Japan Inc suddenly sees the reverse side of the yen’s fall

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When Canon launched its corporate earnings season in Japan in late April with improved benchmarks for annual profits, CEO Fuji Mitarai hailed the yen’s sharp decline as a “big plus” for the printer maker.

Canon was one of the biggest beneficiaries as the Japanese currency fell 130 ¥ to the dollar a few days before the results came out. The fall of the yen made it cheaper to export office equipment, which it produces in Japan, while increasing profits abroad.

Other major Japanese export names from Sony and Toyota to Nintendo worked even better, earning record profits despite disruptions from Covid-19. But what has been a long-standing blessing for corporate Japan is suddenly becoming a threat, as the spectacular fall of the yen to a minimum in a few decades coincides with rising commodity prices caused by Russia’s invasion of Ukraine.

The Japanese Federation of Iron and Steel warned that the fall of the yen “for the first time poses a risk to Japanese producers.” Noting that companies import raw materials to produce and sell products in Japan, Tadashi Yanai, open CEO of Uniqlo Fast Retailing owner, said stated that “a weak yen has no merit.”

This is not entirely true. The head of the Bank of Japan Haruhika Kurada claims that the yen remains weak generally positive for the Japanese economy, despite the difficulties it causes, especially for small businesses that depend on imports of fuel and raw materials.

But even for major exporters, the benefits of the weaker yen have disappeared compared to a decade ago, when businesses warmly welcomed then-Prime Minister Shinzo Abe’s efforts to devalue the exchange rate through aggressive monetary easing.

Tokyo’s Sony headquarters. The company reported record profits, which contributed to the weak yen © Kimimasa Mayama / EPA-EFE / Shutterstock

“Before Abenomics the yen was too strong, so the transition from ¥80 to ¥101 was welcomed. And the weak yen was good for eliminating deflation, ”said Kazuo Moma, executive economist at the Mizuha Research Institute.

Japanese carmakers and other manufacturers have shifted production overseas to reduce the impact on currency volatility after they were punished by a strong yen as a result of the 2008 global financial crisis. The ratio of overseas production among Japanese producers rose to about 22 percent last fiscal year from 17 percent in fiscal 2007, according to the Cabinet.

“If someone tells me that ¥ 130 (against the dollar) is good news for you, I will say it is not good news and not bad news because. . . we have plants around the world, ”said Nissan Gupta, Nissan’s chief operating officer, in an interview. “I think we’ll say that anything between 116 and 122 yen makes our operations the most efficient in the world.”

The usual use of hedging to protect against exchange rate fluctuations also means that Japanese companies cannot immediately reduce export prices in line with the weakening yen. Maritaka Yoshida, president of Toyota Aisin supplier, said the answer was even more difficult when the currency moved as sharply as when the yen fell from 114 yen to the dollar in early March to 130 yen by the end of April.

Another key difference from the Abenomics era is the inflationary pressures that are now squeezing households. The fall of the yen has accelerated global commodity prices, making everything from gasoline to bread and vegetables more expensive as Japan is a net importer of oil and food.

For Toyota, an “unprecedented” rise in raw material and logistics costs destroy ¥ 1.45 trillion ($ 11 billion) of its operating income for the fiscal year to March 2024, well in excess of ¥ 195 billion in currency-related income. Even given the group’s conservative forecast of ¥ 115 per dollar compared to ¥ 128 on Wednesday, its costs from rising steel and aluminum prices are unlikely to be offset by a weakening yen.

Toyota produces a third of its cars in Japan, compared to less than 20% in Nissan and Honda. This makes it a bigger beneficiary from the weaker yen, but analysts say Japan’s largest carmaker is at a disadvantage compared to global competitors when it comes to passing on higher raw material costs to consumers.

“Rising prices for finished products are not common in Japan,” said Takaki Nakanishi, an automotive analyst. “Those who produce abroad find it relatively easier to raise product prices to eliminate rising costs during the production process.”

Chip shortages and other supply constraints have also prevented companies from increasing production at their plants. This has mitigated the effect of a weaker yen runoff that occurs when companies at a lower level in the supply chain benefit as export giants invest in factories at home to expand capacity.

“The future is uncertain because of the Ukrainian crisis,” said Wakaba Kabayashi, an economist at the Daiva Research Institute. “So while exporters are benefiting from the weak yen, they are still reluctant to invest.”

However, longtime observers in Japan, such as Nissan’s Gupta, are convinced that a weaker yen will benefit the economy as a whole if it ultimately helps achieve the government’s long-held goal of sustained domestic inflation.

“We see Japan coming out of deflation. This is great news, ”Gupta said. “Sure, it was driven by more costs, but I think we’re entering a cycle when it’s going to be pulled by people.”

Additional report by Antoni Sladkowski

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