Japan’s new Prime Minister, Shinzo Abe, has received much attention from around the world for his aggressive economic policies. Abe is implementing some controversial actions, such as inflation targeting and stimulus spending. However, no action has been as critiqued as Abe’s attempt to devalue the Japanese yen.
Many economists agree that the Japanese yen has been overvalued for the past few decades. Abe wants a weak yen since it should help exports. So far it has been working. The yen is now at a 33-month low, with the exchange rate at approximately 96 yen to the dollar. When Abe was elected in late December, the rate was closer to 85 yen for every dollar. This has sparked concerns over a currency war as other countries might try to devalue their currencies, as well.
Chris Woods, an analyst at CLSA, has some shocking data regarding the yen and Japanese exports. Woods notes that both the Japanese government and Japanese companies are reluctant to provide much data on the yen; however, Woods found some information that should scare Japan.
He reveals that Japanese manufacturers are making enormous profits as the yen falls in value. Toyota announced that for every drop of 1 yen to the dollar, the company earns an extra 40 billion yen (or $420 million).
The data are getting better for Japan. For the past four years, the yen/dollar breakeven point of Japanese manufacturers has been lowered by an average of 6 yen to the dollar. This means Toyota can reap billions in yen (and dollars) even if the yen is strong (although it would prefer a weaker currency, which would earn the company even more).
Why then is there so much secrecy regarding the yen and how much it will impact company profitability? Bridgestone recently forecast a 33 percent increase in earnings, with over 50 percent of the earnings increase based on an expected weaker yen. Woods says that the data from Toyota and Bridgestone are surprising.
This brings us back to our main point: Abe is in a do-or-die situation. While a weaker currency almost always boosts exports, companies like Ford or Siemens can do well whether the dollar or euro is strong. However, a company like Toyota is addicted and dependent on a weak yen for profits.
This is likely why Japan and domestic companies have not released data on the breakeven point. If the yen gets too strong, Japanese companies can no longer compete. If other countries try to devalue their currencies and the yen strengthens, it would cripple Japanese corporations (how Japan was competitive with a strong yen is beyond the scope of this article, but, in short, times have changed).
Abe better hope that the yen stays weak because Japan is in tremendous trouble if his Hail Mary fails.
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