Japan seems to have joined the bandwagon. Last week, Bank of
Japan (BOJ) announced a major quantitative easing (QE) program in
an effort to revive the economy out of deflationary pressure that
lasted more than a decade. The credit goes to Shinzo Abe - the
new prime minister of Japan - and certainly his so-called
BOJ has decided to purchase ¥7 trillion ($71 billion) of
long-term government bonds, a drastic move that will double
Japan's monetary base (cash circulating in the economy plus
commercial banks' reserves with the central bank) to ¥270
trillion ($2.7 trillion) from ¥135 trillion ($1.4 trillion)
within two years.
With ample cash being injected into the economy, consumer
spending will increase pushing price and wage levels upwards.
Based on this radical Abenomics principle, BOJ's newly-appointed
governor Haruhiko Kuroda intends to achieve an inflation rate of
2% per annum within 2 years.
Japanese yen has already been falling due to the government's
devaluation. Since last June, the yen has dipped by more than 20%
against the U.S. dollar. The falling yen has been helping the
Japanese economy very well in boosting exports.
Exports in Japan went up 6.4% on a year-on-year basis in January
for the first time in eight months. Exports to the U.S. grew
10.9%, including a 10.5% and 29.9% rise in exports of automobile
and auto parts, respectively in the same month. Higher exports
mean lower trade deficit in medium-to-long term as well as higher
The recent QE measure by the BOJ delivered another blow to the
falling yen. Since the announcement on Apr 4, yen depreciated
sharply by 5.6% against the dollar, ending its short-term gain
following the Cyprus crisis. It also led the Nikkei index go up
by 5.1% for the week, the second strongest since November last
year. Kudos to Abe!
The Pain of U.S. Automakers
A falling yen certainly boosted the confidence of the Japanese
automakers operating in the U.S. and, on the other hand,
inflicted pain to the U.S. automakers.
Toyota Motor Corp.
), being the largest among the Japanese auto manufacturers, is
expected to be the biggest gainer from the currency tailwind.
According to a Deutsche Bank report, Toyota exports more than 2
million vehicles from Japan and about 27% of the vehicles sold by
it in the U.S. are imported compared with 10% by
Honda Motor Co.
). The report also revealed that 15%-35% of the parts in models
built by Toyota's North American facilities are imported from
Japan. As a result, Toyota is believed to be very well positioned
to take advantage of the falling yen compared to other automakers
in its home country.
Last year, Toyota recaptured the sales crown from
) by selling 9.75 million vehicles globally, which exceeded GM's
sales of 9.29 million vehicles. The falling yen could further
help the company in achieving its goal of selling 10 million cars
and trucks globally by 2015.
In the third quarter of the fiscal year ended Dec 31, 2012,
Toyota saw its operating income dip 16.7% to ¥124.76 billion
($1.54 billion). Further, the company continues to struggle with
a series of safety recalls, costing it millions of dollars for
fines and penalties.
Nevertheless, the automaker expects significantly higher
operating income of ¥1.15 trillion (up 223.4% from fiscal 2012)
and net income of ¥860.0 billion (up 203.3% from fiscal 2012) for
fiscal 2013 ended Mar 31.
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Honda also expects operating profit to improve 124.8% to ¥520.0
billion and net profit to go up by 75.0% to ¥370.0 billion in
fiscal 2013. All these undoubtedly reflect benefits from the
The U.S. automakers, especially the Detroit Big Three including
Ford Motor Co.
) and Chrysler, are highly concerned about how falling yen would
provide a competitive edge to the Japanese automakers in terms of
pricing. They have already tasted the bitterness seeking
bankruptcies or undergoing aggressive restructuring during the
global economic crisis in 2009 in order to become afloat in a
market dominated by the Japanese automakers.
The U.S. automakers are afraid that Japanese automakers might use
the depreciating yen as a strong weapon to beat them, unleashing
many growth-oriented strategies and launching new models using
their inflated profits. This in turn may compel the U.S.
automakers to engage in price wars, eroding their margins over
What Fed has to Say?
The U.S. Federal Reserve has apparently welcomed Abe's policies
for choosing the path paved by them. Fed's Chairman Ben S.
Bernanke already considered Abe's currency policies as "mutually
beneficial," while many political activists are able to see its
potential threat and asked for corrective action. Bernanke
believes that Abe's policies are mainly intended in mending the
Japanese economy rather than hurting the interest of major
economies around the world.
How Sustainable is the Effect of Favorable Yen?
Firstly, Abe's policies could significantly offend certain groups
of the world economy due to its resultant impact of a currency
war. They could seriously undermine the decisions taken by G7
finance ministers and central bank governors at their February
meeting against currency devaluation as a measure to revive the
economy. They have clearly mentioned that volatile and disorder
movements in exchange rates could have adverse impact on economic
and financial stability.
Given the ailing conditions of the global economy at present, it
is quite possible that many countries would seek currency
devaluation in order to secure a competitive advantage, resulting
in nothing but a zero-sum game. Apart from the currency war,
Abe's policies could also endanger the stability of the
international monetary system and the very existence of the
Secondly, currency could not be the sole weapon in winning market
share and boosting profits. It is true that Japanese automakers
gain competitive advantage in the U.S. market due to the currency
effect but that doesn't make them invincible in the global
Demand for Japanese automotive brands in the world's biggest
market China has already shattered due to the political conflict
between Beijing and Tokyo over disputed islands in the East China
Sea. According to the China Association of Automobile
Manufacturers (CAAM), sales of Japanese passenger cars dipped 16%
year-over-year in the first quarter of the year.
In contrast, emerging markets such as Brazil, China and India are
gradually becoming the biggest strength of Detroit automakers.
Both Ford and General Motors have embarked on a major expansion
plan in these markets that include investment in new facilities
and rolling out new models. Ford expects Asia to account for 70%
of its global growth in this decade, mostly from China and India.
On the other hand, GM plans to upgrade 70% of its global lineups
by the end of this year and invest $8 billion annually in new
vehicle development. The automaker plans to pump in $1.5 billion
in its North American facilities in 2013 as part of its annual
investment plan for new vehicle development. The company expects
to boost profit margins in the region from the current 8% to 10%
in the next three to four years.