Japanese manufacturers’ breakeven point is decreasing every year and is now close to 80 Japanese Yen to one US dollar. The data comes from a new report from CSLA’s Chris Wood. In his popular Greed & fear, Chris Woods shows how every year the Japanese Yen needs to come down even further for domestic companies to breakeven. The current US Dollar ($) / Japanese Yen (¥) rate is 93.41. The new Prime Minister, Shinzo Abe has been attempting to devalue the Japanese Yen in part to help increase exports. Hedge funds shorting the Japanese Yen have made billions off trade, and many continue to short. Data from Greed & fear shows that the Japanese Yen would have to decrease by over 10% immediately for Japanese companies to breakeven. Furthermore, the breakeven point has been decreasing by nearly six Japanese Yen/USD over the past several years. Below is a brief excerpt from the latest Greed & fear on the Japanese Yen topic followed by a summary of the report.
The “currency wars” hype has fortunately receded after the latest talking shop conducted in Moscow. Still the lack of censure directed at Japan at the G20 summit last weekend makes it clearer than ever that Washington has given the green light to Japanese Prime Minister Shinzo Abe’s new surge of currency-related policy activism.
The decline in the Japanese yen remains the big story of the past three months in markets. The Japanese Yen is currently in consolidation mode pending the announcement of who will be the government’s candidate for the next BOJ governor. Hopefully, more clarity will be provided on this during next week’s CLSA Japan Forum in Tokyo. But, in the meantime, it is important to understand that the yen only has to stay at its present level for it to be extremely constructive for prominent exporters’ earnings. A clue to this phenomenon was provided by the full year results this week from Bridgestone Corp (TYO:5108) (PINK:BRDCY). The company forecast 33.6% growth in operating profits for calendar year 2013 based on a forecast exchange rate of ¥89/US$ and ¥119/€. The company also said that its sensitivity to the yen/dollar rate has increased by 5% to ¥3.9bn per one Japanese Yen move. This is a reminder that during the period of endaka, or the strong Japanese Yen era under the redoubtable Masaaki Shirakawa at the BoJ, corporate Japan has been forced to lower its breakeven point to deal with the strong currency.
The same message was given by Toyota Motor Corporation (NYSE:TM) (TYO:7203) earlier this month when the company announced that it could make money on its domestic produced cars at a yen/dollar exchange rate of ¥79/US$ and that every one Japanese Yen fall in the value of the yen adds ¥40bn to its operating profits. This has very positive implications given the yen is now ¥93.6/US$ or 16% lower. Toyota Motor Corporation (NYSE:TM) (TYO:7203) forecasts operating profits for FY3/13 ending 31 March to reach ¥1.15tn, while consensus forecasts are now ¥1.22tn for FY3/13 and ¥1.77tn for FY3/14. About half of Toyota’s auto production is in Japan.
The other point to remember is that the weak Japanese Yen is not only a positive because it means higher profit margin on products sold abroad. But it also likely means higher top line sales since the products are priced more competitively (i.e. it is a dynamic not static situation). But the real icing on the cake is the extent to which the top Japanese corporates have lowered their breakeven point in recent years.
GREED & fear hears that Japanese companies are remarkably reluctant to provide detailed information on this issue which is why the Bridgestone Corp (TYO:5108) (PINK:BRDCY) announcement is interesting. But in the absence of specific bottom-up data, the best clue on this phenomenon can be found in an annual government report which has been cited by CLSA’s
Tokyo strategist Nicholas Smith. Thus, according to the Annual Survey of Corporate Behavior conducted by the Economic and Social Research Institute (ESRI) of the Cabinet Office, the yen/dollar