3288-4524
E-mail:matsumura.hideki@jri.co.jp

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