May 28, 2023

Weakening Yen Helps Toyota Double Its Quarterly Profit

Profit in the Japanese automaker’s financial first quarter beat analysts’ expectations by a wide margin, and underscored the boost that Toyota and other automakers have received from the economic policies of Prime Minister Shinzo Abe of Japan. Those policies have galvanized Japan’s export industry by weakening the yen by about 15 percent since last year, increasing the value of products sold overseas.

Technically, Toyota sold almost 37,000 fewer vehicles in the latest quarter, compared with the same quarter last year, with sales falling in Europe, Asia and Japan. Sales in Japan have slowed since government incentives for fuel-efficient cars expired last year. Toyota is also struggling in China, the world’s biggest auto market, because consumer enmity over a territorial spat between Beijing and Tokyo has weighed on sales of Japanese brands. Auto sales continue to slump across the board in Europe.

But it was the weaker yen, together with a strong showing in its biggest overseas market, the United States, that lifted Toyota’s bottom line. Economists predict the yen to weaken further, while the latest United States sales figures, for July, showed Toyota surging ahead of Ford for the first time in three years, with a 17 percent jump from the same month last year.

Toyota now expects net income for its full financial year that ends next March to reach 1.48 trillion yen, up slightly from a previous forecast of 1.37 trillion yen and an increase of 54 percent from its net profit last year.

In the latest quarter, net profit rose 93.6 percent from a year earlier to 562.1 billion yen, while operating profit rose 87.9 percent to 663.3 billion yen. Toyota attributed more than four-fifths of its operating profit increase to the weaker yen. Net revenue for the quarter rose 13.7 percent to 6.255 trillion yen compared to last year.

Helped by its strong numbers, Toyota is set to become the first automaker in the world to build more than 10 million vehicles in a single year. It said on Friday that it would build 10.12 million vehicles this calendar year, up 180,000 units from a previous production plan. Those numbers include models made by Daihatsu Motor and Hino Motors, which are part of the Toyota group.

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Fundamentally: Japanese Stocks, Trying to Return to High Gear

As the administration of Prime Minister Shinzo Abe pushed to devalue the yen, investors gravitated toward long-forgotten Japanese exporters, which directly benefit from this policy. That’s because a weakening yen makes the price of Japanese-made products more competitive in the global marketplace.

Indeed, some of the best-performing Japanese stocks in this stretch were traditional, multinational industrial giants. Shares of Toyota Motor, for instance, returned nearly 115 percent from mid-November of last year to May 22.

Then in a flash, this strategy seemed to fall apart — or did it?

Concerns over the Bank of Japan’s commitment to so-called quantitative easing — coupled with fears that the Federal Reserve in the United States would soon end its own bond-buying program — helped push the country’s stocks into yet another correction. From its May 22 peak, the Nikkei 225 index of Japanese shares fell more than 20 percent by June 13. But then it came roaring back by more than 16 percent on more recent signs that the country’s economy was indeed nearing a turnaround.

The currency was also whipsawed. After exchange rates had sunk to a low of 103 yen to the dollar, the yen strengthened back to around 94 to the dollar before sliding again. At the end of the week, it stood at more than 99.

As the dust settles, Japanese equity funds are up more than 27 percent for the year. And, year to date, the yen has weakened more than 14 percent against the dollar.

This roller-coaster ride, though, has complicated matters for investors.

Should they go back to favoring shares of exporters, since the yen has been losing value again? Or should they ignore those companies and instead tilt toward businesses that can thrive under a strong yen, should the trend reverse once more? Or should they avoid Japanese stocks altogether?

Many market watchers say investors can sidestep these questions, at least for the moment. Instead, they can do what Japanese stock fund managers have done for years: find ways to invest in Japanese companies without necessarily betting on Japan’s economic growth.

For example, one of the top Japanese holdings in the Causeway International Value fund is the JGC Corporation, an engineering company.

“It’s one of our largest Japanese holdings but it has little do with Japan,” said Sarah H. Ketterer, co-manager of the fund, which beat more than 85 percent of its peers in the past year. Among other things, she said, the company builds liquefied natural-gas plants to help meet the growing demand for the fuel in Southeast Asia.

Over all, less than one-fifth of the company’s revenue comes from Japan.

Another alternative is to invest in companies that don’t necessarily require a strong economy, but that stand to benefit from demographic trends playing out in Japan.

