The Japanese yen surprised the foreign exchange industry as it unexpectedly strengthened, which caused Japan’s major exporters to worry about their profitability. Decliners might include electronic manufacturers and automakers.
The Japanese currency moves within the 117-118 range against the dollar as opposed to August 2015’s lower 125 range. If the yen would remain at this level, it might affect corporate profits for the fiscal year ending March and may cause worries for their financial outlook for 2016.
Why Japanese Companies want a Weaker Yen?
The weaker yen has been a huge factor in their expectations for two consecutive years of record profits at certain Japanese companies for the fiscal year of 2015, ending in March. These companies assumed that the foreign-exchange rate of yen would stay at 118.7 against the dollar for the second half of the fiscal year 2015. Note that this figure is in accordance with a survey conducted by Nikkei in 133 big companies with fiscal years that end in March.
About 70% of the companies surveyed expected a weak yen-dollar rate than what can be seen at the moment. During a quarterly survey conducted by the Bank of Japan’s Tankan, major Japanese companies assumed an 119.4 yen to dollar foreign exchange rate for the fiscal year 2015.
On Tuesday, however, the yen rose to lower-117 yen range against the dollar, sending the stocks of automakers and electronic companies lower. Mazda Motor dropped by 5% compared to the end of last week. According to Mizuho Securities, the appreciation of the yen caused export-dependent companies to worry about their outlook.
What are the Effects of the Stronger Yen?
If the yen continues to be around 117.3 against the dollar during the first quarter of 2016, operating profits of 25 major exporters will rise by approximately 190 billion yen in the second half. The estimate is lower than expected as companies have projected a 400 billion yen boost when the dollar trades at 123 yen last autumn. During that time, the yen has seen a boost of profits among Japan’s 7 major automakers, including Toyota, by 270 billion yen. With the uptrend, they are likely to suffer.
Fuji Heavy Industries, the manufacturer of Subaru cars, are enjoying their strong sales in North America. They estimated 1 yen rise in the value of the Japanese currency every year against the dollar, which lowers their yearly operating profit by approximately 10 billion yen. Their outlook for the next months through March is based on the assumption that the yen is at 118 against the dollar. Mitsuru Takahashi, their CFO, said they will be paying close attention to whether the yen would remain strong.
Plenty of companies are avoiding foreign exchange risks through hedging. According to an official at Olympus, an optical equipment maker, the company had already completed the majority of their forward contracts required for the year ending March in terms of dollar and euro. Through this pre-emptive move, Olympus is more likely to insulate themselves against the recent fluctuations of the currency rates nowadays.