Japan Inc suddenly sees the downside of tumbling yen

As Canon kicked off Japan’s corporate earnings season in late April with an upgrade to its annual profit guidance, chief executive Fujio Mitarai welcomed the yen’s sharp decline as “a big plus” for the printer maker.

Canon has been one of the biggest beneficiaries as the Japanese currency fell through ¥130 against the dollar just days before its results came out. The yen’s tumble has made it cheaper to export the office equipment it makes in Japan while boosting profits earned overseas.

Other big Japanese export names such as Sony, Toyota and Nintendo have done even better, churning out record profits despite Covid-19 disruptions. But what was long a blessing for corporate Japan is suddenly turning into a threat as the yen’s spectacular fall to a multi-decade low coincides with a surge in commodity prices sparked by Russia’s invasion of Ukraine.

The Japan Iron and Steel Federation has warned that the yen’s fall presents “a risk for Japan’s manufacturers for the first time”. Noting that companies import raw materials to make and sell products in Japan, Tadashi Yanai, outspoken chief executive of Uniqlo owner Fast Retailing, has declared that “the weak yen has no merit whatsoever”.

That is not quite the case. Bank of Japan governor Haruhiko Kuroda argues that a weak yen remains broadly positive for the Japanese economy despite the difficulties it causes, particularly for smaller businesses dependent on imports of fuel and raw materials.

But even for large exporters, the benefits of a weaker yen have waned compared with a decade ago, when businesses warmly welcomed then-prime minister Shinzo Abe’s efforts to drive the currency lower through aggressive monetary easing.

“Before Abenomics, the yen was too strong so the move from ¥80 to ¥110 was welcomed. And a weak yen was convenient to resolve deflation,” said Kazuo Momma, executive economist at Mizuho Research Institute.

Japanese carmakers and other manufacturers have shifted production overseas to reduce their exposure to currency volatility since being punished by a strong yen in the wake of the global financial crisis in 2008. The ratio of overseas production among Japanese manufacturers rose to an estimated 22 per cent in the last fiscal year from 17 per cent in fiscal 2007, according to cabinet office data.

“If somebody tells me that ¥130 [against the dollar] is good news for you, I will say it’s not good news and it’s not bad news because . . . we have plants all over the world,” Ashwani Gupta, Nissan’s chief operating officer, said in an interview. “I think we will say that anything between ¥116 and ¥122 makes our operations the most effective globally.”

The common use of hedges to protect against swings in foreign exchange rates also means Japanese companies cannot cut export prices immediately in line with a weakening of the yen. Moritaka Yoshida, president of Toyota supplier Aisin, said responding was even trickier when the currency moves as dramatically as when the yen dropped from ¥114 against the dollar in early March to ¥130 by the end of April.

Another critical difference from the Abenomics era is the inflationary pressure now squeezing households. The yen’s fall has accelerated the global rise in commodity prices, making everything from petrol to bread and vegetables more expensive since Japan is a net importer of oil and food.

For Toyota, “an unprecedented” rise in raw material and logistics costs will wipe ¥1.45tn ($11bn) from its operating profits for the fiscal year through to March 2024, far outweighing ¥195bn in currency-related gains. Even considering the group’s conservative exchange rate forecast of ¥115 to the dollar, compared with ¥128 on Wednesday, its costs from climbing steel and aluminium prices are unlikely to be offset by a weaker yen.

Toyota produces a third of its cars in Japan, compared with less than 20 per cent for Nissan and Honda. That makes it a bigger beneficiary of the weaker yen, but analysts said Japan’s largest carmaker was at a disadvantage to global rivals when it came to passing on the higher cost of raw materials to consumers.

“Raising prices for finished products is not widespread in Japan,” said Takaki Nakanishi, an automotive analyst. “It is relatively easier for those that produce overseas to raise product prices to address the increase in costs during the production process.” 

The chip shortage and other supply constraints have also prevented companies from increasing production from their plants. That has reduced the trickle-down effect of the weaker yen, which comes when companies lower in the supply chain benefit as export giants invest in factories at home to expand capacity.

“The future has become uncertain due to the Ukraine crisis,” said Wakaba Kobayashi, economist at Daiwa Institute of Research. “So while exporters are benefiting from the weak yen, they remain hesitant to make capital investments.”

Still, longtime Japan watchers such as Nissan’s Gupta are convinced the weaker yen will be good for the economy as a whole if it can eventually help achieve the government’s long-stated goal of sustained domestically generated inflation.

“We are seeing Japan graduating from deflation. This is great news,” Gupta said. “Of course it was driven more by the cost side, but I think we’re getting into a cycle when it will be pulled by the people.”

Additional reporting by Antoni Slodkowski