High Yen Slashes Profitability of Japanese Companies - The Reality

Osaka – Sunday, November 28, 2010




In one of the previous article "Negative Effects of High Yen on Japan – The Reality" the author explained the mechanism of how high yen leads to profitability decrease of export-oriented Japanese companies, which constitutes the majority of Japanese companies operating globally such as of automobiles and consumer electronics.



In this article, the author would like to introduce such cases in more depth, based on a recent article of Nikkei, Japanese leading newspaper specialized in business and economy, to prove that high yen has significance negative effect on Japanese companies of the industries that are usually regarded as being globally competitive.



1. How high yen has cut profitability of Japanese manufacturers?






1) Automobile



The profitability decrease for fiscal year ending March 2011 of leading 7 automobile companies (including Toyota, Nissan and Honda), is estimated to total as much as 81.6 billion yen, when compared with total profit calculated with the exchange rate of 85 yen per USD, which was the rate used in their original estimation. This amount is equivalent to one third of the profit that should have been generated if there had not been deterioration in the exchange rate.



2) Rubber (Yokoyama Rubber Co. Ltd.)



Yokoyama Rubber business in Russia suffered from more than 1 billion exchange-rate loss despite their strong business in Russia. Their winter tires of Yokohama Rubber is popular in Russia and their business in Russia has been growing steadily in the first half of fiscal year 2010 in local currency base. However, with high yen and low ruble, their revenue decreased when converted to yen, resulting in over 1 billion exchange-rate loss.



3) Mechatronics (Shibaura Mechatronics Corporation)



In the case of Shibaura Mechatroonics Corporation, the financial performance deteriorated due to high yen verses low won. Low won made their Korea competitors strong in price competitiveness and deprived of their business and market share. As a result, the order that Shibaura Mechatronics received in the first half of 2010 was 40% less that their original plan.



2. To what degree the yen appreciated this year?



The yen appreciated by over 10% in only a year. It was around 93 yen per USD in average in fiscal year 2009. However, in the first has of this year the yen drastically appreciated against almost all currencies, and the yen has been hovering 80-83 yen per USD this year, which is around 10 yen or more per USD higher this year than last year. This is the primary factor for profitability reduction of Japanese companies.



3. At which high yen level would make Japanese companies in the red?



A Japanese research institute estimates that overall manufacturers would turn to red when the yen gets as high as 65 yen per USD. However, even in the current level (i.e. 80-83 yen per USD), many companies are suffering from balancing revenue and employment in Japan.



Net profit for the latter half of 2010 of Shinko Electric Industrial, would be almost zero at the level of 80 yen per USD. IC package for MPU (Micro Processing Unit), their major product, is of high value added products of many SKUs each with little volume. For this reason, it is difficult for them to shift their production to overseas, which is the first solution adopted by Japanese companies to overcome high yen.



4. What would be the primary factor that determines where the Japanese companies invest in the future?



It would be the foreign exchange rage, i.e. how yen is high or low against other major currencies. The fact that more companies including Nissan have decided to shift their production to overseas is the evidence.



Even Tokyo Electron Ltd. that had kept to their policy of manufacturing in Japan to avoid outflow of their technologies, decided to shift their production to overseas this October at last, because of the high yen. They will construct a production plant for producing LCD panel manufacturing equipment in China with the objective of cost reduction and of benefiting from growing China demand.



Asia is now not only production site but also has grown to a major consumption market. Investment environment also has improved and thus the hurdle for Japanese companies to decide shifting to Asia has drastically lowered.



5. How many people would become unemployed in Japan when production is shifted to overseas?



If Tokyo Electron mentioned above should shift their production to overseas, their current employment of their 4000 factory workers in Japan would become unemployed.



And, Toyota estimates that total of 120,000 people (inside and outside Toyota) in Japan would lose their job if their production of 1 million cars per year, which is equivalent to approximately one third of their total Japan domestic production, is to be shifted to overseas. This is equivalent to approximately 1.7 times that of Toyota employees (non-consolidated). A Toyota executive said in their recent financial performance announcement that the present currency level is above the competitiveness of Japan economy, at least of Toyota.