Post-crisis global demand has driven up profits at Japan’s top companies, but the yen is also rising owing to fears for the recovery’s durability — casting a shadow over future earnings, analysts say.
The safe-haven unit has strengthened beyond the trading levels assumed earlier by many exporters who have eyed its rise with anxiety, as investors seek a refuge from US dollar and euro volatility.
If sustained, a stronger yen could erode repatriated overseas profits and make goods more expensive overseas, threatening the export sector that Japan depends on to offset its weak domestic picture, analysts say.
“A higher yen is a risk for exporters in the future,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute. “With production turning softer, the general recovery will possibly weaken toward the end of the year.”
On Friday, Japanese government data showed that shipments of cars, gadgets and components — crucial in offsetting a weaker domestic demand picture — unexpectedly slipped 1.5 percent in June. Concern is mounting that Beijing’s efforts to cool China’s economy and doubts over the health of eurozone and US economies may hit Japan.
“Rising exports lead to stronger industrial output, which drives other positive changes across the domestic economy, investment bank Macquarie said in a research note.
However, “the process works equally well in reverse, as seen in the second half of 2008,” the bank added, referring to the moment a global credit crunch threw world trade into a tailspin, sending Japan into deep recession.
Such uncertainty has enabled the yen to maintain its strength against the US dollar and the European single currency, which fell 14 percent against the yen in the April to June quarter, as investors sought the safe-haven currency.
The Japanese currency has continued to surge against the US dollar, which has been dogged by a run of disappointing US economic indicators. The greenback slid to more than a seven-month low of ¥86.27 on July 16.
Last month, Toshiyuki Shiga, chairman of the Japan Auto Manufacturers Association, urged the Japanese government to deal with the yen’s strength, saying its seemingly relentless strength could hurt the country’s economy. Earnings reports for the April to June quarter hinted that such an outcome could be on the horizon, with a strong currency eroding overseas profits and mitigating a recovery in consumer demand.
“Many Japanese electronics makers are on a recovery track, but there are some uncertain elements, notably the appreciation of the yen,” said Hiroshi Sakai, chief economist at SMBC Friend Research Centre. “The present rate is tough.”
Electronics giant Sony warned that “further appreciation of the yen against the euro is expected” and revised its exchange rate forecast to ¥110 versus the euro, compared with ¥125 forecast in May.
It maintained its previous forecast of ¥90 to the US dollar. However, the greenback is currently hovering at about the ¥87 mark, while the euro is about ¥113.
Europe comprises a quarter of Sony’s business and chief financial officer Masaru Kato urged caution: “We cannot let our guards down regarding our future prospects,” he told reporters.
Canon posted a sharp rise in profits because of healthy demand for consumer gadgets, but was nevertheless reluctant to raise its profit forecast for the year because of uncertainty over the yen.
“Had it not been for the strong yen, we would have raised our earnings forecasts,” Canon vice president Toshizo Tanaka said at a news conference.
Japan’s Finance Minister Yoshihiko Noda said on Friday he was carefully monitoring financial markets “every day,” suggesting possible discomfort about the persistently strong yen, in comments cited by Dow Jones Newswires.
Japan has not intervened in currency markets since 2004.
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