Hot Sony Gadget: Negative Rates

The technology company's future may be decided by the Bank of Japan.

Sony's closest analogue among U.S. blue-chip companies isn't Apple, it's Berkshire Hathaway.

At base, the inventor of the CD player and lithium-ion battery is, like Warren Buffett's holding company, an insurance business bankrolling an industrial conglomerate.

So it's worth setting aside the impressive earnings performance in the company's third-quarter results, announced after Friday's close. (The stock rose 6.1 percent ahead of the release.) The really big news for Chief Executive Officer Kazuo Hirai came out of the Bank of Japan a few hours earlier, when Governor Haruhiko Kuroda introduced a negative interest rate -- minus 0.1 percent -- to stoke the country's sluggish economy.

Electronics components operating loss

12 billion yen

Earnings within Sony's sprawling non-financial divisions come and go. Like global interest rates, they also frequently head below zero these days. The electronic components business, a mainstay of Hirai's ambitions for the company that swallowed up Toshiba's image-sensing unit and Israeli chipmaker Altair over the past few months, slipped to a 12 billion yen ($99 million) operating loss in the most recent quarter as global smartphone sales slowed. Sony Pictures swung from a 46 billion yen profit three quarters ago, to a 22.5 billion yen loss in the second quarter, then back to a 20 billion yen profit in the most recent period. The mobile unit posted 24 billion yen of profit this time, after losing money in five out of the previous six quarters.

Financial services, by contrast, has turned in consistent profits quarter after quarter.

Firm Foundations

Operating income at Sony divisions, quarterly

Source: Company reports

Note: Sony's music and movies divisions, and the home-entertainment and cameras units, have been combined to improve clarity.

Considering Sony has 7.22 trillion yen of Japanese government bonds on its books, that division can expect an outsized impact from the Bank of Japan's decision. Lower interest rates are generally seen as bad for insurance companies, which are obliged to invest most of their premiums in stable securities such as government debt, and ought to suffer declining earnings as cheaper money drives down yields.

It's worth asking whether this conventional wisdom stands up to scrutiny. Take a look back at the share price performance of the company's 60 percent-owned Sony Financial division over the past five years, and you'll notice how it does better whenever the yield on benchmark government bonds falls:

Sony Financial share price and government bond yields

Or have a look at Switzerland, where a year of negative interest rates has done no harm to the share prices of Swiss Re and Swiss Life (Zurich Insurance, hit by some big natural-disaster payouts, was less fortunate.)

Not So Negative

Sub-zero interest rates haven't been too bad for Switzerland's insurers

Source: Bloomberg data

Note: Figures have been rebased to Jan. 15, 2015, when Swiss National Bank moved to negative interest rates

For Sony shareholders, lower government yields that push up the value of the company's debt holdings could be a boon. If nothing else, they help generate income and buy Hirai time to try to turn around a business that has lost money in five of the last seven years.

(Fixes reference to shares in second paragraph to show that the earnings came after the close.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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