Will Falling Yen Cut U.S. Automakers? - Analyst Blog
April 12 2013 - 9:02AM
Zacks
Japan seems to have joined the bandwagon. Last week, Bank of
Japan (BOJ) announced a major quantitative easing (QE) program in
an effort to revive the economy out of deflationary pressure that
lasted more than a decade. The credit goes to Shinzo Abe – the new
prime minister of Japan – and certainly his so-called
Abenomics.
BOJ has decided to purchase ¥7 trillion ($71 billion) of long-term
government bonds, a drastic move that will double Japan’s monetary
base (cash circulating in the economy plus commercial banks’
reserves with the central bank) to ¥270 trillion ($2.7 trillion)
from ¥135 trillion ($1.4 trillion) within two years.
With ample cash being injected into the economy, consumer spending
will increase pushing price and wage levels upwards. Based on this
radical Abenomics principle, BOJ’s newly-appointed governor
Haruhiko Kuroda intends to achieve an inflation rate of 2% per
annum within 2 years.
Japanese yen has already been falling due to the government’s
devaluation. Since last June, the yen has dipped by more than 20%
against the U.S. dollar. The falling yen has been helping the
Japanese economy very well in boosting exports.
Exports in Japan went up 6.4% on a year-on-year basis in January
for the first time in eight months. Exports to the U.S. grew 10.9%,
including a 10.5% and 29.9% rise in exports of automobile and auto
parts, respectively in the same month. Higher exports mean lower
trade deficit in medium-to-long term as well as higher GDP.
The recent QE measure by the BOJ delivered another blow to the
falling yen. Since the announcement on Apr 4, yen depreciated
sharply by 5.6% against the dollar, ending its short-term gain
following the Cyprus crisis. It also led the Nikkei index go up by
5.1% for the week, the second strongest since November last year.
Kudos to Abe!
The Pain of U.S. Automakers
A falling yen certainly boosted the confidence of the Japanese
automakers operating in the U.S. and, on the other hand, inflicted
pain to the U.S. automakers. Toyota Motor Corp.
(TM), being the largest among the Japanese auto manufacturers, is
expected to be the biggest gainer from the currency tailwind.
According to a Deutsche Bank report, Toyota exports more than 2
million vehicles from Japan and about 27% of the vehicles sold by
it in the U.S. are imported compared with 10% by Honda
Motor Co. (HMC). The report also revealed that 15%–35% of
the parts in models built by Toyota’s North American facilities are
imported from Japan. As a result, Toyota is believed to be very
well positioned to take advantage of the falling yen compared to
other automakers in its home country.
Last year, Toyota recaptured the sales crown from General
Motors (GM) by selling 9.75 million vehicles globally,
which exceeded GM’s sales of 9.29 million vehicles. The falling yen
could further help the company in achieving its goal of selling 10
million cars and trucks globally by 2015.
In the third quarter of the fiscal year ended Dec 31, 2012, Toyota
saw its operating income dip 16.7% to ¥124.76 billion ($1.54
billion). Further, the company continues to struggle with a series
of safety recalls, costing it millions of dollars for fines and
penalties.
Nevertheless, the automaker expects significantly higher
operating income of ¥1.15 trillion (up 223.4% from fiscal 2012) and
net income of ¥860.0 billion (up 203.3% from fiscal 2012) for
fiscal 2013 ended Mar 31.
Honda also expects operating profit to improve 124.8% to ¥520.0
billion and net profit to go up by 75.0% to ¥370.0 billion in
fiscal 2013. All these undoubtedly reflect benefits from the
depreciating yen.
Price War
The U.S. automakers, especially the Detroit Big Three including GM,
Ford Motor Co. (F) and Chrysler, are highly
concerned about how falling yen would provide a competitive edge to
the Japanese automakers in terms of pricing. They have already
tasted the bitterness seeking bankruptcies or undergoing aggressive
restructuring during the global economic crisis in 2009 in order to
become afloat in a market dominated by the Japanese automakers.
The U.S. automakers are afraid that Japanese automakers might use
the depreciating yen as a strong weapon to beat them, unleashing
many growth-oriented strategies and launching new models using
their inflated profits. This in turn may compel the U.S. automakers
to engage in price wars, eroding their margins over time.
What Fed has to Say?
The U.S. Federal Reserve has apparently welcomed Abe’s policies for
choosing the path paved by them. Fed’s Chairman Ben S. Bernanke
already considered Abe’s currency policies as “mutually
beneficial,” while many political activists are able to see its
potential threat and asked for corrective action. Bernanke believes
that Abe’s policies are mainly intended in mending the Japanese
economy rather than hurting the interest of major economies around
the world.
How Sustainable is the Effect of Favorable
Yen?
Firstly, Abe’s policies could significantly offend certain groups
of the world economy due to its resultant impact of a currency war.
They could seriously undermine the decisions taken by G7 finance
ministers and central bank governors at their February meeting
against currency devaluation as a measure to revive the economy.
They have clearly mentioned that volatile and disorder movements in
exchange rates could have adverse impact on economic and financial
stability.
Given the ailing conditions of the global economy at present, it is
quite possible that many countries would seek currency devaluation
in order to secure a competitive advantage, resulting in nothing
but a zero-sum game. Apart from the currency war, Abe’s policies
could also endanger the stability of the international monetary
system and the very existence of the global capitalism.
Secondly, currency could not be the sole weapon in winning market
share and boosting profits. It is true that Japanese automakers
gain competitive advantage in the U.S. market due to the currency
effect but that doesn’t make them invincible in the global
market.
Demand for Japanese automotive brands in the world’s biggest market
China has already shattered due to the political conflict between
Beijing and Tokyo over disputed islands in the East China Sea.
According to the China Association of Automobile Manufacturers
(CAAM), sales of Japanese passenger cars dipped 16% year-over-year
in the first quarter of the year.
In contrast, emerging markets such as Brazil, China and India are
gradually becoming the biggest strength of Detroit automakers. Both
Ford and General Motors have embarked on a major expansion plan in
these markets that include investment in new facilities and rolling
out new models. Ford expects Asia to account for 70% of its global
growth in this decade, mostly from China and India.
On the other hand, GM plans to upgrade 70% of its global lineups by
the end of this year and invest $8 billion annually in new vehicle
development. The automaker plans to pump in $1.5 billion in its
North American facilities in 2013 as part of its annual investment
plan for new vehicle development. The company expects to boost
profit margins in the region from the current 8% to 10% in the next
three to four years.
FORD MOTOR CO (F): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
HONDA MOTOR (HMC): Free Stock Analysis Report
TOYOTA MOTOR CP (TM): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
Toyota Motor (NYSE:TM)
Historical Stock Chart
From Jun 2024 to Jul 2024
Toyota Motor (NYSE:TM)
Historical Stock Chart
From Jul 2023 to Jul 2024