Excluding bright spots in the manufacturing and export sectors, the spreading sub-prime mortgage crisis, falling corporate capital spending and sluggish domestic consumer activity rallied against Japan’s economic recovery in the period of June through September.

GDP between June and August is expected to be revised by the Government of Japan to – 0.2%, marking the first quarter of negative growth in 10 quarters. The decline has been attributed to deteriorating corporate capital spending. Equity markets fell in stride with the widening sub-prime crisis in the U.S. Tokyo’s Nikkei index fell from its recent peak at the 18,000 level in May to its current level of 15,765.

As equities fell, the yen resurged. With the current account surplus ballooning to its highest level in 22 years and as battle weary investors unwound yen carry trade positions, the yen gained 5% versus the Canadian dollar, 6.4% versus the US dollar and 4.3% versus the Euro between the beginning of June and mid September. Due to the deteriorating GDP and strengthening yen, the Bank of Japan is expected to hold its key discount rate at its next meeting in September. Corporate profits offered the one bright area to the economy. Corporate pre-tax profits of publicly traded companies rose 20.4% between April and June compared with the year prior, thus marking the 20th consecutive quarter of profit growth and establishing a post war record. Profits were led by manufacturers in the export sector.

Rising corporate profits failed to translate into increased domestic consumer spending – the other 50% of Japan’s economy. Notwithstanding the 0.1% drop in the unemployment rate to 3.6% in July, consumer spending faltered with nationwide department store sales dropping 4.3% in July. Beyond Japan’s healthy employment numbers, structural shifts in the labour market are negatively impacting average monthly wages. Average monthly wages were down 1.9% in July, the eighth consecutive month of decline. As Japan’s baby boomers begin to retire and are replaced by less highly paid younger workers on an increasingly part time basis, average pay has fallen 10% between 1997 and 2005. In addition, lower paid part time employment represents 1/3 of new hires presently compared with 1/5 a decade earlier. Disposable income was also squeezed further this past quarter with gasoline prices hitting a record 145 yen per litre in August.

And now for the bad news: Japan’s housing market registered a dramatic decline in July starts following weak demand and regulatory delays in building permit approvals as a result of Building Standard Law revisions which came into effect on June 20th. At 81,714 units, July housing starts posted a dramatic 23.4% decline over July of 2006, pushing seasonally adjusted annualized housing starts to 947,000 units. Prices in Japan’s lumber markets largely held despite the drop in starts, however cracks in price levels began to emerge as Chugoku Mokuzai discounted KD Douglas Fir 105x180/Wdr Hirakaku by 3000 yen in an attempt to stimulate sales. Although global Tokyo Lumber Terminal inventory fell 5% in August, the inventory adjustment was thanks to a 41% and 39% respective drop in North American and Russian/Chinese inbound shipments compared with the month prior. Actual TLT outbound shipments fell 13% in August on slowing building activity.

(Sources: MLIT, The Nikkei Weekly, Nikkan Mokuzai Shimbun, Mokuzai Kenzai Weekly, TLT Lumber Statistics, The Japan Times)

Specially selected and sawn Canada Tsuga timbers (8x8, 10x10, up to 12x12) are gaining popularity as the timbers of choice for a group of timber-frame builders in Japan.

Led by a specialty wood frame manufacturers K.K. Akai Seizai and K.K. Daitec, a network of builders, designers and housing companies is developing the timber-frame market in Japan. Early in the spring of 2007, a small group of 16 timber-frame enthusiasts visited the BC West Coast to inspect the original source of Canada Tsuga fiber.

Timber-frame components & Building site in Kofu City, Yamanashi Prefecture – July 2007 The latest Timber-frame structure by the group – All Canada Tsuga Timbers

Subsequent discussions and marketing activities spurred the creation of a network that includes architects, structural engineers, pre-cut and pre-fab manufacturers, builders and house marketing companies. The group numbers approximately 32 companies and is behind efforts to test several timber-frame framed components in an effort to secure HOWTEC equivalency connector approvals to facilitate building permit approvals of timber-frame houses in Japan.

The raw materials are supplied on a custom cut basis through producers such as Western Forest Products. The timbers are milled rough and oversized. After being shipped to Japan, the rough timbers are then stored under cover for approximately 6 months to acclimatize the materials to the local climate before they are re-sawn and finished to final component dimensions.

The Timber-frame structures are presently marketed for residential applications but the commercial market represents a key opportunity for future growth. The commercial market will be targeted after key certifications are obtained.

