The persistent strength of the yen is squeezing profits of Japan's big exporters--and hobbling the recovery of the world's second-largest economy.
Over the past two months, a grim procession of Japanese corporate heavyweights--among them Sony Corp., Hitachi Ltd. and Mitsubishi Heavy Industries Ltd.--have reported weak midyear profits and blamed the currency's strength for their disappointing performances. Adding to the indignity, many of these firms have seen their earnings slide even as overseas sales have improved.
Hitachi this week slashed by 36 percent its forecast for consolidated pretax profit in the fiscal year ending March 2000. Sony has reported that its consolidated pretax profit for the six months ended Sept. 30 dropped 32 percent from the same period last year.
At Honda Motor Co., consolidated pretax profit from April to September fell 20 percent from the same period a year ago. All three companies cited the surging Japanese currency in explaining their dismal earnings.
A strong yen hurts Japanese exporters by making the goods and services they export more expensive and reducing overseas earnings when converted into yen.
"It's not a pretty sight," said Craig Chudler, equity strategist at Nikko Salomon Smith Barney. Japan's exporters "are taking a huge whack because of the currency," he said. "It's definitely crimping the recovery."
The appreciation of the Japanese currency--which has climbed 11 percent against the dollar in the six months ended Sept. 30 and remained at its current level of about 105 yen since September--has prompted analysts at Nikko Salomon Smith Barney to cut in half their estimate for earnings growth for nonfinancial companies listed on the first section of the Tokyo Stock Exchange.
Earlier this year, the Nikko Salomon Smith Barney team had predicted that those companies would earn consolidated pretax profits of $7.5 billion in the fiscal year ending in March 2000--a 23.7 percent improvement from last year, when the Japanese economy was in the depths of recession. Now Nikko Salomon Smith Barney expects Japan's top-listed firms to report profits of $6 billion for the current fiscal year. That would reduce the year-on-year improvement to 13.1 percent.
In past recessions, Japan's blue-chip exporters have served as the locomotive pulling the rest of the economy with them to higher growth. This time, however, that once-reliable engine is sputtering and threatens to stall entirely because it must climb against the effect of the currency's sharp rise.
The travails of Japan's export giants have prompted many Japanese executives and politicians to call for help from the nation's central bank. Japan's business press is filled with the anguished pleas of managers who argue that the Bank of Japan could help them by effectively putting more yen into circulation, thereby reducing its value against the dollar.
Thus far, however, the central bank has made only token concessions. Top bank officials contend that a weaker yen would only hurt Japan's economy in the long run, and they have made no secret of their view that a cheap currency would allow Japanese firms to ease up on painful, but long-overdue, corporate restructuring efforts.
"It is not realistic to think that all problems relating to the financial system and structural reform . . . can be solved by monetary policy alone," Yutaka Yamaguchi, the central bank's deputy governor, said in a recent policy address.
Although the payoff may be several years away, "the stronger yen is serving as a pressure to force restructuring," said Keiko Kondo of Merrill Lynch Japan Inc.
The capacity of a strong yen to weaken profits is particularly evident at companies such as Sony, where earnings are in the doldrums despite popular products such as the company's stylish new Vaio personal computer line, and steadily growing sales. Sony officials estimate that if the yen had remained at last year's levels, the operating profit of its electronics business in the July-September quarter of this year would have risen 35 percent instead of falling 47 percent.
Similarly, Honda sold more cars in North America and Europe in the first half-year than it did in the same period last year. Total sales, however, sank 3.2 percent.
Japan's mammoth shipbuilders, which typically rely on exports for more than a third of sales, have also felt the pain. This month, for example, Mitsubishi Heavy Industries reported a pretax loss of $353 million for the six months ended Sept. 30. Company officials attributed nearly half of that loss to exchange rate changes and are bracing in the current fiscal year for the first one-year loss in more than 30 years.
Buffeted by a series of endaka, or strong yen shocks, over the past decade, Japanese firms are increasingly moving production facilities to other countries. Total value of overseas production by Japanese manufactures has exceeded overall exports since 1996, according to the Japan Research Institute.
But the consensus among Western currency traders remains that, with only a few exceptions, Japan's big exporters do a poor job of hedging their exchange-rate risks.