Among the biggest holdings in the Matthews Japan fund, for instance, is JP-Holdings, which operates child-care centers.

In addition to advocating a weak yen to reinvigorate economic growth, Mr. Abe been calling for more women to enter the work force, including leadership posts in Japanese corporations. The country has long been plagued by an aging labor pool, in part because of a declining birthrate. Getting more women into the work force could help address the aging issue and bolster gross domestic product. To do that, though, the government acknowledges a need for more day care options nationwide.

“Companies have to boost investments in child care to facilitate moving young mothers into the work force,” said Taizo Ishida, lead manager of Matthews Japan. And JP-Holdings, one of the largest operators of child care centers in Japan, would surely stand to benefit, he said. Since the start of the year, the shares have more than tripled in value.

Strategists say investors should also look for those few Japanese companies that have shown a willingness to go against the grain.

For instance, during the years when the yen was strengthening, few exporters could gain global market share in the face of a strong currency.

One exception, though, was Unicharm, a maker of diapers. Yoko Sakai, an analyst at Harding Loevner who specializes in Japanese equities, said Unicharm could achieve this partly because it recognized early on that to sell in a cost-effective way to the developing world, it couldn’t rely on the same high-quality, high-priced diapers that Japanese customers demanded. It produced cheaper diapers, which proved quite popular in countries like Indonesia and Thailand, Ms. Sakai said.

Harding Loevner looked for the other kinds of nontraditional thinking from Japanese companies that are domestically oriented. “Whether the yen works for them or against them in a year or two,” she said, “we want companies that can find ways to improve.”

One such company, she said, is ABC-Mart, a shoe retailer in which Harding Loevner invests. ABC-Mart began as a wholesaler but decided to integrate vertically by owning its own retail stores. Then it began buying some shoe brands. “This company isn’t just taking share, it is disrupting the market and getting rid of the middleman,” she said.

WHEN will it be safe to start betting more directly on a Japanese rebound?

It’s hard to say, according to money managers. Skepticism about the future of the stock market is deeply rooted. “In Japan, people are conditioned to sell after a 20 percent rise in asset prices,” said M. Campbell Gunn, manager of the T. Rowe Price Japan fund.

And Ms. Sakai said, “If anybody tells you that they know what’s going to happen in Japan, they’re lying.”

At the very least, money managers say the recent correction is a reminder of just how far the Japanese stock market has to go before it really recovers.

Charles de Lardemelle, co-manager for the IVA International fund, points out that Japan, which has had a shrinking population and work force, hasn’t even begun to tackle the issue of immigration reform, which may also be required to turn around the population trend toward fewer workers. And at the corporate level, he said, there needs to be greater consolidation of companies with a greater focus on delivering more to shareholders.

“To have a real, sustainable long-term rally in Japan,” he said, “you have to see a lot of political changes that so far have not happened.”

Paul J. Lim is a senior editor at Money magazine. E-mail:

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Nikkei Dives More Than 4 Percent

HONG KONG — The battered Japanese stock market lurched into bear market territory Thursday, after a tumble of 4.5 percent took the combined decline in the Nikkei 225 index since May 23 to more than 20 percent.

By early afternoon in Tokyo, the Nikkei 225 hovered around 12,680 points, about 20 percent below a high of nearly 16,000 reached in intraday trading three weeks earlier.

The drop on Thursday was one of many sharp declines seen in recent weeks, since a feverish six-month rally in Japanese stocks — incited by optimism over the government’s aggressive efforts to reinvigorate the listless economy — came to an abrupt end.

The Nikkei 225 soared more than 80 percent between mid-November and mid-May, but staged a sudden about-face with a 7.3 percent plunge on May 23.

Sentiment has been fragile and trading volatile ever since, as investors have taken stock of the challenges that face “Abenomics,” the economic policies of Prime Minister Shinzo Abe, and weighed the pros and cons of taking profits after the rally.

But factors beyond Japan also have come into the fray, and helped send markets lower around the world.

In China, which is a key engine of global growth, the flow of economic data in recent weeks has reinforced the picture of an economy that is struggling to regain momentum.

And in the United States, comments on May 22 by Ben S. Bernanke, the chairman of the U.S. Federal Reserve, that he and his colleagues might consider paring back their bond-buying programs “in the next few meetings” if the economy is showing signs of improvement have helped fan global nervousness. Investors and analysts, meanwhile, have struggled to assess the possible implications of even a small withdrawal of the bond buying that has supported markets in recent years.

