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As red ink flows, Japanese firms struggle to keep manufacturing at home

Japan's manufacturing base is hollowing out as many electronic and car factories move overseas. Meanwhile, a strong yen is sending firms on an international buying spree.

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In this January 19 photo, Japanese cars are unloaded from trailer trucks before being shipped for export at a port in Kawasaki near Tokyo. Japan's industrial production rebounded 4 percent in December from November and household spending increased, suggesting the still-weak economy is gaining some steam after last year's tsunami disaster and flooding in Thailand that disrupted manufacturers' supply chains.

Koji Sasahara/AP

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Following the report of Japan’s first annual trade deficit in more than 30 years, the country’s major manufacturers have been delivering earnings results soaked in red ink.

The factories that once powered the economy by churning out world-beating electronics, cars, and machinery are either being relocated overseas or losing out to Asian rivals.

Japan will now have to come to terms with a new post-industrial economy that will see it increasingly rely on income from overseas investments. 

Japan recorded a trade deficit of nearly 2.5 trillion yen ($32 billion) in 2011 as a storm literally battered its industries. The March tsunami destroyed factories, ports, and infrastructure, disrupting supply chains across the country and the globe.

With nuclear reactors shut down for safety checks in the wake of the Fukushima crisis – 50 of Japan’s 54 reactors are currently offline – there has been no choice but to import more fuel and fire up old thermal power stations.

Tellingly, the only major Japanese companies to announce increased profits for 2011 were the giant trading houses that import much of the fuel required for the revived power plants. The strong yen also made Japanese exports less competitive as economic troubles in Europe and the US weakened their own currencies and the demand in those crucial markets.

Although 2011 was something of an aberration, the days of huge trade surpluses for Japan are almost certainly over.

Faced with lower wage costs in developing countries and innovative rivals in South Korea and Taiwan, Japan’s corporations are struggling to keep meaningful manufacturing at home. One concern is that without the surpluses Japan has had as a buffer for decades, its ability to service its huge national debt – currently around 200 percent of GDP – could be at risk.

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