Yen's Appreciation Tipping Japanese Carmakers' Balance Sheets

Yen's Appreciation Tipping Japanese Carmakers' Balance Sheets

By Peter Nunn

In Tokyo, it's like déjà vu all over again.

Exactly a year ago, in March 2007, the media and airwaves were full of stories about the fast-rising value of the yen. The Japanese currency had soared from ¥120 to the dollar up to ¥115, and to some it was like the yenshock era of the '80s returning.

How Japan's auto industry, which gets hurt with every appreciation of the yen, would love to see ¥115 again.

Last Monday the yen rocketed to the ¥102 level, the first time it had been in that territory since January 2005, as the global economic turmoil continues to unfold amid fears of a U.S. recession and record high oil prices.

Japan's auto players have been here before, of course. In fact, several times and in one of those fascinating insights into the financial inner workings of the industry, it's said Toyota suffers a ¥35 billion loss with every ¥1 appreciation (if it's sustained for a whole year). For Honda the hit is ¥20 billion; for Mazda, the loss is a more modest ¥2 billion.

Converted into dollars, that would equate to a $343 million loss for Toyota. Honda would be down $196 million and Mazda, $19.6 million, to put it into perspective. 

Japan's auto industry still shudders when it remembers an even worse time, in April 1995, when the yen set an all-time record by dipping under the ¥80 level.

This was in the midst of Japan's so-called 'Lost Decade' and the Toyotas of this world frantically began work behind the scenes on a radical, cost-cutting "Â¥80 to the dollar car," or so well-placed sources said.

Two things happened thereafter to ease the pressure and put that ¥80 car on hold. The yen/dollar rate backed off, retreating across ¥100 line and eventually down to ¥130 again by 2002.

At the same time, Japan's automotive Titans began the process of building up their global manufacturing operations to offset the effects of these kind of currency swings. 

So yenshock is by no means the hammer blow it once was although for outfits like Mazda and Subaru, which don't have a big global manufacturing capability and still rely heavily on exports, clearly it will make the job of earning profits a whole lot harder.

Some critics, meantime, might not be too sorry about the recent financial movements as it's widely believed the Japanese government keeps the yen artificially soft to help the country's mighty export machine. Time for a rebalancing of the slate, then.

Still, Japan's auto industry has come a long way over the past decade and as the drive to slash costs and improve efficiency in both design and manufacturing goes ever further and deeper, and the global reach of the Toyotas, Hondas and Nissans of the world grows ever larger, it might be that these lean and mean giants could even live with that red-hot ¥80 to the dollar rate of the mid-'80s now whereas previously their balance sheets would simply have burned.

As for the mythical ¥80 to the dollar car, that's now come back on stream as part of the rush to build low-cost competitors for the likes of the Renault Logan and Tata Nano, the new megastars of the emerging markets.

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.