Analysis: Weaker yen may be burden in disguise for Japan Inc

By Natsuko Waki

TOKYO (Reuters) – Japanese companies will face more pain than relief from a weaker yen, which may have started a long-term downtrend after a four-year ascent just when currency strength would help the country pay for the reconstruction of the quake-hit economy.

A weaker yen enhances export competitiveness for the likes of Toyota Motor Inc (7203.T: Quote, Profile, Research) and Canon Inc (7751.T: Quote, Profile, Research) and is therefore usually considered a boon for the world’s third-largest economy.

However, manufacturers are unlikely to benefit near term from the yen’s fall after the triple disaster of earthquake, tsunami and nuclear crisis combined to idle production and so reduce their chances of taking advantage of currency weakness.

“Of course for companies which import raw material, fuel and resources, a weaker yen makes things difficult and it is in a way a one-two punch,” said Kazutaka Oshima, president at Rakuten Investment Management, a fund manager.

The yen, trading on Tuesday at 84.25 per dollar, has dropped 9 percent since hitting a record high of 76.25 shortly after the earthquake. The descent was helped by rare coordinated intervention by Group of Seven central banks.

Markets are betting the yen will stay weak longer term because Japan’s central bank is likely to keep interest rates low to aid recovery just as the euro zone and U.S. central banks are poised to tighten monetary policy.

The prospect of rising interest rates tends to attract capital for the higher returns. Indeed, the European Central Bank is widely expected to raise interest rates on Thursday for the first time since the global financial crisis.

The longer-term risk is that investors will think Japan’s already weak recovery from the global financial crisis will be made even more difficult by the natural disaster and the battle it unleashed to bring a nuclear power station under control.

“After moving above 83 yen the trend seems to have changed. Yen weakness may be reflecting a re-appraisal of the Japanese economy and ‘Sell Japan’ mentality. There is a question mark over the prospect for Japan’s recovery — partly because few people realize how deep the impact from the nuclear crisis and blackouts would be,” Oshima said.

The fall in the yen has not gone unnoticed in Tokyo. Economy Minister Kaoru Yosano warned the yen’s weakness means rising crude oil prices may directly hurt the economy.

The combination of crisis, high commodity prices and a weaker yen could, for a time, speed up the decline in Japan’s terms of trade as import prices rise faster than export prices. The terms of trade index is now below 80 from a high in 1994 of 145.6.

Manufacturing activity posted its steepest monthly decline on record in March, a purchasing managers’ survey showed, while big manufacturers expect business conditions to worsen in the next three months, another report said.

Illustrating the plight of automakers, lost car production in Japan in the two weeks since the quake has topped a third of a million vehicles.

Nomura estimates Japanese firms on its 400 companies index which include bluechips such as Sony Corp (6758.T: Quote, Profile, Research) to chalk up $17 billion in lost profits in the current fiscal year ending next March.


Some firms, facing rising import bills, want to pass on those costs to customers but that is proving difficult when production lines are suspended and demand is falling.

Nippon Steel (5401.T: Quote, Profile, Research), for example, is seeking a roughly 25 percent price hike from domestic contract manufacturers to cover surging input costs.

Ratings Agency Moody’s, which is reviewing Nippon Steel and rival JFE Holdings (5411.T: Quote, Profile, Research) for a possible downgrade, said their profits are likely to deteriorate as they face higher cost for steel and coking coal, and falling demand.

“We don’t like steel. It is oversupplied in the region with rising input cost and limited pricing power,” said Arnout van Rijn, Asia chief investment officer of Robeco, an asset management firm.

“In the near term we have to quantify the amount of earnings downgrades that will result from this dramatic sequence of events.”

A likely rise in imports and decline in exports as production lines struggle to return to normal operations will weigh on Japan’s trade balance.

The balance in February was in deficit for first time in 22 months.

Rising energy prices and Japan’s increasing oil-and-gas demand will be the biggest factors driving the rise in imports.

International oil prices are already hovering near their highest levels since 2008 off the back of political turmoil in the Middle East.

Japan’s oil demand is set to rise sharply in coming months after the natural disaster put nuclear power plants out of operation.

Credit Suisse estimates higher imports from a shift to thermal power generation would shave 2.8 trillion yen ($33 billion) off Japan’s trade surplus in 2011.

That would be a sizeable hit when measures against Japan’s 2010 trade surplus of 6.6 trillion yen.

“Power outages may also keep companies from producing at full capacity for quite a long time. It will take several months to fix disruptions in supply chains,” Eiji Hirano, former executive director of the Bank of Japan, told Reuters.

“While exports will slump mainly for manufacturers, imports will rise as reconstruction demand picks up. That will affect Japan’s current account balance,” said Hirano, who is now executive vice president of Toyota Financial Services.

While a gradual yen decline would certainly boost exporters once they get their production facilities back on track, they will find it hard to adjust if currency swings were as wild as they were in the past fortnight.

The yen rose to its record high of 76.25 per dollar from 82 per dollar in just two days, a massive rise for a currency. The G7 intervention pushed it back to around 82 per dollar a day later.

“In our experience, if the yen weakens about 5 yen, we can absorb it in six months, for about 10 yen, it takes a year,” said Akio Nitori, president of Nitori Holdings Co (9843.T: Quote, Profile, Research), which operates a chain of furniture and interior goods stories.

“As long as there isn’t a sudden swing, (a weak yen) can be dealt with,” Nitori said at a results briefing.

The company, which imports more than 70 percent of the goods in its Japan stores from overseas, has forecast its first annual decline in profits in 25 years, citing the disaster and higher raw materials prices.

Lower volatility would also suggest yen weakness over a long-term horizon. UBS’s calculations show that the yen’s nominal effective exchange rate falls 0.4 percent for every 1 percent decline in one-month dollar/yen volatility.

Naomi Fink, Japan strategist at Jefferies, says rising import costs would accelerate the trend for firms to move their production base offshore.

“Yen weakness only compounds the rising cost of imports. If you don’t have to convert to yen in the first place you don’t need to worry about it,” she said.

(Additional reporting by Leika Kihara and James Topham in TOKYO and Nishant Kumar in HONG KONG; Editing by Neil Fullick and Kevin Plumberg)

Analysis: Weaker yen may be burden in disguise for Japan Inc