Analysis: Japan Inc and the yen: No panic like 1995

TOKYO (Reuters) - A decade and a half after a surging yen left Japanese businesses struggling to make money, Toyota (7203.T), Panasonic (6752.T) and other leading exporters are again lamenting a profit-sapping foreign exchange fluctuation.

This time round, however, they aren't panicking.

Behind their relative calm lie new foreign factories that have made many enterprises resistant to yen swings, and years of deflation which have squeezed wage costs while the rest of the world inflated.

The switch to overseas production has been rapid. In 1995, Toyota, Japan's biggest company, built just 1.3 million vehicles overseas. By 2009 that had almost tripled to 3.7 million while production in Japan shrank by 190,000 cars to 3.5 million.

Rivals Honda Motor (7267.T) and Nissan Motor (7201.T) have shifted even faster, building more than two-thirds of their cars outside Japan. Four years ago, Japanese auto industry output abroad surpassed domestic production for the first time.

With the yen having hit a 15 year high this week and nudging back toward 80 yen to the dollar, the rationale to do more overseas production is strengthening. Executives at Toyota seem eager to do just that.

"The best hedge is to build cars where they are sold as much as possible. We've been taking all these steps for some time," Takahiko Ijichi, a senior Toyota executive, said last week when announcing operating profits of 211.7 billion yen ($2.48 billion) for April-June, following a loss a year ago.

Rival Honda would be able to make money this year even at a dollar rate of 85 yen, its Chief Financial Officer Yoichi Hojo says, partly because it has bolstered overseas production.

Executives at Japan's leading consumer-electronics maker, Panasonic, are also heading for new shores. That a strong yen means bigger financial clout to buy assets or acquire rivals is an added incentive to expand abroad.

"A manufacturer has to make competitive products, procure parts locally and increase local production. If you bring goods back to Japan from there, you are no longer affected by exchange rates," Hitoshi Otsuki, senior managing director in charge of overseas operations at Panasonic, told a press briefing recently.

Measures such as raising imports of refrigerators to Japan from China to 1.5 million from 1 million will help to offset the strong yen, Otsuki said. Panasonic didn't give a time-frame for the import of the China-made refrigerators.

"You need steady steps like that. It's not magic," he said.

LEANER, MEANER

There's no rush, however, to exit the yen zone. Corporate profits are rebounding. And made lean by recession, companies are riding the global economic rebound, so these days a rising yen is less of a drag.

Nomura senior strategist, Takashi Ito, said in 1999 a one yen rise against the dollar trimmed recurring profit at manufacturers on the Nomura 400 index by 2.1 percent, based on a survey of analysts. For this business year, the squeeze on earnings from a similar move, according to the strategist, will be 0.9 percent.

Overall, operating profit at non-financial companies on the Nomura 400 index will grow 38 percent in the second quarter compared with a year ago after jumping 268 percent in the three months ended June 30, Ito added.

"Despite all the moaning, the yen is at 85 and they (automakers) are not going to go bust. It's definitely not as bad as it was," said Christopher Richter, a senior auto analyst at CLSA in Tokyo.

Corporate Japan is a making a natural shift to lower currency exposure, said Kirby Daley, senior strategist at Newedge Group in Hong Kong.

Firms might start pushing for action if the dollar/yen rate dips below 80 but Daley doubted the government would wave its intervention wand.

If the authorities do leave the dollar/yen rate to the market, the clamor from companies may be muted. The reason: the yen is weaker than it looks.

Persistent deflation after 1995 has made Japanese labor cheaper. In the past 15 years the average salary in the United States has ballooned by 50 percent to more than $40,000 as workers' pay kept pace with rising prices.

Japan's workforce earns 5 percent less than in 1995. Though still with a bigger dollar wage packet than their American counterparts, the gap has narrowed. It means Toyota can still export 60 percent of its domestic output without having to scrabble to throw up new overseas plants.

That deflation disparity, analysts say, means that the dollar/yen rate would have to surge to 57 or 58 yen to be equivalent to the record 79.75 yen rate reached in 1995.

SOPHISTICATED APPROACH

The strength of the yen is determined by the U.S. economy and "there's nothing Japan can do about it," said Yuuki Sakurai, chief executive officer of Fukoku Capital Management, which manages more than $8 billion in stocks and bonds.

In the meantime investors are huddling around those exporters who are capable of hedging currencies, Sakurai said. Compared with 15 years ago, companies such as Toyota or Nissan are much more sophisticated, Sakurai added, noting Nissan's decision this year to shift production of its March model to Thailand.

From the end of April to the close of trading on August 6, when the yen appreciated 9 percent against the dollar and 10 percent against the euro, Toyota's shares dipped 15 percent.

That decline was only slightly steeper than a 13 percent fall in shares of Seven & I (3382.T), Japan's biggest retailer, and a 14 percent dip of its nearest rival Aeon (8267.T), both companies that normally benefit as a strong yen makes imports cheaper.

The benchmark Topix .TOPX slumped by 13 percent over the same period. Nissan fell by 19 percent while shares of Mazda (7261.T), the most sensitive of Japan's automakers to yen strength, dropped by one-quarter.

Among euro-exposed companies feeling the currency pinch was Nippon Sheet Glass (5202.T), which also dipped by 25 percent.

Japan's policymakers fret about their strong-yen economy like it's 1995, but so far, at least, there has been no repeat of the crisis that gripped Japanese boardrooms 15 years ago.

($1=85.34 Yen)

(Reporting by Tim Kelly, Chang-Ran Kim, Isabel Reynolds and Benjamin Shatil; Editing by Muralikumar Anantharaman)