Cheap Yen May Lift Japan's Automakers

Investor's Business Daily

Japan's aggressive monetary easing has sent the yen sharply lower in recent months, giving its auto giants a competitive boost vs. Detroit.

The impact has yet to be felt. General Motors (GM), Ford (F) and Chrysler have gained share this year in a growing domestic market. But they could feel pressure over time.

The Bank of Japan's huge bond buying has shrunk the yen's value over the course of the last several months. A year ago, the dollar bought fewer than 80 yen; it now buys about 100.

The BoJ has indicated it will keep pumping cash into the world's No. 3 economy well into 2014 and perhaps beyond, which would further erode the yen's value. Within a couple years a dollar could fetch 120 yen, predicted Ken Mayland, president of ClearView Economics.

"More cheapening of the yen probably gets you over time a more competitive Japanese automaker and that probably puts fire to the feet of domestic producers," said Mayland, who follows the U.S. auto industry.

Cheaper Production Costs

The weaker yen makes cars and parts cheaper to produce in Japan than in the U.S. Toyota (TM), Honda (HMC) and Nissan (NSANY) could use those cost savings to cut prices to boost market share or be plowed back into product improvements.

What's more, if pricing pressure develops, it could mount, Mayland added, because South Korea's Hyundai, which sells Hyundai and Kia cars in the U.S., likely will push to remain competitive with its Japanese rivals.

"So it's a bigger picture than just Japan," he said.

Mayland and others said that it could take a couple years for the competitive landscape to evolve notably in response to the declining yen. That's because many Japanese cars sold in the U.S. are made here, reducing the cost savings. Boosting output at home would take years, and producers may be wary of doing so if they think the yen will eventually rebound.

But even on U.S.-made cars and trucks, Japanese producers' repatriated U.S. earnings will get a boost in yen terms.

Some Japanese automakers may prefer in the short term to push savings directly to their bottom lines instead of cutting prices or offering more favorable financing, because the U.S. auto sales pie is expanding, said Raymond James Chief Economist Scott Brown.

"For now they can grow without necessarily needing to press for more market share," Brown said.

U.S. Carmakers Rev Up

Automakers in the U.S. sold 1.4 million cars and light trucks in June, a 9.2% increase from a year earlier, according to Autodata Corp. During the first half of 2013, Americans bought 7.7% more vehicles than during the same period a year earlier, in large part due to pent-up demand and affordable credit.

"We have a lot of old cars on the road, and the banks are eager to make auto loans, so that's fueling demand and I don't expect that to go away anytime soon," Brown said, adding that consumer confidence is building alongside a strengthening U.S. economy.

A housing-related rise in purchases of high-margin pickup trucks disproportionately benefits U.S. automakers as well.

When GM executives held a conference call this month to discuss robust June sales, the yen was not even mentioned. GM's U.S. sales rose 6.5% vs. a year earlier to 264,843 vehicles, the most since September 2008.

"We're in an economy that gets a little bit stronger each and every month," Kurt McNeil, GM's vice president of U.S. sales operations, said on the call.

Indeed, in June the big three Detroit automakers either maintained or modestly improved their U.S. market share from a year earlier, according to Autodata. Toyota and Honda essentially held steady. All increased sales from a year earlier.

Investors have been bullish on automakers generally. The Auto Manufacturers group is rated No. 7 out of the 197 industries that IBD tracks. Toyota shares are up 40% so far this year. Ford has rallied 32% and GM 28%, both to their best levels since early 2011. Nissan has climbed 17%, while Honda lags with a 6% gain.

But over the course of several months, if the yen weakens further and Japanese companies gradually amass cost savings on autos and parts made in Japan and sold here, they are bound to either step up pricing competition or investing on future models.

They could offer new features without raising prices and that would attract more customers, Brown said.

Already, signs of this are appearing at the margins. Toyota said in May that it would boost its capital investment budget by 10% this year, and Nissan said the same month that it would cut prices on seven models. If others follow suit, GM, Ford and Chrysler could be forced to compete on price or invest more in upgrades of their own, Mayland said.

Matt Blunt, president of the American Automotive Policy Council, a trade group that represents the Detroit automakers, said "it is a primary concern for us." He said the Bank of Japan's downward pressure on the yen has more to do with stimulating Japanese automakers' exports than juicing its domestic economy.

The fading yen, he said, not only threatens U.S. automakers on their home turf but also abroad. In the Middle East, for example, Detroit companies compete head-to-head with Japanese counterparts.

"So if they have this artificial advantage over there, too, it clearly impacts our future ability to drive our exports," Blunt said.

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