The concerns about the “tapering” of U.S. stimulus measures have sent stocks lower around the world. In the United States, the Dow Jones industrial average and the S. P. 500 have sagged 3.2 percent and 4 percent, respectively, in the past three weeks. The DAX in Germany has fallen about 4.5 percent and the CAC 40 in France has dropped more than 6 percent.

Key markets in the Asia-Pacific region have tumbled even more.

The Straits Times index in Singapore and the Hang Seng in Hong Kong have both shed more than 10 percent since May 22, and in Australia, the S.P./ASX 200 has sagged more than 9 percent.

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Abe Describes Strategy to Free Up Japan’s Economy

TOKYO — In a bid to give second wind to his drive to kick-start Japan’s economy, Prime Minister Shinzo Abe laid out a wide-ranging growth strategy on Wednesday that he said would beat deflation, increase personal incomes, unlock the long-squandered potential of its tech-savvy work force and reboot an economy written off in recent years for its seemingly unshakable malaise.

Initial enthusiasm over his program, dubbed Abenomics, of aggressive monetary easing, public works spending and economic overhauls had driven markets up by 80 percent from late last year, when Mr. Abe began his campaign for office, through the middle of May. But optimism has waned in the past two weeks, as investors have taken stock of the risks and shortfalls that accompanied the bet to end longstanding deflation. Investors have also demanded more specifics on how exactly Mr. Abe intended to encourage economic growth. The Nikkei 225-share index fell 3.8 percent Wednesday.

Mr. Abe sought to provide answers Wednesday. He said he would provide tax breaks to encourage foreign direct investment. He said he would remove cumbersome regulations, for example in the medical sector by removing a ban on sales of most pharmaceuticals on the Internet. And he pledged to combine Japan’s high-grade infrastructure and manufacturing prowess with the daring and creativity of a younger generation eager to seize the reins from the economic old guard.

“For 20 long years of deflation, Japan suffered a deep loss of confidence,” Mr. Abe said. “It is now time for Japan to become an engine of global economic growth.”

If Mr. Abe fails to deliver on his promises for bold change, the euphoria that drove Tokyo shares to a five-year high could evaporate further, economists warn. And without those fundamental overhauls, they say, Japan is at risk of sinking back into the economic torpor that has defined much of the past two decades.

Many economists and younger business leaders say that the crux of the overhauls lies in raising Japan’s economic metabolism by making it easier for new companies to to enter the market and for fading old ones — of which there are many in Japan — to exit. That would need to be paired with a more flexible labor market that would smooth the transfer of workers from ailing companies to promising new ones.

A 2010 study by the economists Kyoji Fukao and Hyeog Ug Kwon showed that Japanese companies set up after 1996 added the most jobs in the period to 2010, creating 1.2 million, compared with a net loss of 3.1 million jobs over the same period at all companies founded before 1996. Foreign companies added more than 150,000 net jobs to Japan, highlighting what is seen as the need for Japan to open up to more foreign direct investment, whose inflows came to less than 4 percent of economic output in 2001, compared to a fifth of the American economy and half of Britain’s.

That, economists say, would bring real change to a country famous for its world-class exporters like Toyota and Canon but also chock-full of laggards that are sheltered by regulations and kept alive by subsidies, sucking the lifeblood out of the Japanese economy. For Japan to make the productivity gains it needs to grow, economists say, these domestic companies must be opened up to more competition from both inside Japan and overseas. One catalyst for such change would be Japan’s participation in the Trans-Pacific Partnership free trade agreement, already announced by Mr. Abe.

Still, some of the fundamental overhauls needed for an economic renewal, like labor market changes, are conspicuously missing from Mr. Abe’s policy plans, as were vital details, said Akio Makabe, a professor in economics at Shinshu University in central Japan.

“At the start, there was hope that Mr. Abe was as committed to economic reforms as he has been with monetary policy and government spending,” Professor Makabe said. “But judging from this policy platform, that commitment appears to be wavering. Where is the labor market reform? Where is the real change? It seems he’s given in to the naysayers and listed up policies that just sound good.”

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Wall St. Opens Lower After Worldwide Slump

Following market declines around the world, Wall Street opened lower on Thursday after investors were rattled by signs of a slowdown in Chinese manufacturing and a potential easing of central bank support for the economy.

