- Japan's PM nominates Haruhiko Kuroda to be the new head of
Bank of Japan.
- Mr. Kuroda supports the PM's policy of monetary easing in
order to revive the economy.
- Since Mr. Abe took over the office in December, the yen has
fallen more than 20% against the dollar. A weak yen benefits
Japanese export companies.
- Toyota's margins should widen significantly due to a
greater dependency on exports.
- Honda's gains will be limited since it exports only a
fraction of vehicles it produces domestically.
In a move that bodes well for the profitability of export
dependent Japanese companies such as
), Prime Minister Shinzo Abe nominated Haruhiko Kuroda,
currently the president of the Asian Development Bank, as the new
head of Japan's central bank. Mr. Kuroda supports the new PM's
policy of aggressive monetary easing in order to fight deflation
and revive the economy by making the Japanese companies more
competitive. Mr. Kuroda still needs to be approved by the Japanese
Parliament before he can head the Bank of Japan.
Since Mr. Abe took over the office in December, the yen has
fallen more than 20% against the greenback, but the PM is
determined to weaken the Yen even further. Until now, the
current central bank head Mr. Masaaki Shirakawa and Mr. Abe were
not exactly on the same page regarding monetary
policies. Although the government has an influence on the
monetary policy, it relies on the central bank actions such as
asset purchase programs if it wants to weaken the currency.
See our complete analysis for Toyota
In the last few years, a highly unstable global economy had made
the Japanese yen a safe haven and therefore strengthened the
currency. Just to emphasize the point, one U.S. dollar yielded 110
yen in July 2008 but the same dollar could only purchase 78 yen
four years later. Mr. Abe has been vocal in his criticism for a
strong yen and insists that the currency must be weakened in order
to resuscitate the economy.
What's In Store For Auto Companies?
So, what does it mean for automotive companies like Toyota and
Honda ? Will a weak Yen have any meaningful impact on their
While the costs associated with manufacturing the cars
domestically will remain pretty much the same since production is
relatively independent of the currency fluctuations, theprofits
earned from overseas markets will translate into more yen. At the
same time, it gives the companies a greater freedom to price their
vehicles in a manner which they believe would maximize the profits
(i.e. the ability to cut prices in order to boost volumes).
Toyota's gross margins stood at 22.8% in 2012, but we estimate
they could rise to 24.0% if the current exchange rates were to be
maintained throughout the year. If the Japanese central bank under
Mr. Kuroda gets more aggressive in its bid to weaken the yen
through monetary easing, there could be a further upside to our
estimates. A hundred basis point gain in the margins could push the
stock price up by 10%. You can drag the trend line to arrive at
your customized price. Toyota still produces almost half of its
vehicles in Japan about two-thirds of which are exported to
Honda is another company that is likely to benefit although the
impact might be less than that for Toyota since the automaker only
produces about 25% of its vehicles domestically. Moreover, only a
fifth of these vehicles are exported abroad so the margin expansion
should be more limited in this case. Note that in our
calculation of gross margins, we do not include R&D and
depreciation costs in the expenses.
We currently have a
$105 price estimate for Toyota's stock
, which is slightly ahead of the current market price.
How a Company's Products Impact its Stock Price at Trefis