Yen and Japanese Corporate Earnings

The strength of the yen is negative for the Japanese economy because it reinforces the deflationary forces and hurts corporate earnings may making exports less competitive. This is fine on a certain level of abstraction, deducing from first economic principles. The problem is in the details.

Three important Japanese companies with large foreign sales reported surprisingly good earnings recently. The point of this exercise is not to recommend particular Japanese companies to invest in, but to suggest that parts of corporate Japan are coping with the yen's rise better than one would expect.

Last week, Sony raised its guidance for the entire year after generating JPY31.1 bln net in come in the three months through Sept. A year ago it reported a loss. Sony returned to profit in the April-June quarter after two years of losses. The company is still adversely impacted from the yen's rise. It said, for example, that the operating income of its consumer products division would have been 2 1/4 times higher if not for the yen's appreciation. It is in the middle of its restructuring program that reorients production away from Japan.

Panasonic also reported a five-fold increase in net profits to JPY31 bln on the back of cut cutting and robust sales. Toshiba appears to be further ahead of Sony, Panasonic and many other Japanese multinational companies in buying and building more outside of Japan. The company says that it actually profited from the yen's rise in the first half of the fiscal year that ended Sept 30.

Other Japanese multinationals have not done as well. Sharp cut its full year forecast, bout noted falling prices for its liquid crystal displays. Nintendo warned of waning demand for Wii. Many of the car makers have been hit be a sharp decline in domestic demand as the government's scheme that subsidized purchases ended.