Consumer

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

In case he's penning a thank you note to his Japanese hosts, Ben Bernanke should slip in the latest profit warning from Fast Retailing with a few words scribbled in the margin. "Time to act," perhaps.

The operator of Uniqlo stores said Thursday that net income will probably be 45 billion yen ($426 million) for the year ending Aug. 31, down from the 60 billion yen guidance it gave in April. Blame a third cut in the forecast in six months on a strong yen -- more than 42 percent of Fast Retailing's revenue came from foreign markets in its last fiscal year, up from less than 23 percent three years earlier.

When the yen was weak, Fast could use aggressive pricing to pick up volume from the likes of H&M, Inditex's Zara and Gap, with which the Japanese company has been increasingly headbutting, according to Bloomberg Intelligence analyst Thomas Jastrzab. But a strong yen hurts, and raising prices to shore up margins could upset its value-conscious customers.

It's Tight
Uniqlo operator Fast Retailing's operating margins have shrunk

The hit to the bottom line could get uglier if the 23 percent gain in the yen's nominal effective exchange rate against trading partners' currencies over the last year intensifies. The surge, which gathered momentum after the Bank of Japan's botched experiment with negative interest rates, is putting exporters' profit pool at risk.  

Ouch, That Hurts
Yen's rise is squeezing profits for companies like Uniqlo operator Fast Retail
Sources: Barclays Capital, Bloomberg

This is where a reminder from the former Fed chairman might help. Without urgent and coordinated stimulus by Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda, the yen's haven status could become a profit killer, which will be the end of already sputtering private investment and the start of a new episode of misery for the country's banks.

A few months ago, Bernanke floated the idea of the Japanese government borrowing from its central bank by issuing it a perpetual bond, Bloomberg News reported Thursday. This week he attended a gathering with Abe, and lunched with Kuroda. It's not clear how seriously Tokyo is taking Bernanke's advice, but since the central bank would print money to finance a bond purchase, and the government could use the proceeds to put money in people's pockets, the net effect would be so-called helicopter money, as the unconventional policy is known. 

Businesses like Uniqlo are crucial to Abe's program to help Japan Inc. diversify. Apart from Sony and Toyota, the top 15 companies by market value in the Topix index at the turn of the millennium included Hitachi, Panasonic and Fujitsu. While Sony and Toyota still figure near the top of the list, jostling with them are the robot maker Fanuc, the drugmakers Takeda Pharmaceutical and Astellas Pharma, and all three of Japan's big banks.

If Japanese companies had faith that Abe would be able to sustain a triple-digit exchange rate, even smaller firms like the retailer Jeans Mate -- the smallest member of the Topix -- might go global.   

At about 105 to the dollar, the yen is a tad weaker than the 99 level it breached in the immediate aftermath of Brexit. That's only because stimulus expectations from Abe-Kuroda are running high. And Japan has disappointed before. In 1999, Bernanke called the nation's monetary policy a case of self-induced paralysis.

Now that corporations are beginning to flex their muscles again, repeated profit warnings from Uniqlo are showing up as alarming blips on the health monitor.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. On Dec. 31, 1999, the only bank among the top 15 stocks of Topix was Bank of Tokyo-Mitsubishi UFJ. It had a 1.5 percent weight. Mitsubishi UFJ, Sumitomo Mitsui and Mizuho together account for almost 4.5 percent of the benchmark now. 

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net