A strong yen is not good news for Japanese export-driven companies. But the impact of the yen’s recent surge against the dollar to three-year highs is expected to be limited for now since firms have hedged the currency risk, economists and major manufacturers said.
If the yen continues to rise over the next year, however, this could cool consumer sentiment — canceling out gains from cheaper imports — and eat into corporate profits, they said.
The yen briefly hit a three-year high above 108 to the dollar in Tokyo on Wednesday, having risen about 6 percent since mid-September.
Junichi Makino, a senior economist at Daiwa Research Institute, estimated that any impact of a higher yen on corporate profits would be limited this fiscal year.
Even if the dollar fell to the 107 yen range during the October-March period, the aggregate operating profits of 1,364 listed Japanese firms for fiscal 2003 would increase by 6.4 percent from the previous year, compared with 6.9 percent if the rate were 117 yen, he said.
“Is a stronger yen still a blow to Japanese exporters?” asked Hideo Kumano, a senior economist at Dai-Ichi Life Research Institute Inc. “Yes it is, but they are trying to minimize the damage.”
Kumano said that during the process of the yen’s record strengthening, when the dollar fell to an all-time low of 79.75 yen in 1995, Japanese export-driven manufacturers were able to hedge the currency risk by increasing imports.
They also shifted production bases to Southeast Asia and China to cut costs and lessen their exposure to the risks of a yen rise.
In addition, firms made forward dollar contracts for most of their products, company officials said.
“Theoretically, the yen’s appreciation against the dollar by 1 brings about a fall in operating profits by 3 billion yen,” Sony Corp. chief financial officer, Takao Yuhara, said last week.
“But we’ve already made the dollar’s forward contracts at 114 yen for 80 percent of expected sales for the third quarter (October-December),” he said, adding that the electronics giant’s fiscal 2003 profits are not expected to suffer greatly.
According to a survey conducted earlier this month by the Ministry of Economy, Trade and Industry, 38 out of 49 selected companies representing 12 industries, most of them manufacturers, said they had made forward dollar contracts for at least two months.
Manufacturing products in the land of the dollar is also an effective hedge against a strong yen. Japan’s major carmakers either have a solid production presence in the United States or are gearing up for one.
Nissan Motor Co. is preparing to assemble vehicles in the U.S., Nissan President Carlos Ghosn told reporters earlier this month, noting that a 1 yen change to the dollar has a 10 billion yen impact on the firm’s profitability.
Yet the outlook for manufacturers will be dimmer if the yen continues rising and the dollar nears 100 yen in the next fiscal year.
Makino of Daiwa Research said that a dollar rate of 106.2 yen would send fiscal 2004 operating profits at vehicle manufacturers to zero.
Electronics makers have a stronger resistance line. If the exchange rate becomes 101.6 yen, they can still turn a profit.
Companies more immune to exchange-rate fluctuations, including chemical firms and steelmakers, could still post profits if the rate were 95 yen, Makino said.
He also said the impact of a yen rise on corporate operations has a 1 1/2- to two-year time lag. While a yen rise immediately reduces dollar-denominated profits when they are repatriated, it takes time for the price of Japanese-made goods to be increased overseas, and thus their competitiveness is lowered, he said.
According to the METI survey, 54 out of 67 responding firms said if the yen stays stronger than 110 yen in the mid to long term, they expect a negative impact on their profits or a downward revision of their capital spending plans.
Kumano of Dai-Ichi Life said smaller firms could suffer more than larger ones. Of the total amount of production by Japanese companies in 2002, 18 percent was estimated to stem from overseas manufacturing plants, according to another report by the trade ministry. The Bank of Japan said in a separate report that 91 percent of Japanese firms involved in overseas production in 2002 were big companies.
A strong yen, however, is not bad news for all Japanese. It makes imports, including oil, and overseas travel cheaper.
But Makino said that all in all, it could dampen consumer sentiment as it threatens employment and salaries by reducing corporate profits.
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