Hugely profitable Toyota Motor Corp. doesn't need any extra handouts from the Japanese government. But like other big exporters it gets them anyway whenever the Bank of Japan does something that batters the yen. Which the helpful central bank did again last week.
Since the BoJ took its monetary stimulus program to nosebleed levels with plans to purchase ¥80-trillion ($795-billion) worth of Japanese government bonds annually, the yen has fallen to its lowest level against the U.S. dollar in seven years. Even the stumbling euro briefly reached a seven-month high against the Japanese currency.
That will inevitably spell more trouble for Japan's sclerotic economy. But it's a good time to be an exporter, provided you're not heavily reliant on imported materials.
For Toyota, the sudden 4-per-cent-plus depreciation is like a cherry on top of an already rich Japanese white chocolate soufflé. The auto giant benefits more than its domestic rivals because it produces a larger percentage of its vehicles at home and derives about 75 per cent of its income from foreign markets. The company estimates that each decline of ¥1 to the greenback boosts profit by a cool ¥10-billion.
After posting 23 per cent higher profit in the fiscal second quarter, Toyota now forecasts a record net gain of as much as ¥2-trillion for the year ending March 31. That's more than 12 per cent above its previous assessment last May, when it warned that earnings would dip slightly as the benefits of a falling yen slowly dwindled. The improved forecast is pegged to an average exchange rate of ¥104 to the U.S. dollar, which Japanese industry watchers consider an ideal level. Its earlier guesstimate was based on an exchange rate of ¥101.
Based on Japan's worsening fiscal condition, negative real interest rates and dismal growth prospects, a further depreciation of the yen was long overdue even before the BoJ's decision to turn the money taps wide open. But the move lit a fire under the currency, which currently hovers close to ¥115 to the greenback. It may stay in that vicinity for a while, thanks to a vow by BoJ governor Haruhiko Kuroda to do even more quantitative easing to drive inflation closer to the bank's 2-per-cent target range.
Any time the greenback drifts north of ¥105 or so, the potential damage far outweighs any benefits for Japan Inc. As it is, the bulk of the Japanese economy has gained little from a weaker yen, which drives up import costs for raw materials and finished goods (good for inflation), further dampens consumer spending (bad for inflation), and takes a heavy toll on small and mid-size businesses already reeling from the government's ill-timed hike in the consumption tax to 8 per cent from 5 per cent last April.
Meanwhile, the swelling export earnings will be more of a boon to equity investors than the economy as a whole. The big, financially conservative exporters have been piling up cash reserves rather than boosting wages and employment or investing substantial sums in their domestic operations.
Another unwanted side effect will be a further deterioration of trade relations with South Korea and poorer Asian countries heavily dependent on manufacturing exports at a time when Japan is pushing hard for a broad Trans-Pacific Partnership free-trade pact.
It won't help that Japan's car makers will be able to use the falling yen to wring greater market share and juicier profits abroad, at the expense of their U.S., European and South Korean rivals.
"If we had to name just one macroeconomic factor that has the greatest number of [rival] auto CEOs losing the greatest amount of sleep at night, it is without question the weakening Japanese yen," Morgan Stanley says in a new assessment of the weaker yen's impact on the fortunes of U.S. car makers.