Strong yen benefiting American automakers

[NINETY EIGHT REGENCY]

Strong yen benefiting American automakers

Christine Tierney / The Detroit News

Japan's mighty auto industry has been a pillar of its graying economy, but a surge in the value of the yen has eroded the profitability of vehicles made in Japan.

In recent weeks, the yen has risen to 15-year highs of about 85 to the dollar -- a rate at which Japan's carmakers struggle to make money on exports, auto executives and financial analysts say.

Although Detroit's automakers don't export to Japan, a relatively closed auto market, they are benefiting indirectly because a stronger yen effectively raises Japanese production costs.

"The yen is the biggest concern for us because the Japanese import a lot of cars and car parts here, so the level of the yen is a major focus of our attention," said Stephen Collins, president of the American Automotive Policy Council in Washington, D.C.

Tensions are brewing now as Japanese policymakers are taking action to halt the three-year rise in the yen to keep Japan's automakers from shifting more production and jobs offshore, including to the United States.

Since 2007, the yen has appreciated 32 percent against the dollar, and even more against the euro, whose recent slide has created a strong tailwind for Germany's luxury car exporters.

On Sept. 14, as the yen reached its highest level since 1995, the Bank of Japan intervened in foreign exchange markets for the first time in six years. It bought billions of dollars, zapping traders betting on the yen.

But the yen wasn't suppressed for long -- it was trading at 84.58 to the dollar on Wednesday amid speculation that Japan might not be able to halt the currency's advance on its own. Other central banks didn't join the intervention this month, signaling that Japan's move wasn't sanctioned by its trading partners.

"We think investors will have to be convinced that the yen will not strengthen to 80 yen to the dollar or beyond before sentiment turns," said Noriyuki Matsushima, of Citi Investment Research & Analysis in Tokyo.

Some forecasts have the yen strengthening to 78-79 yen to the dollar, compared with June 2007, when one dollar fetched 123 yen in the foreign exchange markets.

Toyota Motor Corp., Japan's biggest automaker, says each one-yen rise against the dollar shaves around 30 billion yen, or $360 million at current rates, from its operating profit.

Toyota estimates that currency trends will have a negative $1.4 billion impact on operating profit this fiscal year.

Investment firm Deutsche Bank says Toyota and Mazda Motor Corp. are most exposed to the strengthening yen. "Toyota faces an operational challenge as, not only does it export 35-40 percent of U.S. sales, we estimate 65 percent of those are low-margin compact cars that are competing in price-sensitive segments," Deutsche Bank analyst Kurt Sanger wrote in a report.

"Overall, Mazda faces the biggest challenge as an exporter of nearly 80 percent of output."

In a weak market, Japan's automakers can't pass on to consumers the cost of the yen's rise by increasing U.S. vehicle prices.

But Toyota's recent decision to complete construction of a plant in Blue Springs, Miss., and assemble Corolla compacts there reflects concerns about the strong yen, say people familiar with the company's thinking.

The company may move up plans to build a second line at its Mississippi and San Antonio plants to produce more models in the United States, they say.

Japan's automakers already have a long tradition of building vehicles in the countries where they sell them, partly to quell protectionist sentiment and also to be close to their markets. Their own domestic market is stagnating because Japan's population is aging rapidly, while the best growth prospects lie abroad.

In July, Honda Motor Co. revealed that for the first time in the company's history, it had built more vehicles in the United States in the quarter just ended than it had made in Japan.

In the first six months of 2010, 90 percent of the vehicles Honda sold in the United States were produced in North America, said spokesman David Iida.

Toyota now assembles more vehicles outside Japan than at home, too. Policymakers worry a strong yen will accelerate this trend. "If the yen's strength lasts at current levels, factories, investment and jobs will all move overseas," Tetsufumi Yamakawa, co-head of Japanese research at Barclays Capital, told The Japan Times this month.

Much of the new production capacity is going up in China, where the currency trades in a narrow range tied to the dollar.

A currency's strength or weakness normally reflects the state of an economy. But the yen's rise is driven mainly by the spread between Japanese and other national interest rates, and its trade surpluses. Japan's economy is recovering slowly from the global downturn.

In the second quarter, Japan's gross domestic product grew at a 1.5 percent rate, but the country fell behind China in the global rankings to become the world's third-largest economy.

From The Detroit News: http://detnews.com/article/20100923/AUTO01/9230411/1148/Strong-yen-benefiting-American-automakers#ixzz10MLlPrHv