Yellen-Kuroda Two-Step Gives Japan Inc. an Edge Over Rivals

  • Japanese companies enjoying record profits after BOJ easing
  • Fed rate increase may weaken yen in boon for Japan exporters

Japan’s exporters are getting a helping hand from two different central banks these days.

While Bank of Japan Governor Haruhiko Kuroda is keeping stimulus measures flowing at home and putting downward pressure on the yen, U.S. competitors are set to be burdened by higher borrowing costs after Federal Reserve Chair Janet Yellen enacted the first U.S. interest rate increase in almost a decade.

Add to that BOJ data released Thursday showing that companies are continuing to add to their record piles of cash, and you get an idea of the formidable ability of Japan Inc. to compete in global markets. Japanese firms are cash rich amid record low interest rates, and the Fed’s move to tighten monetary policy only increases their competitive edge, according to Nicholas Smith, a Tokyo-based strategist at CLSA Ltd.

“Right now a Japanese corporate should be able to take on a three-front battle while juggling eight champagne bottles and balancing a carrot on its nose,” said Smith. “Super-cheap loans and a super-fluidity of money is a huge unfair advantage. It would be churlish not to take advantage of it.”

Policies implemented by Japan’s government have pushed funding costs to record lows and helped weaken the yen by 29 percent since Prime Minister Shinzo Abe came to power in 2012, drawing the ire of U.S. competitors. Cash and deposits held by Japanese companies rose 6.1 percent from a year earlier to a record 247 trillion yen ($2 trillion) at the end of September, the BOJ said Thursday. That’s a third more than in 2006 when the Fed last raised rates.

Yen Impact

The Fed’s rate hike may also result in a weaker yen against the dollar, giving Japanese companies such as Toyota Motor Corp. and Sony Corp. an additional advantage. Sony’s shares rose as much as 4.9 percent in Tokyo, their biggest intraday gain since Sept. 30.

The yen may gradually approach 128 yen against the dollar “in a few months” said Takuji Okubo, Tokyo-based chief economist at Japan Macro Advisors. The greenback bought 122.42 yen as of 9.33 a.m. on Thursday in London.

The cost of protecting debt against non-payment fell in Japan, with the country’s credit-default swaps index dropping 2 basis points to 71 basis points as of 2:01 p.m. in Tokyo, based on Citigroup Inc. prices. The yield on Japan’s 10-year bond fell 0.5 basis point to 0.295 percent Thursday.

Well Capitalized

Takehito Yoshino, chief fund manager at Mizuho Trust & Banking Co.’s fixed-income investment team in Tokyo, said he expects the Fed to raise rates by 0.25 percent twice in 2016, lower than Fed expectations. Fed policy makers forecast that the short-term policy rate will rise to 1.375 percent at the end of 2016, implying four quarter-point increases in the target range next year, based on the median number from 17 officials.

“There is a strong chance that the U.S. economy will peak out, and companies’ earnings right now aren’t that strong,” said Mizuho’s Yoshino. “There are a lot of risk factors globally.”

The average yield on U.S. corporate bonds has risen to 3.68 percent, its highest since January 2012, representing a 45 basis point gain since the start of the year, according to Bank of America Merrill Lynch data. The corresponding level in Japan was 0.32 percent, 6 basis points above a 10-year low reached in January, the indexes show.

“Japanese companies are incredibly well capitalized,” said CLSA’s Smith. “They are not the frail things they were a decade ago.”

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