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Yen Freefall Has Fewer Benefits for Japan Inc. As Economy Shifts

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(Bloomberg) -- SoftBank Group Corp. and video game makers are emerging as rare beneficiaries of a weaker yen, which no longer offers the clear advantage to Japan’s corporate sector it did a decade ago.

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Automakers and electronics makers including Sony Group Corp. once welcomed a softer yen for bolstering their competitiveness abroad and inflating the value of their repatriated profits. But after shifting production overseas in recent years to secure growth and resilient supply chains, many of them see a mixed, or mostly neutral, effect from the yen’s freefall to 20-year lows, according to industry executives and analysts.

For some consumer companies including Uniqlo owner Fast Retailing Co., the latest slump in the yen is a negative factor, exacerbating the impact of surging raw materials costs and higher energy prices amid Russia’s war in Ukraine.

“It’s no longer the case that the weak yen benefits many firms in the manufacturing sector,” Morningstar Research analyst Kazunori Ito said. “Even those who still benefit from the weak yen, the magnitude has become much smaller. Sony is a great example of that.”

The yen had its longest losing streak against the dollar in 50 years this month, as the gap widens between U.S. and Japanese interest rates. The Japanese currency has fallen around 10% against the U.S. dollar year to date, last trading on Tuesday at around 127.60 yen.

SoftBank’s massive bets on overseas startups mean it is poised to clearly benefit from a weaker yen. The value of SoftBank’s assets will rise 9% if the yen weakens 12% year-on-year as the group has 86% of its value in dollar-linked assets, said Kirk Boodry, analyst at Redex Research. In a report published last week, he said the softer currency also helps SoftBank’s 1 trillion yen share buyback program announced in November, although it’s negative for the group’s debt.

Japanese video game publishers such as Nintendo Co. and Capcom Corp. are also expected to benefit. Both companies create software in Japan, meaning a bulk of their costs are in yen, while a large portion of their sales come from overseas. Nintendo’s operating profit would increase by 1.1 billion yen per every 1 yen decline against the U.S. dollar, said Mitsubishi UFJ Morgan Stanley Securities analyst Hirotoshi Murakami.

Kenjiro Asano, chief financial officer of video game publisher Koei Tecmo Holdings Corp., said on Monday that its operating profit may get a boost of over 100 million yen for each 1 yen fall.

Upcoming business results should show Japanese automakers benefiting from a weaker currency, at least in accounting terms, analysts said.

“Yen depreciation will partially offset Japan carmakers’ triple pain of ongoing virus outbreaks, parts shortages and higher input costs, combined with impact from the Russia-Ukraine war,” said Bloomberg Intelligence analyst Tatsuo Yoshida. “Yen depreciation’s effect will vary by company, but should provide an overall boost to Japanese automakers’ operating profit,” he said, forecasting a particularly strong boost to Mazda Motor Corp. and Subaru Corp.

But analysts and executives said the exchange rate’s impact was much smaller than it would have been a decade ago. A strong yen and supply chain disruptions from the earthquake and tsunami of 2011 prompted automakers and a broad range of suppliers to build a more resilient, global supply chain over the past decade. Stronger growth in overseas markets compared with sluggish demand in Japan also spurred a shift in production overseas.

Toyota’s top U.S. sales executive, Bob Carter noted that 77% of the vehicles sold in the U.S. last year were made in North America.

“It doesn’t have the relevance in our business that it had 20 years ago,” he said.

Honda Motor Co. is in a similar situation, according to Chief Executive Officer Toshihiro Mibe.

“We operate under the basic principle of producing in the region where the market is,” he told Bloomberg News. “The business is operating in a way that makes it little impacted by fluctuations in exchange rates.”

Satoru Aoyama, senior director of Asia-Pacific Corporates at Fitch Ratings, warned that supply chain constraints and chips shortages meant the year ahead could be harder for automakers.

“The yen depreciation today and for the next six months, it’s like window-dressing, it doesn’t resolve the real, underlying issues,” he said.

For many Japanese manufacturers, the impact is expected to be more neutral. Panasonic Holdings Corp.’s CEO Yuki Kusumi said the negative impact on its home appliances business would cancel out gains in other areas.

In Sony’s case, the yen is likely a negative for its small smartphone business which is reliant on imports and sold mainly in Japan. Its image sensor business could see a boost as they are mostly made in Japan and sold to overseas customers, including smartphone makers like Apple Inc.

In some industries, the weaker yen is a clear negative, particularly among restaurant chains and others struggling with higher costs of imported foods and goods.

Even Fast Retailing, whose casual clothing chain Uniqlo boasts a global sales and production structure, says the latest round of yen weakness is clearly negative due to higher import costs, particularly as a weak economy made it difficult to mark up prices in Japan.

“There are no benefits from the weaker yen,” CEO Tadashi Yanai said earlier this month.

The 73-year-old, one of the most prominent executives in Japan explained the sharp currency move is squeezing companies like his between rising costs and reluctant consumers.

“Given the current economic situation in Japan, we cannot easily raise product prices,” he said. “But when the cost of raw materials have doubled and tripled, it’s impossible to sell it at the current prices.”

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