The worst drop in share prices was seen in Tokyo, where the Nikkei index fell 7.3 percent, the most since the 2011 tsunami there. In New York, the benchmark Standard Poor’s 500-stock index was down 0.9 percent in early trading. Leading indexes were down 2.6 percent in Germany and 2.5 percent in France.

The pessimism that overtook investors on Thursday was a sharp reversal from months of steady advances in share prices around the world. Many investors had voiced concern that the rally was due for a break, but it had not been clear what would serve as a catalyst for a downturn.

The dip began on Wednesday afternoon, after Ben S. Bernanke, the Federal Reserve chairman, testified before Congress that the Fed could pull back on its monetary stimulus programs if the economy continues to show progress. Later on, an index of Chinese manufacturing showed that activity actually slowed down in May for the first time in months.

China’s slowing momentum has been long in the making and is, to some extent, deliberately engineered by the authorities in Beijing, who are trying to bring about a more balanced pace of growth. Still, disappointments over the performance of China’s economy – the second-largest in the world after the United States – remain liable to unsettle markets not just in Asia but around the globe.

The response was particularly stark in Japan, which is in the early stages of an aggressive government effort to prop up the long-suffering economy. High hopes that the bold economic policies of Prime Minister Shinzo Abe will succeed have prompted a huge rally in stocks since November. The Japanese market is still up nearly 40 percent since the start of the year.

Akira Amari, Japan’s economy minister, sought to calm nerves after the market closed Thursday. “The Japanese economy is staging a sound recovery, and there is no need for panic,” he said, according to the Nikkei business daily. The plunge “is not exceedingly large, and stock prices in China, where the shock originated, have not fallen so much either,” he added.

“The stock market’s rise has so far been largely driven by expectations of an economic turnaround, but we’ve yet to see Mr. Abe’s policies really gain traction,” said Kiyoshi Yoshimoto, chief senior economist at the Japan Research Institute in Tokyo. “That means even small shocks, like lower-than-expected numbers out of China or some volatility in bond markets, can trigger a big but temporary response.”

Analysts have broadly welcomed Mr. Abe’s efforts to breathe life into the Japanese economy through a three-pronged approach of major fiscal spending, a promise to pursue structural reforms and a monetary policy that has effectively flooded the economy with cheap money through purchases of government bonds, commercial debt and other assets.

One result has been a weakening of the yen, whose 17 percent drop against the dollar since the start of this year has helped lift the earnings prospects of many Japanese exporters. Data released in the last few weeks have shown that the economy has begun to pick up speed.

Taking many market observers by surprise, however, bond yields have risen in recent days, fanning worries about a rising interest rate burden for the government. The yield on the 10-year Japanese government bond briefly spiked above 1 percent Thursday before dropping back to 0.9 percent. The move spooked investors, helping produce the fall in the stock markets, said Stephen Davies, chief executive of Javelin Wealth Management in Singapore.

Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial assets held by banks, pension funds and insurance companies, making a surge in debt yields perilous. Given the indebtedness of the Japanese government, there are worries about the impact that this could have if sustained, Mr. Davies said. “It is too early to say whether it will be sustained, so we should not read too much into one day’s extreme move in the markets.”

The sell-off Thursday came in spite of economic news from Europe that was, if not good, at least better than many expected. The Markit Economics euro zone purchasing managers’ index for the manufacturing sector rose to 47.8 points from 46.7, while the services index rose to 47.5 from 47. While a number below 50 indicates continued contraction, the improvement suggests the economy may be getting nearer to its nadir, setting up conditions for a rebound in the second half.

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Dollar Tops 100 Yen in Milestone for Bank of Japan Effort

Japanese authorities’ efforts to lift the moribund economy showed progress on Thursday, as the yen breached an important level against the United States dollar.

Since taking office in late December, Prime Minister Shinzo Abe has made beating deflation a major point of his economic policy, prompting the central bank to pour money into the economy. That policy is bearing fruit, as the yen weakens against the dollar and other world currencies.

With the yen falling, the dollar is now valued at more than 100 yen, a level not seen in four years.

The yen’s move is kindling inflation in an economy that has long been moribund, in the process delivering a competitive boost to the country’s big exporters. The promise of reflation has also had an effect on the stock market; the Nikkei has risen throughout this year on the anticipation of laxer policy.

The Bank of Japan has moved aggressively to reinvigorate the economy and fight deflation.

