Strong yen weighs on exporters

Hatoyama team's tolerance of exchange-rate gains poses threat to economy, some say

by Jason Clenfield and Toru Fujioka

Bloomberg

Exporters are in danger of being left behind by a global trade recovery as the nation’s change in government ushers in a tolerance for exchange-rate gains that threaten to erode their profits.

Exports fell 36 percent in August from a year earlier, the Finance Ministry said Thursday, marking the 11th decline in a row. The drop was exacerbated by the yen’s 17 percent surge against the dollar in the past year, making Japanese goods more expensive abroad and hurting the value of repatriated earnings.

Japan’s currency jumped to a seven-month high last week after Finance Minister Hirohisa Fujii, whose Democratic Party of Japan won elections promising to boost consumers’ purchasing power, said he didn’t support a “weak yen.” The comments suggested a change from the Liberal Democratic Party, which ruled for most of the past 55 years supporting the exporters that led growth.

“You’ve got some romantic longing that maybe a strong yen isn’t such a bad thing,” said Jesper Koll, chief executive officer of hedge fund TRJ Tantallon Research Japan. “It’s a nice little policy that at the margins increases the purchasing power of Mr. and Mrs. Watanabe. The problem is that whether you like it or not, you are a net exporter. A stronger yen will eat further into the profitability of corporate Japan.”

The currency’s gains have made it harder for exporters such as Panasonic Corp. and Toyota Motor Corp. to compete with rivals in South Korea. The Korean won has depreciated 23 percent versus the dollar in the past two years just as the yen surged 26 percent.

“You can see the damage from the yen if you look at Japanese exports compared to Korean exports,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “Korea’s done much better over the last year and if you look at the won-yen exchange rate that tells you a lot of the reason.”

Record sales helped Samsung Electronics Co.’s profit climb 5.2 percent last quarter, while Panasonic suffered a net loss as revenue dropped 26 percent. Hyundai Motor Co. has taken market share away from Toyota: The South Korean carmaker’s U.S. sales dropped less than 1 percent in the first eight months of the year, while Toyota’s plunged 29 percent.

“We’re affected by exchange rates, there’s no doubt about it,” said Paul Nolasco, a Tokyo-based spokesman at Toyota, which based its earnings estimates on the assumption that the yen will trade at an average of 92 to the dollar in the next six months. The automaker forecasts a ¥450 billion ($5 billion) net loss for the year ending March 2010.

The yen was trading at 91.11 per dollar at 11:13 a.m. in New York on Friday, rising 0.2 percent from late Thursday. That’s stronger than the 97.33 level that Japan’s exporters say they need to ensure a profit, according to a Cabinet Office survey released April 22.

Exports helped lead Japan’s economy to grow for the first time in more than a year in the second quarter, ending its worst postwar recession.

During the election campaign, the DPJ, led by Yukio Hatoyama, said a stronger currency would benefit households by making imported goods less expensive. The emphasis on consumers contrasted with the LDP’s focus on corporate interests, analysts said.

While LDP-led governments didn’t sell the yen in the past five years, they had a history of foreign-exchange intervention combined with support for the “strong-dollar” policy of the United States. The Bank of Japan, at the behest of the Finance Ministry, sold yen and bought dollars on more than 40 days during the first quarter of 2004.

“For the previous guys, there was an underlying doubt in the minds of the market that at some point they would intervene,” said Macquarie’s Jerram. “Fujii’s comments suggest the possibility is less under the DPJ.”

Fujii said Thursday that “in principle, markets — the currency market, the stock market — are the stronghold of a free economy. I have been questioning the idea of easy intervention.”

Goldman Sachs Group Inc. analysts are among those predicting the yen will decline because the BOJ will refrain from raising interest rates longer than its counterparts, seeking to strengthen the recovery.

The yen rose to a seven-month high of 90.13 on Sept. 16 after Fujii said he doesn’t support a weak-yen policy.

The yen’s strength is already taking a toll on some Japanese companies. Canon Inc., the country’s biggest maker of office equipment, says every ¥1 increase against the dollar will lower its second-half operating profit by ¥4.2 billion. The company based its profit forecast of ¥110 billion on the assumption the yen would average 95 to the dollar in the last six months of the business year.

“There are some factors that are not in our control,” said Richard Berger, a Tokyo-based spokesman at the company. “Changes in the exchange rate can have a serious impact on results.”