Editorial: Cars And Currencies

Imagine your sell someone a house. It’s hard to imagine, I know, but humor me. You settle on a million. You sign. Papers are shuffled, titles researched. Three months later, at the closing, you get a check for $780K. Imagine there’s nothing you can do. Your lawyers are shrugging their shoulders. $220K poof, gone. The same happens every day in international trade. Welcome to the strange world of world currencies. You sell something in Euro, Yen, Won or Rupees. You ask: “How much is that in real money?” And a few days later, it’s all changed. Such is the life of a global automaker.

Japanese automakers are increasingly anxious about the high value of their Yen. Sure, their holidays and green fees in Hawaii will get cheaper. But when the yen is high their profits from abroad evaporate.

For eons, one Yankee dollar was worth more than 100 Japanese yen. In August, the dollar cost 110 yen. A week ago, it was down to 87 yen. The change spills yet more red ink onto Japanese automakers’ ink-saturated books. Against the Euro, the picture is bleaker still. But the Japanese don’t have as much exposure to the Euro as to the greenback.

Toyota is especially jumpy: “High up among Toyota’s problems is the recent surge in the yen against the dollar and euro. Every ¥1 gain against the dollar results in about a ¥40b plunge in profits at Toyota. While the company made its initial forecast based on an exchange rate of ¥100 to the dollar, the US currency appears trapped around the ¥90 level, a 13-year low,” writes the Manchester Guardian.

If you don’t like thinking in yen, here’s the translation [via Business Week]. “For every one yen strengthening against the dollar, Toyota’s operating earnings are reduced by over $450m.” According to CNNMoney, “Toyota expects losses of about $2.2b due to currency exchange rates alone.” Meaning: If the darned yen wouldn’t have surged suddenly, Toyota would still make a small profit, instead expected losses for fiscal ’08 between $1.5b to $1.7b.

Yoichi Hojo, COO for business management operations of Honda, told the Nikkei [sub] “If the exchange rate remains firmly below 90 yen to the dollar, and depending on the number of vehicles we export from Japan, then there is a possibility our consolidated operating profit for fiscal 2008 will be less than the projected 180 billion yen.”

Hojo’s comments also highlight the fact that the exchange rate is a major driver in whether they’ll build cars at home or abroad. “If the exchange rate remains below 90 yen to the dollar, it would be advantageous for us to increase overseas production, and we would be forced to cope with the issue of reducing the labor force at our domestic plants. On the other hand, if the yen significantly weakens, we would have to increase domestic production and reduce costs at our overseas production bases.”

Locating, building and ramping-up of a new car plant takes many years. Who dares to predict where the dollar, euro, yen will be three years from now? If anybody would have predicted in July that the yen, the currency of that non-growth, zero-interest country Japan would appreciate against the Euro by 33 percent within three months, that person would have been committed. Only to be released four months later and bestowed with the Nobel Prize in Economics.

“So yes,” says CNN Money, “the news is history-making and head-turning from Toyota. But it also paints a gloomy picture of how deep Japan’s recession will be and how tough it will be to recover.” Again, the bulk of the loss doesn’t come from Toyota’s weakness, or the weakness of the market, but the strength of the Japanese currency.

All is not lost for ToMoCo’s honchos. The yen rose from 100 to the dollar (at which it is in the books of most Japanese auto companies) to 87 to the dollar in just six weeks, The Japanese fiscal year usually ends in March. With a little luck or some adroit central bank intervention, the dollar may be worth 100 yen again in March, and Toyota would be profitable.

Japanese officials all the way up to Finance Minister Shoichi Nakagawa have dropped hints that an intervention is possible. Nakagawa told reporters in Tokyo ten days ago that he has “the means” to limit the yen’s strength and is “keenly watching” developments in foreign-exchange and other financial markets, as well as the economy. Since then, the rhetoric’s got louder. But there’s been no intervention yet.

According to Bloomberg, the last time Japan intervened on its own, it sold a record 20.4 trillion yen in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen strengthened to 103.42 per dollar.

“I am surprised the Japanese haven’t intervened,” said Dennis Gartman, economist and editor of the Gartman Letter in Suffolk, Virginia. “Intervention to weaken your currency can be very effective.” Especially between the holidays, when the markets are thin. Or in March, when it’s desperately needed.