One of the first Timber-frame houses built by the group Iwaki City, Fukushima Prefecture – All Canada Tsuga Timbers

Canada Wood was instrumental in bringing together Mr. Adachi Mitsuo, President of The Second House Chain and wooden post manufacturer, Canada Tsuga. Seeking to open a furniture and interior design centre in two of his next restaurant and garden shops in Kusatsu City, Shiga Prefecture, Mr. Adachi, visited the Canada Wood Pavilion at The Nikkei Building Materials show in Tokyo March 2007. Intrigued by Canada Tsuga on the Canada Wood Japan website, Mr. Adachi decided to visit and participate in the Canada Tsuga interactive display at The Nikkei Show. Mr. Adachi was in the midst of planning a 600 square meter furniture store and interior design centre and was searching for suitable lumber materials to meet his building and design requirements. The building was developed as a glass enclosed post and beam structure with a floor design that would highlight bright and open spaces and accentuate the natural beauty of wood.

When selecting the posts for his project, Mr. Adachi had initially considered using laminated European Whitewood posts. However, after visiting the Canada Tsuga interactive display booth, Mr. Adachi was won over on the benefits of utilizing Hem-Fir E120-F330 posts in his project. Not only was he impressed by the superior strength properties of Canadian Hemlock compared with laminated Whitewood, Mr. Adachi preferred to use solid kiln dried Canada Tsuga E120 – F330 posts as he was concerned that laminated posts that were exposed to exterior elements held the risk of delaminating. As well, Mr. Adachi was impressed by Canada Tsuga’s attractive fine grain which he wanted to showcase in the store interior.

After the trade show, follow-up discussions with Yutaka Miyazaki, Canada Tsuga Japan Promotions Director, resulted in Mr. Adachi advising his architect to build with Canada Tsuga and upon completion, the Vee – Vas Furniture and Interior Design Centre was opened on August 18th in Kusatsu City, Shiga Prefecture.

The Second House Restaurant Chain: Showcasing 2x6 SPF Construction & Design

Mr. Adachi’s Vee – Vas project is his most recent commercial project which features the use of Canadian wood products. Over the past 30 years Mr. Adachi has built a chain of 10 “Second House” restaurants and garden centers in the Kyoto area and neighboring Shiga Prefecture. At the Second House spaghetti restaurant in Kusatsu City, next to the newly opened Vee – Vas location, Mr. Adachi built an 800m² building which utilizes 2x6 SPF panelized construction.

In the main restaurant hall, the Second House utilizes prefabricated 2x6 triangular panels which are assembled in a round helix structure. The assembly was chosen to allow for a wide open interior rustic design and for its energy efficiency. The panels were built with exposed Canadian OSB and 2x6 SPF framing adding to the rustic cottage interior feel that Mr. Adachi envisaged. The projects underline the growing opportunities that larger scale commercial projects represent for Canadian lumber producers. Judging from the bustling lunch time crowds frequenting the Second House restaurant, it appears that the design elements of Canadian forest products are winning over Japanese consumers as well.

Developer Mr. Adachi Mitsuo has chosen a wide range of Canadian Wood products to make his new developments more attractive and structurally sound.

Kevin Bews, originally from Calgary, Alberta, is one of the longest-serving veterans on the COFI team in Japan. He has resided in Japan for the past sixteen years. He came to Japan in 1991 to study Japanese after graduating from the University of Guelph, with a Bachelor of Commerce degree. After completing the Japanese language program at Sony Language Laboratory in 1993, he found employment with Sunpia Homes, a privately held Japanese housing company that manufactured and supplied housing components and building materials for wood-frame structures in central Japan. He was responsible for importing and selling North American building materials. In 1998, upon completion of his five-year contract with Sunpia Homes, he joined COFI. Operating from the Canada Wood Office in Tokyo, Kevin represents the SPF Group and is responsible for development, implementation and management of market programs in Japan that promote the use of SPF dimension lumber in residential, non-residential wood and non-wood structures.

Canada Wood Japan veteran Kevin Bews (left) works tirelessly in the field promoting Canadian Wood Products amidst increasingly intense competition and poor economic conditions.

Kevin attributes the successes that the team in Japan has had over the last thirty-three years to former and current colleagues. He is convinced that without the relentless hard work and commitment to the Japanese market by COFI staff, Canadian lumber companies, Canadian academics, and provincial and federal governments, COFI would not be in the position that it finds itself in today - Japan is a leading offshore market for Canadian wood products. He understands that serving the dynamic Japanese market will continue to be a challenge: Japan demands high quality wood products at competitive prices, the Japanese market is evolving, and competition in Japan has intensified over the years. However, Kevin strongly believes that COFI can further develop this lucrative market (annual demand for wood products in Japan is 90 million m3 in log volume) and even expand business by adapting to and facing new market challenges.

