Japan`s manufacturers count cost of high yen

For 50 years, UD Trucks, formerly named Nissan Diesel, has been producing vehicles at its Ageo plant outside Tokyo, relying on Japan's reputation for quality and safety to sell to hauliers in South Africa, Indonesia, Australia and Thailand. But only rarely has making money seemed as difficult as it does today.

"We sell our products mainly in yen, so the strong currency affects our volumes," says Yusuke Sakaue, president of UD or "Ultimate Dependability", Japan's third-largest truckmaker, wholly owned since 2007 by Volvo. "We have to increase our price to keep our profitability. But we are already the price leader - we can't afford to increase again."

More News From Financial Times
Japanese get to grips with triple-deckers
Japan sees record shortfall in first half
Yen falls after Bank Of Japan stimulus surprise
FTSE falls as stimulus hopes fade
Made in Osaka: why the BoJ intervened

It is the kind of lament you hear a lot from Japanese exporters. With the yen still near the record high against the US dollar it hit almost a year ago, many are finding it difficult to compete against cheaper Asian rivals, especially as China's economy slows and Europe's languishes.

According to the central bank's much-watched Tankan survey of business sentiment, published on Monday, the key measure of confidence among big manufacturers slipped to minus 3 from minus-1 in June. That was the fourth straight quarter in which pessimists outnumbered optimists, and the longest string of negative readings since Japan emerged from a long post-Lehman slump just over two years ago.

Just 11 per cent of big manufacturers - defined as having equity capital of more than Y1bn (USD 13 million) - said current business conditions were "favourable," while less than one-tenth expected favourable conditions for the remainder of the current fiscal year to March.

The strong currency accounts for much of the gloom. Exporters expect the yen to stay below 79 to the dollar, on average, until March. That is little changed from the current rate of about 78, but well short of the levels many need just to break even.

"I'm relatively confident that we're already in a recession," says Kiichi Murashima, chief economist at Citi in Tokyo, who expects a "shallow" export-led contraction in Japan's output of about 0.3 percent in the third quarter and 0.1 percent in the fourth.

Manufacturers are responding to the squeeze on profits by moving production outside Japan and by pressing suppliers for cost cuts, deepening Japan's deflationary spiral.

Sumco Corp, a big manufacturer of silicon wafers used in semiconductors, is closing three business lines in Japan while shifting some capacity to its Taipei-based affiliate. Like UD Trucks, it relies on sales to overseas customers for about two-thirds of its total.

"The semiconductor market has not seen a revival," says Hiroshi Shibuya, general manager of investor relations. "We had a huge deficit in earnings [last year], so this is one of the options we took."

In some cases the strong currency is serving as a catalyst for much-needed restructuring. Shoji Muneoka, chairman and chief executive of Nippon Steel & Sumitomo Metal Corp, told reporters last week that the high yen was one of half a dozen reasons why the two predecessor companies, which formally merged on Monday, struggled to compete with the likes of South Korea's Posco or Baoshan Iron & Steel of China.

The Bank of Japan is seeking to limit the pain, last month adding "foreign exchange market developments" to its list of big risks for the economy.

In the past, the BoJ has weighed the pros and cons of a stronger yen, notes Yuichiro Nagai, economist at Barclays. "Now it seems clear that it thinks the demerits are much bigger than the merits."

But with investors still drawn to the bonds and the currency of the world's biggest net creditor nation amid ongoing turmoil, there is not much the BoJ can do beyond shaping short-term trends, says Sakaue of UD Trucks.

The yen, after all, has gained against every paper currency in the world over the past five years - from the Papua New Guinea Kina (minus-5 percent) to the New Sudanese Pound (minus-69 percent). "As long as Europe stays weak, I'm not so optimistic," he says.