Analysis: Resurgent yen brings high-flying Japan Inc back to earth

Subaru

05/08/2024 12:56

By Sam Nussey and Daniel Leussink
       TOKYO, Aug 5 (Reuters) - A resurgent yen helped bring
Japanese stocks crashing back to earth on Monday, leaving
investors scrambling to gauge the potentially diminished outlook
for earnings, and snuffing out a months-long dramatic run by the
Tokyo market.
    In just three trading sessions the Nikkei share average
 .N225  has lost a fifth of its value. On Monday it tumbled
12.4%, marking its second-largest decline on record and its
biggest since the Black Monday crash of October 1987. 
    In part, the sell-off has been driven by the recent
turnaround in the yen  JPY=  after the Bank of Japan began to
raise rates for the first time in decades, most recently last
week.
    Now investors are forced to size up Japan Inc's prospects
without the extra cushion from the currency, which has helped
many heavyweight exporters. Up until a few days ago, the
Japanese stock market was seen as a global stand-out, having
gained almost 30% last year and touching a lifetime high last
month.
    "All the benefits, all the tailwinds from forex that have
been propping up Nikkei 225 stocks and exporters,
multinationals, it's all gone," said Amir Anvarzadeh of
Asymmetric Advisors, a Japan-focused equity advisory firm.
    
    Now, companies now will have to do well on their own merits,
he said.
    A weaker yen drives up cost for small businesses and
households, but it is largely positive for big exporters, such
as Toyota Motor  7203.T , because it makes their products
cheaper overseas and boosts profits when foreign earnings are
brought home.
    The yen traded around its strongest level in seven months on
Monday, at 142 to the dollar. It has gained about 14% over the
last month, recovering after months of losses.
    To get a sense of the size of the potential disruption for
Japan's industrial giants, one need look no further than Toyota.
The world's largest automaker says every 1 yen change against
the dollar means a difference of 50 billion yen ($350 million)
in profit.
    At Toyota's latest quarterly earnings, announced last week,
the currency contributed 370 billion yen to operating profit.
    The selling has spread beyond exporters, with banks and
other industries also shredded, casting a cloud over the
Japanese market's recent comeback, which was seen as a
triumphant revival after years in deflationary doldrums.
        
    FUNDAMENTALS SOLID
    While corporate Japan's fundamentals remain largely solid,
analysts said, the sell-off is a reminder that markets - at
least in the short-term - do not always reflect fundamentals.
    With many exporters assuming a yen exchange rate of 140 or
145 to the dollar, investors had been expecting to see stronger
earnings ahead given the yen traded at 160 a few weeks ago, said
Kei Okamura, a portfolio manager at Neuberger Berman in Tokyo.
    "A lot of global investors have been looking for Japanese
companies to announce upward revisions" due to the currency, he
said.    
    "That's why from some people's perspective the upward
revisions might not be there, but from our perspective, the
fundamentals still look okay."
    Exporters' shares were also hit by concerns about a slowdown
in the United States, one of Japan's biggest export markets, and
one absolutely vital to its auto industry.
    "If the U.S. economy slows down, cars won't sell," said
Takatoshi Itoshima, a strategist at Pictet Asset Management
Japan. 
    Automakers are also heavyweight components of the Nikkei and
the broader Topix  .TOPX  index, Itoshima said, something that
adds to the overall pain for markets.
    Subaru, which reported that almost 80% of its revenue came
from North America in the first quarter, on Monday said it was
sticking by its forecast for a 142 yen exchange rate for the
full year.
    Chief Financial Officer Katsuyuki Mizuma told an earnings
briefing the automaker would have to take a look at the
incentives it offers in the United States. Every 1 yen increase
in the exchange rate meant a shift in 10 billion yen of
operating profit, he said. 
    Printer maker Epson last week said it was revising its
exchange rate assumption to 151 yen to the dollar from 144 yen
previously - and lifting its profit outlook as a result, which
now may look in doubt.
    
    The market turmoil may come with a silver lining for
investors who look beyond a group of Japan's export champions.
    The yen's reversal could offer relief to the broader economy
after its months-long decline has pushed up consumer prices,
raising deep concerns about the outlook for spending in Japan.
    The yen's decline has even prompted the founder of Uniqlo
parent Fast Retailing to warn there was "no merit" to a weaker
yen, given that Japan imports raw materials from all over the
world before manufacturing and exporting.
    "A stronger yen might not be good for the Nikkei 225 stocks
and the foreigners owning it," said Anvarzadeh of Asymmetric
Advisors. 
    "But it's good for the country, it's good for the economy." 
  

($1 = 142.7500 yen)

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High-flying Nikkei Index tumbles    https://reut.rs/3WPqfNa
Japanese yen posts best month since November 2022    https://reut.rs/3YoXHLF
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 (Reporting by Sam Nussey, Daniel Leussink and Rocky Swift;
Additional reporting by Maki Shiraki and Nobuhiro Kubo; Writing
by David Dolan
Editing by Tomasz Janowski)
 ((david.dolan@thomsonreuters.com; +81 3 4563 2708;))