In our last newsletter, we reported that China recently overtook the USA as Japan’s largest trading partner. As of September 2007, China has reached another milestone by overtaking Canada as the US’s largest trading partner. There is no slowdown in sight and investment growth will continue despite the central government’s attempts to slow things down. Local municipalities in China in an attempt to increase tax revenue and employment happily saying yes to new investment projects while Beijing, fearing over capacity in certain sectors is saying no. It is little surprise then that investment projects approved by the central government rose by just 13.2 % in the first eight months of the year, while projects approved by local governments increased by 28.4 %.

SPF exports to China are at an all time high, averaging 12,500 MFMB over May, June and July. That is a fivefold increase over the same period last year when total SPF exports were 2,400 MFBM (see table 1). The 2X4 construction market is active as of late, with more than 330 units under construction by eight different builders/developers. The truss roof promotion initiative which includes a calling strategy aimed at prospective developers is now underway. The technical services team continues to build innovative 2X4 hands-on displays for seminars, workshops and trade shows as well as provides on-site technical support for the eight active 2X4 builders.

From May to August I had the pleasure and privilege of working with our overseas staff in Asia. Based out of the 'Dream Home Canada' facility in Shanghai, I participated in projects across China and also visited Korea twice.

The perspective of being on the ground at the 'sharp end' and a field rep as opposed to a head office type is an experience we should all have the opportunity to try at some point. In an earlier life I spent five and a half years in a field office, albeit in the European theater. I had forgotten how rewarding it is to be delivering projects as opposed to pushing paper around one's desk!

Not surprisingly a number of impressions formed during my stay. The first one is that Canadian industry and our government partners are fortunate to have a team of qualified and dedicated people working on our behalf. These people are working hard and intelligently to develop new markets and opportunities for our wood products. This is a Long March however (to quote Chairman Mao) as opposed to a lightning blitzkrieg and will require determination and staying power by all concerned. Engrained ways of thinking and building will take time to change. That said, in China events are moving in the right direction. Conservation of energy in building and construction is a huge issue as are widespread concerns about the effects of pollution. Now is the time is sell the benefits of wood in construction.

And this needs to be done. According to a Canada Wood commissioned report by top-ranked Tsinghua University, China uses 6.6 times the amount of energy required in the USA to generate an incremental unit of GDP output and 3.7 times that of Japan. Thirty percent of energy consumption in China relates to buildings. Conventional wisdom leads us to believe that it is globally recognized that wood is a 'positive' factor in developing a sustainable economy and environmentally sensitive built environment. But in China this is not presently the case. In fact central government policy is somewhat negative on expanded wood use. The reasons are complex but domestic scarcity of timber resources and a sense that wood construction is only for small buildings figures heavily.

Building an Emerging Market: Paul Newman reports that progress is being made developing WFC in China, but continued efforts to promote benefits and innovation are required for wood to be viewed as a mainstream viable construction material.

So the challenge facing us is to demonstrate why wood is relevant to China's needs and can make a meaningful contribution. Along with European and American colleagues, Canada Wood is establishing a Wood Dialogue initiative with key government and institutional entities. The idea is to present and debate the facts and then package this information so it can be widely marketed in China by western politicians and others.

We also need to think well beyond our current Canadian scope of application for wood to encompass new innovative ideas. These include European concepts of using wood assemblies in concrete frame high-rise structures and as roofing to upgrade masonry buildings. Canada Wood is joining forces with the European Wood organization in Beijing on Sept 24-25th to promote wood as infill construction in concrete frames at an energy efficiency trade fair organized by the National Development and Reform Commission, a powerful policy implementation ministry in the Chinese central government.

Having enjoyed my three months in Asia I am heading back again for another two month stint at the end of September. Japan should feature heavily this time as will China. Preaching the (wood is) good message is something we need to do fervently and with missionary zeal. To quote the famous bard – "There is a tide in the affairs of men. Which taken at the flood leads on to Fortune. Omitted all the voyage of their lives is bound in shallows and in miseries" (Julius Caesar 4 iii)

Majestic Mansion is a master-planned luxury residential community situated on 90 acres at the northwestern edge of the Summer Palace. Located in a highly desirable section of Beijing known as the Haidan District, Majestic Mansion is the first major residential project in the immediate area, replacing aging housing structures. The location, which is surrounded by hills, offers views of the Summer Palace and its lake. The location has long been prized by the imperial dynasties for its natural beauty. The site also contains a school, a soccer field and government buildings, which have been preserved. Because of Majestic Mansion’s proximity to government buildings and high-ranking government officials’ residences and offices, the property is being marketed only to a select class of elite Chinese citizens.

