Uncertain outlook for Japanese OEMs
Whilst some of the international OEMs are reporting good results in their earning calls, their Japanese counterparts are about to announce profits for fiscal year 2022, ending in March. In addition to the struggles that all OEMs deal with, such as semiconductor shortage and, more recently, the cost of raw material, Japanese manufacturers must deal with a weak Yen.
The Japanese Yen or JPY was projected to exchange at 111.93¥ for 1$ but weakened to 130¥ to the dollar. As a result, parts sourced outside of Japan become more expensive, but at the same time, depreciation of the JPY has a positive effect on earnings. To put this in perspective, every 1¥ that the Japanese currency depreciates against the dollar, represents, for Toyota, a 48 billion JPY boost of the annual operating profit (source: Nikkei Asia).
In normal circumstances, the higher cost of imported parts or materials is easily offset by the higher operating profit, leading to the conclusion that inflation delivers a positive outcome, even if not sustainable. The Japanese OEMs are traditionally fairly conservative in their exchange rate projections, rightly not relying on the position of the Yen and leaving space for adjustments.
Yen and inflation
Japan’s government has been trying to boost its weak economic growth for decades and uses one magical formula: higher inflation and weaker Yen. To cut a long story short, it has never worked. Japanese consumers are used to price stability and salaries have not gone up. This has changed now.
A weak Yen is good for export as Japanese goods and services become cheaper abroad. It’s especially good when there’s little competition and goods are produced in Japan. In the same ideal world, a weak Yen contributes to inflation. Nowadays however, competition is steep and Japanese companies are increasingly producing outside of Japan, to avoid trade restrictions or find cheaper labor.
Add a Japanese National Bank that insists on keeping interest rates close to zero – to boost the economy – and high energy/raw material costs, the weak Yen is no longer contributing to economic success, but to higher consumer prices instead. A good example is that of the popular brand Asahi, which, for the first time in over a decade, had to raise the price of a beer.
Back to the OEMs
It’s fairly sure that the Japanese OEMs will be prudent and frame the impact of the weak Yen in the right context. Fact is that Japan’s car output totaled 23 million units, which is 0.4% down from 2021 and 10% down from 2020.
Supported by the Japanese National Bank, not willing to raise interest rates, things look very much “business as usual,” but analysts are already talking about the cracks in the Japanese economy – even a risk for downward spiral is being mentioned as goods are becoming more expensive for the Japanese consumer, the domestic economy is stagnating and a weak Yen not delivering the expected outcome…