If you were paying attention in our Japan lesson in the School of Pipsology, you can skip on right ahead and see the cool stuff.
If not, then shame on you! Here’s a quick crash course on the Japanese economy to get you up to speed.
After experiencing a major setback in World War 2, Japan decided to refocus its energy and resources towards building up its economy. In the more than 50 years that have passed, Japan has been on an absolute tear.
For a very long time, it had the second-largest economy in the world (now ranked third, thanks to China), with its manufacturing industries leading the way.
In order to make up for the lack of available resources, Japan became very export-dependent. Historically, exports have accounted for nearly 40% of Japan’s GDP, while in 2011, Japan exported more than 700 billion USD worth of goods.
Recently though, we’ve been hearing sirens going off at Japanese companies, as they’ve been hit hard the past few years. Aside from slowing global demand, Japanese companies are crying due to the rise in the value of the yen.
Remember, if another country wants to order goods from Japan, it first has to convert its local currency into yen before it can begin purchasing.
With the yen hitting all-time highs, sales of Japanese exports have dropped as Japanese goods have now become relatively more expensive than goods from other countries. In an export-dependent country like Japan, this is like receiving a karate kick to the gut!
Japanese companies like Toyota and Honda have now been calling on the Bank of Japan to kick up its intervention efforts in order to weaken the yen. They argue that the yen’s appreciation is hurting sales and that without the government’s help, it could send the Japanese economy into a deeper rut.
I decided to see what effect the yen’s value has had on the stock prices of Toyota and Honda over the years.
Below is a chart of USD/JPY, plotted against the stock prices of Toyota and Honda from 1990 to 2011.
If you take a closer look, you’ll notice that whenever USD/JPY falls (meaning yen appreciation), Toyota and Honda’s stock prices tend to drop.
Conversely, whenever USD/JPY rises (yen depreciation), then the stock price would move up the charts as well.
Take note that while many factors affect stock prices, we also have to take into consideration how the yen’s value plays into the operations of Japanese exporters.Much of their fixed costs remain constant, but sales will vary wildly depending on how strong or weak the yen is.
Over the past three years or so, the yen has appreciated by over 30%. During the same period, Toyota’s stock price has dropped from 8,000 yen/share to a shade less than 3,000 yen/share, marking a more than 60% decline!
Meanwhile, Honda’s value has also dropped by more than 40%, with Honda now trading at around 2,700 yen/share, after hitting highs above 4,700 in early 2007.
With USD/JPY now trading below the 77.00 handle, things could get ugly really fast. I expect Japanese CEOs to express more concern about the strength of the yen and to lobby for some action from the BOJ.
If it comes to the point where more and more companies see deteriorating sales figures, the BOJ may have no choice but to dip into its reserves and hit the markets with an intervention bomb!