Majestic Mansion is the only major luxury residential community being developed in Beijing that is not a high-rise. The project managers report that the completed development will consist of 467 units and have two country clubs on site: one that will cater for large public gatherings and the other, for the exclusive use of its residents. The larger clubhouse will encompass 100,000 square feet and include banquet, ballroom and meeting facilities, restaurants, various sports courts, an indoor/outdoor swimming pool as well as underground parking.

Majestic Mansion is being developed in four phases providing many opportunities for wood frame construction. Phase I, which is set on 10.5 acres, encompasses seven buildings and 67 units ranging in size from 3,000 to 10,000 square feet. To date, more than half have been sold, representing $50 million in sales. The developer for this project was Greentown China. The luxury homes will be completed in early December 2007.

In an exclusive area overlooking the legendary Summer Palace Lake, Majestic Mansion is the only major luxury residential community being developed in Beijing that is not a high-rise with plans to develop 467 units.

Opportunity in High Rise Buildings: A Canada Wood Success Story

Real estate prices in China continue to rapidly rise and space is selling at a premium. To accommodate more growth, a policy was enacted June 1, 2006 on all new residential housing projects being subject to space restrictions amounting to 70% of the new units having to be less than 90 square meters. In response to the demand for bigger houses in China an innovative developer in Chongqing started building empty shell rooms 90 m² by 6.1 m high, and in having the kitchen and bathroom finished, the apartment owner will be able to separate the room into 2 floors and make the apartment appear much bigger.

In this situation, wood construction has a design flexibility advantage because wood is very light and easy to work with. A one-layer wood flooring system and partition wall into the room was built and added attractiveness into the units as well. The idea for using wood came from attending a Canada Wood Wood Frame Construction Building Seminar, inspiring this particular builder to have confidence in using wood, resulting in the order of 10 containers of SPF from Canada.

With space at a premium in Chongquing, builders are making use of WFC flooring and walls to make units appear more spacious and attractive.

Designers building WFC will soon have detailed shop drawings approved by the Ministry of Construction to provide easier reference and acceptance of their designs. "Timber Structure Residential Building Standard Design" will provide WFC designers the same tools as designers specifying concrete and steel - using Standard Design Drawings published by the China Institute of Building Standard Design & Research with the approval of the MOC.

"Timber Structure Residential Building Standard Design" was approved by the MOC in 2006 as a national standard design document. The Canada Wood team consisting of Greg Hoing, Kerry Haggkvist, Chris Mattock and Haiyan Zhang provided technical expertise and support to facilitate the publication of this document.

In addition to detailed design drawings, typical structural components Fire Resistance Rating and Sound Transmission Class from NBCC is referred in the document as well as Canadian lumber/plywood/engineering wood grading marks are referred as an appendix.

In the next 10-15 years, YiXing local government is aiming to turn YiXing Economic development zone into an International Modern City for environmental protection, both for living and for working.

Jennifer Yu of Canada Wood Shanghai met the Party Secretary, Mr. Zhu Xu Feng and Director Mr. Shi Yan Wei of Jiangsu YiXing Economic Development Zone, a city, located along the west bank of Taihu Lake crowned many titles including: National Hygienic City, National Model City for Environmental Protection, National Garden City and China's Excellent Tourist City.

Since wood frame buildings are truly "green" buildings utilizing materials from renewable, sustainable forestry resources, Mr. Zhu said that it would be a perfect construction style suited for the residential and commercial buildings of this planned National Environmental and Garden city.

YiXing Economic Development Zone of Jiangsu province is located in the center of the delta area along the Yangtze River, 180 kilometers east of Shanghai, 135 kilometers west of Nanjing and 125 kilometers south of Hangzhou. The economic circle of 2 hours ride covers 16 big and middle cities in the delta areas along the Yangtze River. It is an important commercial and trade service center in the common border of Jiangsu Province, Zhejiang Province and Anhui Province.

