Surging quarterly profits for Japan’s top companies belie the threat posed by a strong yen, as the currency’s rise prompts firms to shift production out of the country to stay competitive, analysts say.
With the currency closing in on its post-World-War-II high of ￥79.75 against the US dollar, Japan’s biggest companies are preparing to adapt to life with a currency that has defied Tokyo’s efforts to weaken it.
For many firms, the yen’s 14 percent rise against the US dollar and near 16 percent rise versus the euro this year has mitigated a post-crisis demand revival and undermined the benefits of earlier cost cuts and restructuring.
With more companies considering moving production overseas to stay competitive against rivals benefiting from weaker currencies in their home countries, Japan’s fragile recovery could be further tested, analysts say.
“Japanese companies are losing their edge. They are aware that they need to take the next step,” said Hideyuki Araki, economist at Resona Research Institute.
“This will mean shifting production overseas or a switch to imports of foreign-made parts from domestically produced ones,” he said.
Such a scenario would mean more jobs being taken out of Japan, threatening an already weak economy dependent on exports that account for two-thirds of its growth, as government efforts to generate domestic demand falter.
An August government survey suggested that at least 40 percent of companies in Japan were considering moving production overseas if the yen stayed high.
Despite last month intervening in the foreign exchange market for the first time in six years to sell the yen and adopting near zero interest rates, Tokyo has been unable halt the Japanese currency’s climb.
While many firms are coping better than expected, recent earnings point to darkened horizons.
Top exporters Sony and Panasonic both reported surging profits in the second quarter, with Sony raising its full year profit forecast.
However, the maker of PlayStation consoles and Bravia TV sets cut its full year sales forecast to ￥7.4 trillion (US$92 billion) from ￥7.6 trillion and warned of “a difficult business environment for the remainder of the fiscal year.”
Carmakers Honda and Mazda also reported strong profits in the second quarter, but the strong yen has forced them to re-set their dollar rates at more unfavorable levels. Honda downgraded its sales expectations for the year.
“Let me repeat this. The strong yen is painful,” Takashi Yamanouchi, Mazda chief executive, said at a press conference last week.
For every one-yen rise in the currency’s value against the dollar, Japan’s exporters can lose tens of billions of yen earned overseas when repatriated.
Toyota will start producing its Prius hybrid model in Thailand from next month, in its latest move to expand production overseas as the strong yen continues to bite into profits.
Rival Nissan last week spoke of “a sense of crisis” in the industry as it looks to reduce exports from Japan while increasing imports as a short-term measure to cope with the yen, aiming to shift more production abroad.
“Companies are trying to raise their target yen-dollar exchange rates for the second half,” said Mitsushige Akino, analyst at Ichiyoshi Investment Management Co. “But the present yen rate is already much higher [against the dollar] than their forecasts.”