Japan Autos Report Q2 2010

Japan's new vehicle sales fell to the lowest level in 38 years in 2009, despite a late rally kick-started by government incentives to encourage sales of new more fuel-efficient vehicles in Japan which contributed to a fourth straight month of growth in December 2009. Total vehicle sales, including mini-vehicles under 660cc, rose 21.6% year-on-year (y-o-y) for the month to 372,608 units. This follows growth of 18.3% in November, 4.4% in October and 0.2% in September. Total sales finished the year down 9.3% at 4.609mn units, just exceeding our forecast for 4.560mn. Moreover, future sales are expected to be strong as the government will extend the scheme, initially due to expire in March, for a further six months.

The news of extended incentives has underlined expectations for a return to positive full-year growth in vehicle sales in 2010. While we are cautious in forecasting sales of 4.65mn units, taking into account the withdrawal of the scrappage scheme in the latter months of the year, the Japan Automobile Manufacturers Association expects sales of 4.8mn units. However, this would still represent the market's lowest point in 32 years. On the positive side, we expect this growth to be sustainable over the next five years, albeit restricted to average annual growth of around 2%, due to the saturated nature of the market.

Japan stays in fourth in our Business Environment Ratings for the automotives industry in Asia Pacific, with an overall rating of 61.1 from a possible 100. The risks associated with a developed market still exist, however. Just as Australia and South Korea suffer disadvantages due to their developed statuses, a saturated market also weighs on Japan's ratings. While the country scores well in terms of its country risk, with low levels of corruption and a sound legal framework that have bumped up the market's overall score, the auto industry is nearing full capacity, and this consequently reduces production growth potential, while the high level of vehicle ownership restricts possible sales growth. Labour costs are also high, which adds to the cost of expanding production.

Although full data for December is not yet available, news reports show that Toyota Motor's Prius was the best-selling car in Japan for the sixth consecutive month and the company plans to capitalise on the momentum of its hybrid sales with the unveiling of a compact Prius, which will reportedly be cheaper than the original and surpass its 50 miles per gallon fuel consumption. Toyota and Honda Motor, which is also exceeding sales projections with its Insight hybrid, continued to lead the domestic market in December, with sales growth of 52% (excluding Lexus) and 97% respectively. Third-placed Nissan Motor also recorded growth of 16% y-o-y. Toyota reported domestic sales of 1.346mn units for the full year to retain its leadership of the market.