Yen’s Slide No Panacea For Japan Inc.

May 7, 2013, 10:59 p.m. ET

Yen’s Slide No Panacea For Japan Inc.

By AARON BACK

Japanese Prime Minister Shinzo Abe has weakened the yen and sent stocks soaring. Boosting long-term earnings growth for Japanese companies will be more difficult. Increasing domestic consumption is an important objective of Mr. Abe’s plan. But much depends on the impact of a weaker yen on Japan’s export-focused businesses. In the current fiscal year, companies on the main Tokyo stock exchange could see profits jump 30% to 40% year-over-year if the yen averages between 100 and 115 to the dollar, saysCitigroup C +2.45% . The yen’s slide has two main effects on corporate earnings. First, revenue earned overseas is immediately worth more in yen terms. Nomura’s survey of large Japanese nonfinancial companies that have reported earnings for the three months ended March 31 shows profits up 7.7% on the previous year. That is down from a 33.2% jump in the previous quarter, though some major companies haven’t reported yet. The second benefit is that Japanese companies should become more competitive as the cheaper yen means foreigners pay less for the country’s exports. While this should boost sales volumes, not all exporters will be able to take advantage.

Take Canon 7751.TO -0.29% . Revenue from its imaging business fell 1.8% year-over-year in the three months to March 31. The fall would have been 14% but for the effect of the weakening yen. But Canon faces fundamental problems that can’t be fixed by currency movements. The company’s core digital-camera business is in decline because amateur photographers can now snap photos with increasingly high-resolution smartphones. In addition, because Canon mainly competes with other Japanese camera makers like Nikon 7731.TO -0.14% and Olympus7733.TO -1.10%its rivals will also benefit from the yen’s slide.Some manufacturers will also find that input costs rise as the yen falls, with domestic suppliers forced to pay more for energy or raw materials bought overseas. Competitiveness gains will also be limited for manufacturers that have already shifted production overseas to cope with the yen’s strength in recent years.

Citi notes that Japan’s share of major exports in Asia has been in steady decline for more than a decade, even during periods when the yen weakened significantly, including a 20% depreciation against the dollar between 2003 and 2007.

So far this year, the Nikkei 225 stock index has gained over a third and now trades at a rich 19.1 times 2013 earnings, according to FactSet. The S&P 500 is at 14.7 times and Hong Kong’s Hang Seng Index is at just 10.7 times. Strong valuations reflect a better outlook for Japan Inc. And then some.

Beyond the flattering impact of the yen’s slide, however, some Japanese companies will find more sustainable gains are hard to come by.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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