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.
Sony was able to return to profitability recently, due to the weaker yen, making 46.4 billion yen, or about half a billion U.S. dollars in its latest quarter. Sony’s CFO said that if the weak yen persists, then there is big upside ahead. Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC) are much better ways to play this, as they are witnessing strong sales growth.
Toyota Motor Corporation (ADR) (NYSE:TM) saw its U.S. sales increase 27% in 2012, and 22.6% overall auto sales growth in 2012. Honda Motor Co Ltd (ADR) (NYSE:HMC) saw U.S. sales increase 24% in 2012 and overall sales increased 19%. Domestically, Honda Motor Co Ltd (ADR) (NYSE:HMC) and Japan were huge winners. As the Japanese economy recovers from the tsunami, consumers were more willing to go out and spend.
Toyota Motor Corporation (ADR) (NYSE:TM)’s domestic sales increased 35.2% and Honda Motor Co Ltd (ADR) (NYSE:HMC)’s was up 48%. When compared to their South Korean rival, Toyota Motor Corporation (ADR) (NYSE:TM) and Honda’s sales growth was significantly larger than Hyundai’s 11.9% sales growth in Japan.
Final thoughts
While there are some draw backs to a weaker currency, such as higher input costs due to higher relative energy prices, in the long run, this export-based economy has much to gain. As Japan’s economy turns itself around, domestic auto sales will rise, which will benefit Toyota and Honda, and consumers will have more money to spend on Sony products.
Internationally, all three companies will benefit due to higher sales volumes and market share gains. I think that the BOJ will be able to get the yen to 100-110 for 1 USD within the next 3-6 months, that Japan’s corporate sentiment reading will be positive in the next 2-3 months, and that exports will begin to see a meaningful rise within the next 3-6 months. The BOJ is definitely worth watching over the next few months.
The article Is This Japan’s Turnaround? originally appeared on Fool.com and is written by Callum Turcan.
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