Japan Inc Profits Boom Masks Fading Export Gains From Yen

Photographer: Kiyoshi Ota/Bloomberg

Vehicles bound for shipment sit parked at a port in Kawasaki, Kanagawa Prefecture, Japan. Export volumes fell 1.5 percent in 2013 from the previous year, evean as the yen slid 12 percent against the dollar, finance ministry data show. That constrasts with a 7.9 percent surge in 2006 after a similar-sized currency drop the year beforE. Close

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Photographer: Kiyoshi Ota/Bloomberg

Vehicles bound for shipment sit parked at a port in Kawasaki, Kanagawa Prefecture, Japan. Export volumes fell 1.5 percent in 2013 from the previous year, evean as the yen slid 12 percent against the dollar, finance ministry data show. That constrasts with a 7.9 percent surge in 2006 after a similar-sized currency drop the year beforE.

Soaring profits among Japanese manufacturers are masking weakness in exports as the yen’s slide against the dollar fails to deliver the boost seen after previous bouts of currency depreciation.

Export volumes fell 1.5 percent in 2013 from the previous year, Finance Ministry data show, even following a 12 percent decline in the yen against the dollar during 2012. That contrasts with a 7.8 percent surge in 2006 after a similar currency move.

The loss of competitiveness reflects yen strength from the 2007 onset of the global credit crunch until Prime Minister Shinzo Abe started a reflation campaign in late 2012, a period when capital spending slid 37 percent. Unless Abe can convince companies to plow profits into investment at home, the risk is of prolonged trade deficits that drag on the world’s third-largest economy.

“Abe’s economic policies have improved corporate cash-flows, giving them some breathing space,” said Takashi Kozu, chief research fellow at Ricoh Institute of Sustainability and Business and a former Bank of Japan official. “It’s important now that companies invest money to forge forward-looking strategies for true global survival.”

Export volumes last year were 19 percent below a 2007 peak, according to a finance ministry gauge. In the fiscal year ending March 2013, capital spending was 34.6 trillion yen ($335 billion), down 22 percent from the 2007 financial year.

‘Lost Edge’

“As Japanese companies struggled to cope with the prolonged period of yen appreciation, they couldn’t invest in research and development, the quality of goods slipped and they lost their competitive edge,” said Naohiko Baba, Goldman Sachs Group Inc.’s chief Japan economist and a former BOJ official. “It’s no longer an issue that can be resolved by a weak yen.”

Companies’ cash holdings rose to a record in the July-September quarter, adding to evidence that, for now, they are holding onto profits rather than boosting spending. Net income for Japan’s largest non-financial companies probably rose about 52 percent in the three months ended December from a year earlier, data compiled by Bloomberg show.

The yen surged to a record of 75.35 against the dollar dollar in October 2011, before beginning a slide in late 2012 after Abe became leader of the-then opposition Liberal Democratic Party and pledged aggressive monetary stimulus.

The yen traded at 102.18 per dollar as of 12:10 p.m. in Tokyo today, compared with a five-year low of 105.44 on Jan. 2. The Topix stock index dropped 3 percent as of the trading break, heading for the biggest decline since August, after the Federal Reserve pushed ahead with stimulus cuts even amid turmoil in emerging markets.

Trade Deficit

Japan last year reported a record 11.47 trillion yen trade deficit, almost double the amount the previous year, as the weaker yen pushed up import costs and nuclear-plant shutdowns boosted demand for crude oil shipments. Abe said yesterday that the government doesn’t expect the deficit to become permanent.

The shift of Japanese manufacturing abroad, which was fueled by the yen’s gains, is also a limit on exports. Tokyo-based Honda Motor Co. has more auto production capacity in North America than in its home market, and last year shipped more vehicles out of the U.S. than it brought in from Japan.

“We need to think what kind of business needs to be based in Japan and what can be outsourced overseas,” Hiroshi Watanabe, governor of the Japan Bank for International Cooperation, a state-run export-credit agency, said in an interview on Jan. 15. “If they diversify operations early, the currency impact will be offset and they will become resilient to currency swings.”

Coming Home

In one sign of a potential reversal of the trend, Canon Inc., the world’s largest camera maker, said yesterday that it will increase the proportion of manufacturing that it does in Japan, rather than overseas.

Chief Financial Officer Toshizo Tanaka said the reasons include currency levels and a shrinking gap between labor costs in Japan and other Asian nations. The company’s forecast for annual net profit missed analyst estimates, amid competition from makers of smartphones and tablet computers.

Japan’s export volumes may pick up if manufacturers become more confident that the yen’s weakness will be prolonged and cut their prices to boost market share. Last year, the value of shipments abroad jumped 9.5 percent to 69.8 trillion yen, according a preliminary government estimate.

Yen Believers

“If corporate Japan now comes to believe that the yen will stay weak or even continue to wobble, export prices may tumble,” Frederic Neumann, co-head of Asian economics research in Hong Kong at HSBC Holdings Plc., wrote in a note. “Then shipments would soar and Japan’s competitors, like Korea, may finally feel a squeeze.

South Korea’s government is forecasting that nation’s fastest export growth since 2011, a gain of 6.4 percent by value, even after the won’s rise of about 15 percent against the yen in the past year aided Japanese rivals in industries such as autos and electronics. South Korean industrial output jumped the most since 2009 in December, a report showed yesterday.

While stronger exports would help Japan to sustain economic momentum set to take a hit from a sales-tax increase in April, some analysts are sceptical that a resurgence will come. The failure of volumes to improve 16 months after the yen began to slide defies the so-called J-curve effect, which normally shows currency weakness translating into gains after six months or a year, according to economist Daisuke Karakama.

‘‘This has not happened before,” said Karakama, a market economist at Mizuho Bank Ltd. in Tokyo. “It may be time for Japan to formulate an economic policy that is uninfluenced by currency moves.”

To contact the reporter on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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