Strong yen threatens rebound for Japan exporters

TOKYO: Japan's faster-than-expected recovery from the impact of the March earthquake and tsunami has been overshadowed by a soaring yen that threatens the post-disaster rebound of exporters, say analysts.

The unit's surge to around 77 to the dollar amid worries over US and European debt has pressured companies that earlier assumed an average rate of around 82 in their annual forecasts, according to the Bank of Japan.

A strong yen erodes repatriated earnings and makes it harder for companies to make money on products made in Japan and sold overseas.

Japanese officials have upped their verbal threats to intervene and weaken a unit they say is overvalued and divorced from fundamentals, as investors plunge into the "safe haven" currency from the weaker dollar and euro.

But having defied power and parts shortages to restore output crippled by the March disasters, Japan's exporters may have to shift towards more overseas production due to the unit's strength, meaning fewer jobs at home, say analysts.

"The stronger yen poses the question as to whether or not Japanese companies should move production bases abroad," said Masatoshi Sato, senior strategist at Mizuho Investors Securities.

Japan's biggest automaker Toyota on Tuesday raised its full-year profit outlook 39 percent on a faster-than-expected output recovery after the March disasters forced it to halt assembly lines and shutter plants.

But Toyota makes around 40 percent of its cars in Japan and says it is being squeezed by fierce competition from rivals that benefit from cheaper currencies, such as German makers.

"The yen's current level is really hard for exporters like us. The level is beyond the limit," Toyota senior managing officer Takahiko Ijichi said this week.

The yen's rise cut operating profit by 50 billion yen ($648 million) in the quarter and Toyota is considering importing more foreign parts for domestic car assembly, having already moved some production to places such as Thailand.

Annual auto output in Japan was 30 percent lower in 2010 from its 1990 peak, according to the Nikkei business daily.

Post-March 11 power shortages and supply chain problems sent Japanese production plunging, helping tip the economy into a technical recession.

While analysts expect the economy to have contracted further in April-June, export demand and reconstruction projects are seen spurring growth in the second half as firms get back on track.

But their efforts could be undermined by the yen, say experts, amid calls for authorities to intervene for the first time since G7 nations moved to counter the unit's postwar high of 76.25 to the dollar in March.

However, with any intervention expected to have only a temporary effect due to the weakness of the dollar and euro, Japanese firms will be "forced to review their business structure," said Hideki Matsumura, senior economist at Japan Research Institute Ltd.

Sony, which is also reeling from a massive data breach on its online networks, last week revised down its annual net profit forecast by 25 percent due to weak TV sales, also citing the rise of the yen.

Chief Financial Officer Masaru Kato said the TV business suffered from economic weakness in the US and Europe, exposing the company to foreign exchange pressures in highly competitive markets.

"The euro is still an issue for us," he said, adding that Sony would continue trying to move more operations out of Japan, where possible, as part of a 20-year trend. Its shares are at their lowest levels since March 2009.

Nintendo, under intense pressure from the growing smartphone gaming space, slashed its annual forecast 82 percent with a strong yen making matters worse.

The firm generates more than 80 percent of its sales overseas and holds most of its cash assets in foreign currencies.

Nissan said the stronger currency cut 55 billion yen ($715 million) from its operating profit in the quarter ended June 30. It plans to reduce the number of models it exports from Japan over the next three years while boosting production overseas.

However, one benefit of Japan's strong currency, say analysts, is that it blunts the impact of higher fossil fuel import costs as the nation makes up for a post-quake loss of nuclear power capacity.

Only 16 of Japan's 54 reactors are online amid a post-Fukushima backlash, and there are concerns all could be offline by next year because of opposition to restarting those that were halted for regular service checks.

Copyright AFP (Agence France-Presse), 2011