Toyota Motor Corporation (ADR) (TM), Honda Motor Co Ltd (ADR) (HMC): Is This Japan’s Turnaround?

The BOJ is about to take a note from Ben and change history

The yen was worth around 75 yen for a dollar, which was a the strongest valuation since World War 2. Now, it has depreciated to 95 yen for a dollar, and major Japanese exporters like Toyota Motor Corporation (ADR) (NYSE:TM), Honda Motor Co Ltd (ADR) (NYSE:HMC), and Sony Corporation (ADR) (NYSE:SNE) are breathing a huge sigh of relief.

As the yen devalues, it becomes cheaper to buy their products with another currency. If it costs a U.S. consumer 1.5 million yen ($20,000) to buy a car from Japan or $17,000 USD to buy a similar car from South Korea, then many consumers will pick the cheaper option. But if the yen is devalued to 95 yen a dollar, then the cost of the car from Japan to the U.S. consumer is only $15,790. That means more cars will be sold from Japan, which means more jobs, more domestic consumer spending, higher GDP, and so on.

The BOJ

The Bank of Japan’s new chief, Haruhiko Kuroda, wants to achieve a 2% rate of inflation, which would be a sharp rise from the current (0.2)% deflation rate as of January year over year. Kuroda said “achieving the 2 percent inflation target in two years is something that I have in my mind”, which will be done by expanding the BOJ’s asset purchase program and by buying up bonds with longer maturities.

This has not only helped out Japan’s economy by lowering the value of the yen, it has bolstered global markets as the age of unlimited liquidity begins. The ultimate goal is for the yen to reach 120 yen per U.S. dollar. That would cause that 1.5 million yen car to only cost the U.S. consumer $12,500. This will be huge for Japan’s export-based economy.

Exports and corporate moral

In January, Japan’s exports rose 6.3% year over year, but fell 2.3% in February (which was more than the 1.9% expected). It will take time for Japan’s turnaround to fully take hold, but signs in corporate moral seem to be pointing in the right direction.

A Reuters monthly poll (from 250 Japanese firms) shows corporate moral rose 2 points to minus 4, which means there still are more pessimists than optimists out there, but that gap could close by summer. A rise in corporate sentiment could mean a rise in domestic investment, as companies are willing to expand their operations.

How to benefit

Toyota Motor Corporation (ADR) (NYSE:TM), Honda Motor Co Ltd (ADR) (NYSE:HMC), and Sony Corporation (ADR) (NYSE:SNE) are all ways to play this turn of events. As the yen devalues, they will sell more products overseas and steal market share away from competitors. I would be wary of Sony though, due to its exposure to the unprofitable TV market and the lackluster PS4 preview (Sony failed by not showing consumers the actual device), but in the short-term, its stock would benefit from a much cheaper yen.