Mon, Feb 07, 2011 - Page 5 News List

ANALYSIS: Japan Inc profits overshadowed by yen appreciation


Strong earnings for many Japanese exporters may have soothed concerns about the impact of the strong yen, but the unit’s rise still compromises the nation’s biggest companies, analysts warn.

The likes of Canon, Sony and Honda collect more revenue overseas than in Japan and the profit-eroding surge of the Japanese currency has threatened to undermine a demand revival following the global financial crisis.

The earnings season for the quarter ended last month has seen Japan Inc rake in profits thanks to a pick-up in the global economy and strengthening emerging market demand, reflected in Tokyo’s Nikkei index’s 1.77 percent gain last week.

However, many companies have remained cautious in their outlook, maintaining earlier forecasts as the yen continues to cast a shadow, analysts say.

“Corporate earnings seem to be positive, but the impact of a higher yen is certainly there,” said Taro Saito, a senior economist at NLI Research Institute.

“Figures may look good when you see the earnings compared to the previous year, when the aftermath of the Lehman Brothers collapse was still dragging on the economy,” he said. “But profits have slowed because of the strong yen.”

The strength of the yen has compounded the harsh environment in which Japan Inc finds itself, given sluggish consumption and entrenched deflation at home and worries over the durability of recovery in key US and European markets.

Nintendo generates more than 80 percent of its sales overseas and holds most of its cash assets in foreign currencies. It partly blamed an ¥84.4 billion (US$1 billion) foreign exchange loss for a 74 percent net profit slide in April-December.

“The speed of the yen’s ascent has exceeded our capacity to cope,” Nintendo president Satoru Iwata said last month.

In November, the yen struck a 15-year high against the US dollar at 80.21. While it has since stabilized at around the ¥82 level, analysts warn that its strength will continue to bite.

A strong yen causes headaches for Japanese exporters because it makes their products more expensive abroad and eats into overseas revenues repatriated to Japan.

Electronics giant Sony, which makes 80 percent of its sales outside Japan, blamed the yen’s 8.7 percent rise against the US dollar and its 18.5 percent gain against the euro compared with a year earlier for a third quarter revenue and net profit fall.

The maker of Bravia TVs has undergone major restructuring following the financial crisis — slashing thousands of jobs and selling facilities — and now faces exposure to a strong yen.

It saw an 8.6 percent decline in third quarter net profit because of the yen and also on falling LCD TV prices as it struggles against tough competition from overseas rivals with relatively cheaper domestic currencies.

For every ¥1 rise in the currency’s value against the US dollar, Japan’s exporters can lose tens of billions of yen earned overseas when repatriated.

This has forced Japanese manufacturers to rethink their production methods, switching manufacturing closer to the point of sale, or to seek lower costs by automating more assembly.

With a near 80 percent leap in operating profit to US$4.7 billion last year, Canon, the maker of PowerShot cameras, demonstrated that efforts to cut costs — such as by accelerating the automation of its factories — are paying off.

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