"YiXing is the cradle of China environmental industry." Mr. Zhu said. "With the development of more than three decades, there have been more than 1000 environmental companies in the city now, including 20 top hundred companies in China. In 2006, environmental products, engineering and services reached a production value of 15 billion yuan. "

YiXing is scenic, with beautiful mountains and water combined together. The city lies in the mountains and waters while the mountains and waters lies in the city. "YiXing is an excellent tourist destination in China. Gorgeous landscapes and profound culture resources of 5000 years make a new modern YiXing" Mr. Zhu continued. "The urban green coverage in YiXing reaches 42% and road green coverage reaches 100%"

In the next 10-15 years, the local government is aiming to turn the YiXing Economic development zone into an International Modern City for environmental protection, both for living and for working. In its master plan, there will be 6207 hectares of land to be developed in the next 10-15 years, in which 666.9 hectares of land is planned to be developed for residential buildings including 45.9 hectares for low density residential buildings, 439.6 hectares for middle density residential buildings, 133 hectares for high density residential buildings as well as 48.4 hectares for educational facilities. At present, YiXing government is targeting to have at least one third of the planned land (666.9 hectares) developed in the next 5 years and have the rest completed by the 2nd 5 years.

Canada Wood’s Jennifer Yu has identified the YiXing Economic Development as a huge opportunity for Canadian Wood manufacturers to provide products and expertise over the planned 10-15 years of development.

As Mr. Zhu said, there would be lots of opportunities for Canadian technologies of wood frame construction in YiXing in the future given its green and environmental friendly features which fit right into the theme of the master plan of the YiXing Economic Development Zone.

Recently, Mr. Zhu, Mr. Shi and a group of officials from YiXing paid a special visit to Dream Home Canada (Canada Wood Shanghai office) and two residential wood frame construction demo villas. Everybody was impressed with Canadian technologies as well as the comfort, the spacious feelings and the flexibility in design that wood frame construction offers.

"YiXing Local Government would like to establish a friendly working relationship with Canada Wood in the development of YiXing Economic Development Zone, together to build an International Environmental Friendly city in YiXing" said Mr. Zhu at the end of the tour.

A few years ago, Greg Hoing couldn't have imagined that someday in the near future he would be working to exploit the wood frame construction market in China, one of the world's most dynamic nations.

Greg has very strong construction background having grown up in the family construction business. He started his own construction company 13 years ago and went on to work and build over 400 houses in Japan and Korea. However, in July 2006 Greg was looking for a new and exciting challenge so he accepted a move to China, taking on the task of leading the Training and Quality Services arm of Canada Wood based in Shanghai.

Greg soon learned that, although Japan and China are both East Asian countries, with similar origins of culture and language, China as a rising star in the global field has a very different market environment compared to Japan. "The first word I learned was fapiao, or receipt," said Greg half-jokingly. "Somebody told me I need to know this word if you want to do business in China." In China, "Guan Xi", also known as personal relationship or networking, is much more pivotal in the day-to-day work. Over the past year Greg has met and dealt with many different people and touted the benefits of wood frame construction to them everyday. A lot of Chinese developers, builders and suppliers are convinced and have become good friends of him.

With Greg Hoing at the helm of the technical team in China, the first Builders/Suppliers WFC Association as well as the Wood Frame Developers Association in China was established.

Greg's team is always thinking of innovative ways of delivering technical knowledge to the Chinese building community with numerous demonstrations and seminars planned.

When Greg arrived in China one year ago, the entire Canada Wood technical team of Barry Reimche, Eric Zhang and Daryl Birtch had just left the market so Greg's first order of business was to rebuild the whole team to support Canada Wood's training and quality assurance activities in China. Greg's philosophy is to surround himself with efficient, experienced and skillful people, so one year later, with the additions of Construction Specialists Steve Ross and Kerry Haggkvist and support staff Chen Xiao and Freedy Lu, the most important job of developing a qualified, motivated team is complete. "I am so proud of having such a great team with me, without their hard work, we could not have attained the results we've achieved so far." said Greg.

With Greg at the helm of the tech team, they successfully started the first Builders/Suppliers WFC Association as well as the Wood Frame Developers Association in China. In order to reach out to more industrial professionals, they also designed, built, and organized simultaneous trade shows in Beijing and Shanghai that reached thousands of developers, builders and architects. The team is always thinking of innovative ways of delivering technical knowledge to the Chinese building community so they developed a new program of technical demonstrations at seminars and tradeshows that resonated well with the attendees.

There is a Chinese saying "Behind every successful man, there is a woman." Apart from work, one of Greg's most important "tasks" is to spend time with his wife and daughter who are all living and enjoying life in China. In fact they will be adding to the Hoing clan with a new baby due in November.

Greg is still learning and observing this changing country "it is really not an easy job to convince all the Chinese people that wood is good, but we will do our best and we are confident that, in time, we are going to be very successful!" Greg stated enthusiastically.