YEN AND THE ART OF TRADE MAINTENANCE
By Ruma Dubey
Just as Modi has given our country the dream of “Make in India”, Japan’s Abe too is thinking in the same lines. The Japanese Prime Minister, like Modi is looking at options to bring back production, especially of electronics, back to Japan. The difference here is that Modi wants to make India conducive for other countries to set shop here, something like making India the world’s factory, like China. On the other hand, Japan wants to bring back its own companies – Canon, Panasonic, Daikin, Sharp into Japan.
At one time, Japan was an export power house but soon, higher production and prohibitive labour costs pushed up costs, making it less competitive. That eventually led to companies shunting out their production facilities out of Japan, mainly to China. This happened in 2008-09 when the yen soared.
Today, things in Japan have changed. Compared to one dollar bringing in around ¥80 in 2012, the very same dollar fetches ¥117. The weak Yen means costs in Japan in dollar terms have come down. Some companies – Sharp, Canon and Daikin have started shifting some part of the production to Japan but they are moving lock, stock and barrel. It is like testing the waters and see if this works out. And the yen was the reason why Japanese companies moved out – the stagnant domestic demand, aging population and the need to get closer to the customers and not ship from Japan – all reasons to move out remains intact. And that is not going to change irrespective of the yen getting weaker. The car makers, Suzuki, Toyota, Nissan, Honda – none of them plan to shift base to Japan as economically, it just does not make sense.
This small shift and weaker yen has surely bolstered the exports. In November, exports jumped 10.8% (YoY) and imports rose only 2.2%. The falling yen, unlike the Indian Rupee against the dollar, is a pre-planned move. This is a part of Japan’s game plan to fight its battle against deflation and promote economic growth. And unlike India, where a falling rupee is extremely worrisome, the falling yen is welcomed in Japan while those in EU are grumbling that Japan is manipulating its currency to make its exports look good! Well, you cannot please all!
The falling yen is naturally expected to boost exports, which in turn will give impetus to Japan’s economic growth. It has set itself a target to get from deflation to a 2% inflation, which many say is mighty ambitious. Indeed Japan seems like another world when we seem to be fighting relentlessly to tame inflation and interest rates have never been so high!
Well, all said and done, the ultimate question always in all is – mera kya hoga? So how does India gain from a falling yen? For starters, it means that imports from Japan get cheaper and it is definitely advantage for those who take a debt in yen as of now. But for those who have already taken a loan, they usually take debt by buying yen on forward as they have to pay interest rates in yen over the next few years through the loan tenure. So they would have got locked at rates of then while today, the yen is much lower. Thus those who lock into a forward yen at current reference rates could get a benefit through the loan tenure if the yen appreciates later. Yes, with yen fall9ing, we could hear companies rushing to prepay loans to take advantage and can book forex gains.
Companies with strong Japanese connection includes – Honda, Suzuki, Nippon, Swaraj Mazda, Sumitomo, .Sona Koyo, Asahi Songwon, Kansai Paints, Munjal Showa, Tayo Rolls, Igarshi Motors, Ricoh India, Ceekay Daikin, Kokuyo Camlin, Asahi India Glass, Lumax, Ucal Fuel, Uken India and not to forget Ranbaxy which is today controlled by Japanese company, Daiichi Sankyo. L&T has many JVs with Japanese companies and so do many others. These are some of the companies which may or may not benefit but best to keep a close watch on them as a falling yen, surely means lower import costs.