Last month, the central bank announced a decisive break with its earlier policies. Instead of focusing on keeping overnight interest rates close to zero – which seemed to be having little effect in reviving growth – the central bank aimed to double the amount of money in circulation, seeking to produce annual inflation of about 2 percent.

The promise to drastically change Japan’s economic policy and end the long, debilitating era of deflation has caused the dollar to rally for much of this year. By midafternoon in New York, the dollar was valued at 100.53 yen.

With this move, the yen has fallen nearly 14 percent against the dollar this year. The only currency that has fallen by more is the Venezuelan bolívar.

Japanese officials say the policy does not overtly target a lower yen rate, which could raise tensions with other exporting nations like the United States. But a weaker yen is a welcome development in some ways. A number of large Japanese companies have reported banner profit in recent weeks, driven in part by the drop in the currency.

On Wednesday, Toyota reported net income of 313.9 billion yen, or $3.17 billion, in its latest quarter, as the value of its overseas earnings increased in its home currency and production in Japan became more cost-efficient. Sony also cited the yen in its latest earnings report.

The efforts by the Bank of Japan to continue to flood the economy with liquidity is likely to keep downward pressure on the yen in the coming months. The central bank is following an asset purchase program to inflate the economy by aggressively buying longer-term bonds and doubling its government bond holdings in two years.

The depreciation of the yen may be a step in the right direction as the authorities try to fuel some growth. However, Japan still faces many stiff challenges until it breaks out of its period of deflation. It has an aging and shrinking population and cumbersome regulations that make the economy inefficient, and it is not clear that monetary policy alone can end stubborn deflation in Japan.

As he has tried to put a new focus on reviving the economy, Mr. Abe fought with the central bank’s former leaders over setting the 2 percent inflation goal. Mr. Abe’s pressure in the end led to the resignation of the bank’s previous governor, the moderate Masaaki Shirakawa. His departure led to the appointment of Haruhiko Kuroda, who shares Mr. Abe’s economic philosophy.

As it pursues its new policy, the Bank of Japan is buying longer-term government bonds, lengthening the average maturity of its holdings to seven years from three years and expanding Japan’s monetary base to 270 trillion yen by March 2015.

In this way, the bank will buy about 7 trillion yen in bonds each month, equivalent to over 1 percent of its gross domestic product. That is almost twice the bond purchases of the United States Federal Reserve Bank.

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Toyota Says It Is Primed for a Lucrative Year

Toyota said net profit was 99.9 billion yen, or $1.1 billion, in the three months through December, a 23.5 percent increase from results a year earlier, when the effects of the Japanese tsunami still weighed on its business.

Sales for the quarter climbed 26 percent, to 16.2 trillion yen, helped by a surge of almost 50 percent in sales of the company’s fuel-efficient vehicles in the United States.

Cost reductions at the automaker, already known for its lean production, saved 320 billion yen during the quarter, the company said in a statement.

Now Toyota, whose Super Bowl ad “Wish Granted” topped viewership rankings, is set to get a wish of its own: the weaker yen, brought about by the economic policies of Prime Minister Shinzo Abe, who took office late last year, is set to lift Toyota’s bottom line even further.

A weak currency helps Toyota because it lowers the cost of producing in Japan and inflates the yen value of overseas profits. Toyota is poised to get a particularly big lift from the weak yen because it manufactures more cars at home than its domestic rivals. Last year, Toyota made 53 percent of its vehicles in Japan and exported more than half of those cars.

Toyota shares have risen by almost 50 percent since mid-November, when the yen started to weaken. The currency has weakened by about 15 percent during the same period.

In 2013, Toyota expects to sell 9.91 million vehicles, improving on its record of 9.75 million last year, which helped it regain its crown as the world’s top-selling automaker from General Motors. Those sales figures include Daihatsu Motor and Hino Motors, which are part of Toyota Group.

Such a performance could help Toyota get closer to the 1.7 trillion yen in net profit it reported in 2008, before the global financial crisis decimated its earnings.

Since then, a recall scandal, natural disasters and a strong yen have hindered a full comeback. But the combined challenges have also led executives at the 75-year-old automaker to revamp quality control, cut costs and take more risks with design.

“We believe that our efforts have been bearing fruit,” Takahiko Ijichi, Toyota’s senior managing officer, said in the statement on Tuesday. “We are finally on the road to sustainable growth.”

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