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Japan Inc. profit boom masks fading export gains from yen

Bloomberg

Soaring profits among Japanese manufacturers are masking weakness in exports as the yen’s slide against the dollar fails to deliver the boost seen after previous bouts of currency depreciation.

Export volumes fell 1.5 percent in 2013 from the previous year, Finance Ministry data show, even following a 12 percent decline in the yen against the dollar during 2012. That contrasts with a 7.8 percent surge in 2006 after a similar currency move.

The loss of competitiveness reflects yen strength from the 2007 onset of the global credit crunch until Prime Minister Shinzo Abe started a reflation campaign in late 2012, a period when capital spending slid 37 percent.

Unless Abe can persuade companies to plow profits into investment at home, the risk is of prolonged trade deficits that drag on the economy.

“Abe’s economic policies have improved corporate cash-flows, giving them some breathing space,” said Takashi Kozu, chief research fellow at Ricoh Institute of Sustainability and Business and a former Bank of Japan official. “It’s important now that companies invest money to forge forward-looking strategies for true global survival.”

Export volumes last year were 19 percent below a 2007 peak, according to a Finance Ministry gauge. In the fiscal year ending last March, capital spending was ¥34.6 trillion, down 22 percent from the 2007 financial year.

“As Japanese companies struggled to cope with the prolonged period of yen appreciation, they couldn’t invest in research and development, the quality of goods slipped and they lost their competitive edge,” said Naohiko Baba, Goldman Sachs Group Inc.’s chief Japan economist and a former BOJ official. “It’s no longer an issue that can be resolved by a weak yen.”

Companies’ cash holdings rose to a record in the July-September quarter, adding to evidence that, for now, they are holding onto profits rather than boosting spending.

Net income for Japan’s largest nonfinancial companies probably rose about 52 percent in the three months that ended in December from a year earlier, data compiled by Bloomberg show.

The yen surged to a record of 75.35 against the dollar in October 2011 before beginning a slide in late 2012 after Abe became leader of the Liberal Democratic Party and pledged aggressive monetary stimulus.

Japan last year had a record ¥11.47 trillion trade deficit, almost double the amount the previous year, as the weaker yen pushed up import costs and nuclear plant shutdowns boosted demand for crude oil shipments. Abe said Wednesday his administration doesn’t expect the deficit to become permanent.

The shift of manufacturing abroad, which was fueled by the yen’s gains, is also a limit on exports. Honda Motor Co. has more auto production capacity in North America than in its home market and last year shipped more vehicles out of the U.S. than it brought in from Japan.

“We need to think what kind of business needs to be based in Japan and what can be outsourced overseas,” Hiroshi Watanabe, governor of the Japan Bank for International Cooperation, a government-run export-credit agency, said in an interview Jan. 15. “If they diversify operations early, the currency impact will be offset and they will become resilient to currency swings.”

In one sign of a potential reversal of the trend, Canon Inc., the world’s largest camera maker, said Wednesday it will increase the proportion of manufacturing that it does in Japan, rather than overseas.

Chief Financial Officer Toshizo Tanaka said the reasons include currency levels and a shrinking gap between labor costs in Japan and other parts of Asia.