Negative Effects of High Yen on Japan – The Reality

Osaka – Sunday, November 13, 2010




High yen, hovering at the level of 80 – 85 yen per USD, was what export-oriented Japanese companies suffered from around 1995, and what made many of them shift some of their production to other countries of Asia. Yen has been hovering again at the level of 80-82 yen per USD for quite a while now when many of the Japanese companies are said to have originally made their made business plan at the exchange rate 87 – 95 yen per USD and therefore has been a serious issue in Japan.



Taking this opportunity, the author would like to discuss to clarify possible effects of high yen on Japan, focusing on the negative ones in this article, and positive ones in the upcoming article.



1. Profitability decrease of export-oriented Japanese companies



High yen directly hit profitability of export-oriented Japanese companies, when majority of the major Japanese companies such as Toyota, Sony and Panasonic to name just a few are such companies.



In the case of “made in Japan” products that are exported, high yen means decrease in gross margin because the total cost remains almost the same while the sales price in the market would be cut when converted to yen. If raw materials are imported their cost would be lower but it is the production cost accrued in Japan verses the sales price that is the primary determinant of gross margin.



For this reason, high yen is one of the reasons for slow in revenue and profit recovery of many of the Japanese companies compared to their western and Korean counterparts, as mentioned in the previous article "Japan Stagnates in Stock Market Recovery Unlike Worldwide – Why?"



According to the articles dated November 6 by Nikkei, Japanese leading newspaper specialized in business economy, the recovery rate for major Japanese companies fall behind those of western counterparts. Even Mitsubishi Trading that is #1 in the profit recovery, profit is 90% of that of pre-worldwide crisis. Panasonic is just below 50% and for Komatsu strong in Asia business is 60%.



Toyota’s case is probably one of the good examples to understand how high yen is negatively affective company’s profitability, whose profit remains as little as less than 20% of that of pre-worldwide crisis. According to Nikkei, for Apr-Sep 2010, Toyota, that was in negative by 137 billion yen for Apr-Sept 2009, has managed to turn back go black being in positive by 323 billion yen. This attributes to positive factors including sales increase (+570 billion yen) and improvement in cost competitiveness (+90 billion yen). But negative effect on currency (= high yen, which is higher by 7 yen per USD compared to last year) was 120 billion yen and therefore the total profit was only 323 billion yen



2. Shift in production of export-oriented Japanese companies to overseas



The first measures taken in many cases for cost reduction in high yen situation is cutting production cost by shifting production from Japan to countries of lower labour cost such as ASEAN and China. This is why production shift took place in many manufacturing companies especially consumer electronics and automobile companies in mid 1990s.



The recent high yen is triggering further production shift to overseas. Nissan was one of the first companies that explicitly said they will shift more production sites to Asia, followed by other companies. Others that have not yet announced the production shift but they say that if the high yen continues they also would consider production shift to overseas.



There is no sign of the yen to get lower and some view that it is quite possible that it will get higher than 80 yen per USD. Experts and people of the industry say that if the yen should get as high as 75 yen 100% of the production of automobiles need to be shifted to overseas for the companies to make ends meet.



3. Economy remaining sluggish



In addition, high yen would be a big factor for sluggish economy, because of decrease in consumer spending and slow tourism business. Low consumer spending is one of the primary factors for sluggish economy.



Shift in production to overseas drives restructuring and job cuts. As a result, employment rate goes up. In such a situation, consumer spending would unlikely be stimulated unless the government gives incentives/execute economy stimulation measures that trades off such negative factors.



Also, high yen would likely to keep away tourists coming to Japan because it would cost them more to enjoy their visit to Japan, meaning less consumer spending. This is because even if the number of tourists visiting Japan remains the same, they are more unlikely be able to purchase same amount of products and services as low yen time unless they can afford to bring more money with them.