Currency Confusion
Bloomberg’s wrap-up of last night’s Japan trading notes that exporters such as Canon and Sony fell as the yen strengthened vs. the dollar.
This seems perfectly reasonable. As Bloomberg explains:
A stronger yen makes Japanese exporters’ products less competitive and reduces the value of companies’ overseas earnings when converted back into local currency.
This is classic International Economics 101 material. The trouble is, it doesn’t reflect the nature of reality in a borderless world.
The quote above would make perfect sense if Sony and Canon made all of their cameras, computers, and whatnot in Japanese factories and shipped them overseas. But they don’t.
Kenichi Ohmae, the Patron Saint of this blog and former director of McKinsey & Co.’s Japan business for many years demolishes this reasoning in his book “The Borderless Worldâ€:
They [Japan’s largest exporters] have slashed costs, moved production to the NIEs [newly industrialized economies], and mastered zaitech (financial engineering). By becoming established insiders in their key foreign markets, they have matched the currencies of revenue and costs. In dozens of ways they have insulated themselves against FX fluctuations. The proof is that they have absorbed a halving of the dollar/yen rate during the past decade with no loss of competitive effectiveness.
That passage was written 15 years ago and it is just as relevant today as ever before. There are few people, if any, in the entire solar system with a better understanding of Japan than Ohmae, who has personally advised many of its top companies. Have we not learned anything from him after so many years and so many great books?
It’s amazing that there is still this kind of daily knee-jerk reaction of “yen up = exporters down†whenever the currency rate changes. Both long-term investors and traders alike can exploit this naïve market reaction.
I’m not saying that currencies don’t matter, and I don’t think Ohmae is saying that either. The important thing is to realize that some of the old rules of thumb in economics don’t apply as well in a borderless world as they did in the past. In the case of currencies, you need to look beneath the surface to see what’s really going on with a company’s operational structure and its foreign exchange strategy.
If anything, one could argue that Sony and Canon are exactly the kind of companies you want to own in a difficult FX environment because they have the most experience dealing with the yen’s ups and downs.
Keep all of this stuff in mind whenever any discussion of currencies or trade deficits comes up. Ohmae sums it up beautifully:
Adam Smith-era statistics do not do justice to any of these now-standard means of doing business in the deregulated, borderless world.
Comment by Steven Towns on 2 May 2006:
Thanks for this informative post. I see this daily in my review of the financial press covering Japan. I am personally most concerned with the FOREX rate as it applies to ADR and ETF quotes and values. In this case there is a direct effect.
The issue at hand however is trying to understand the organization and just how much of an effect currency rates will have on U.S. sales for a Japanese firm. I also question how much or how often profits are repatriated as opposed to being plowed back into to local U.S. operations (ex. Toyota and the Japanese auto industry).
On a KISS level firms must report FOREX profits/losses so that may also be why some media and investors have the “yen up = exporters down†reaction.
Here’s an extract from a post I made today on the subject:
A Reuters article mentioned that Goldman Sachs said “currency fluctuations would have a limited impact on its [Canon’s] earnings.†I was actually concerned about Canon’s forward currency exchange forecast rate of Y117/US$1 for the year since the Yen has already strengthened to the 112 level — is currently trading in the mid-113 range — and is expected to maintain its strength over the dollar. Goldman’s stance reflects that of John Christy of Forbes International Investment Report and the Borderless Investor who discussed the media’s misinterpretation of FOREX effect on major Japanese exporter companies in a post entitled “Currency Confusion.â€
http://japanstockblog.com/article/9887