[Viewpoint] Strategies needed for changes in won

On Sept. 15 last year, the Japanese government and central bank unexpectedly poured 2 trillion yen ($24 billion) into the foreign exchange market to pull down the value of the yen, marking the first official intervention since April 2004.

Nevertheless, the value of the Japanese yen continued to rise, posting a 15-year high of 80.5 yen per U.S. dollar on Nov. 1. The yen has now remained in the 80-90 per dollar range longer than the four months it sat there in 1995 and shows no sign of weakening soon. Some Japanese are expressing concern about the impact the strong yen will have on their export-driven economy. However, some say that a high yen is actually good for Japan, in spite of the pain it is inflicting on the country’s exporters.

In fact, some in the Japanese media and elsewhere say appreciation of the yen is an opportunity for pumping up growth. Why is there a less-than-expected sense of pessimism?

In nominal terms, the monthly average yen-to-dollar exchange rate hovers at around 81-82, lower than in April 1995, when the rate last peaked. But based on the effective exchange rate, which takes into account purchasing power and inflation of trading partners, the yen is approximately 30 percent undervalued against the dollar compared to April 1995. The muted pessimism about the high yen is attributable to corporate earnings rapidly recovering to levels seen before the global financial crisis amid the country’s trade surplus returning to precrisis levels.

In the first quarter of 2009, Japanese manufacturers recorded their first-ever ordinary losses. But in 2010, when the yen appreciated further, their average ordinary profit to sales pushed above precrisis levels. As for listed companies, they saw ordinary profit recover to 96 percent of precrisis levels in the first half of 2010. Major export industries, including electronics and automobiles that were in the red in the first half of 2009, are now in the black. How have Japanese companies overcome the yen’s appreciation to achieve sustained growth?

First, they never stopped expanding overseas production. In spite of the strengthening yen, Japanese companies continued to increase overseas direct investment. Seven out of 10 Japanese manufacturers have overseas production bases, and thus have secured the ability to cope with any decline in price competitiveness coming from the strong yen. Robust earnings of overseas business units based in Asia have become a major source of profits for Japanese companies.

Among the composition of profits by region of Japanese listed companies whose fiscal year ends in March, the share of profits from branches in emerging countries in 2010 were 30 percent higher than those in 2000.

Second, based on high price bargaining power on the back of competitiveness of their products and domination in global markets, more Japanese companies have been able to receive export payments in yen, with the weight rising to 41 percent in 2010 from 36.2 percent in 2000. The yen has historically remained high, and thus price bargaining power is important to receive payments in yen.

Third, Japanese companies have aggressively slashed expenses by re-engineering their operations. Processes have been eliminated and labor costs reduced. As they did in the past when Toyota’s slogan was “Squeeze the dry towel,” Japanese companies in the wake of the global financial crisis continued with extreme cost-cutting, creating a business structure that enabled huge profits with lower sales. Japanese companies may now become more aggressive. As of September 2010, Japanese companies had 206 trillion yen in currency and deposits, a record high.

Although they are more defensive because of uncertain economic prospects, they are poised to act more assertively when opportunities arise. With Hitachi, Toshiba and Sharp embarking on liquid crystal display panel plants, Japanese companies will make facilities investments where high client demand is expected. They will also promote acquisitions to take advantage of the strong yen. In 2010, the takeover of foreign companies by Japanese companies increased noticeably. The movement of the Korean won has not paralleled the yen’s. Historically, amid a weakening trend, the Korean won sharply depreciated at the outset of a crisis and appreciated moderately afterward.

Amid the sharp gyrations of the won, Korean companies have not had enough time to gain the ability to cope with the strong won. The won will likely appreciate going forward unless global financial conditions deteriorate dramatically. Korean companies need to devise mid- to long-term contingencies to cope with this situation. In the mid-term, cost reduction through rationalization and pursuit of high value-added will raise their ability to transfer losses coming from a strong won. In the long-term, a global production network should be established to secure the ability to cope with increasing currency volatility.

*The writer is a research fellow at the Samsung Economic Research Institute. For more SERI reports, visit www.seriworld.org.

By Koo Bon-kwan