ASIA MARKETS: Japanese Exporters Suffer New Hit From Yen

Japanese exporter shares headed sharply lower Monday, as recent financial results from the likes of Sony Corp. and Honda Motor Co. revealed how deeply the strong yen has hurt the companies' performances.

"The U.S. appetite to pay better prices for goods is weak," said Richard Hastings, consumer strategist at Global Hunter Securities. "So Japanese exporters, of consumer electronics especially, have to deal with two points of impact on revenue and on earnings: price and forex."

The Japanese yen climbed to its highest level against the U.S. dollar in nearly three weeks Monday in Tokyo. One dollar bought as little as 89.81 yen, the weakest exchange level for the greenback since Oct. 14, according to FactSet Research data.

"The strong yen is an obvious problem for Japanese exporters' earnings, and in any stock market downturn, which tends to strengthen the yen, investors will punish exporters further," said Uwe Parpart, chief Asia strategist for Cantor Fitzgerald.

Sony Corp. (SNE) was among the biggest losers, trading 5.8% lower by the end of the morning session in Tokyo.

Auto makers also suffered sizable losses, with shares of Honda Motor Co. (HMC) slumping 2.8%, Nissan Motor Co. (NSANY) shedding 4.1% and Toyota Motor Corp. (TM) down 2.5%.

Among other exporters, shares of Sharp (SHCAF) dropped 1.6%, and Hitachi Ltd. (HIT) fell 2.7%.

Losses among Japanese exporters came in tune with wider declines in Asian markets. Japan's Nikkei 225 Average dropped 2.7%, China's Shanghai Composite lost 0.7%, Hong Kong's Hang Seng Index fell 2%, Australia's S&P/ASX 200 slid 1.9%, and South Korea's Kospi shed 0.9%.

Profit-eater

The weakness in exporter shares reflected market concerns following recent financial results, which showed the true impact of the yen's appreciation on the companies' bottom lines.

At the time of its July forecast of financial results, Sony had assumed a foreign exchange rate of about 93 yen per U.S. dollar from the second quarter through the fourth quarter. But now it's assuming a rate of 90 yen per dollar for the second half of the fiscal year.

The electronics giant posted a net loss of 26.3 billion yen ($292 million) for the quarter ended in September, a narrower loss than expected. But a year ago, it saw net income of 20.8 billion yen.

Among the reasons for Sony's deterioration in operating profitability was a 77 billion yen impact from the appreciation of the yen.

And the downside risks to the share price still include yen appreciation, said Masahiko Ishino, a senior analyst at Mitsubishi UFJ Securities, in a research note.

Also last week, Honda said its operating income for the second quarter fell 56% from a year earlier, due in part to "unfavorable currency effects by the appreciation of the Japanese yen."

Analysts at Deutsche Bank said in a recent note to clients that while global auto output for the Japanese majors fell 9.6% year on year in September, "there is a clear trend of improved overseas output relative to domestic, as OEMs [original equipment manufacturers] cut exports to limit exposure to the strong yen."

Yen's future mixed

Going forward, Global Hunter Securities' Hastings sees short-term strength for the Japanese currency but with an easing not too far off.

"The CIT Group news is certainly going to extend this round of yen strength for another two or three weeks," said Hastings, referring to the U.S. lender's filing for bankruptcy protection.

"Despite all of this, the credit crisis is getting old, with fewer big bad surprises left," he said. "We expect the situation for Japanese consumer-goods exporters with substantial U.S. exposure to get some relief in early 2010, since we believe the overall tone for the holiday retail season is more favorable that the consensus view."

Hastings expects the dollar to rise back to the 95 yen to 97 yen range early next year, once it's "understood that the U.S. consumer is capable of spending in a post-credit crisis world."

"So relief is very likely on its way after the holiday season's results are analyzed," he said, pointing out that the dollar strengthened back to the 98-yen level in March 2009, "when equities were busy going down the drain."

Parpart, meanwhile, said the yen appreciation problem will persist for exporters "as long as the yen enjoys a historically very odd three-month Libor yield advantage over the [U.S. dollar rate] and people use the dollar rather than the yen as the preferred funding currency for carry trades."

"The change will come when the relative three-month yields revert to normal," he said, adding that "a step in that direction could happen as early as Wednesday if/when the [U.S. Federal Open Market Committee] decides to drop the reference to 'extended period' in its policy statement."

"Markets will conclude that the yen yield advantage no longer makes sense when the Fed is becoming palpably more likely to raise rates before the [Bank of Japan]," he said.