Insight to All Things Currency and Treasury Management

Last week I blogged about my appearance on Bloomberg Television to detail why currencies are going to continue to be significant for MNCs and how some companies are mitigating the impact. The segment that ran just before mine was about how U.S. automakers had asked President Obama to fight back against Japan’s weak yen policy. Bloomberg did a great job of explaining why U.S. automakers, and other companies that compete against Japanese firms, are so upset (watch it here).

Creating competitive disadvantage

In 2012, a Camry that cost $22,000 got Toyota 1.7 million yen. In 2013, the same $22,000 Camry gets Toyota 2 million yen – an 18% increase in sales just because the currency weakened. To think of it another way, the weaker a country’s currency is, the more competitive its exports are in global markets (because those exports are relatively cheaper).

It’s not over yet. A commitment to yen-weakening policies was a centerpiece of  newly elected Japanese Prime Minister Shinzo Abe’s campaign. Since November, when Abe’s campaign began, the yen has depreciated more than 10%. The yen is now at about 90 per U.S. dollar, and Japanese officials have said that they will continue active monetary policy at least until the yen reaches 100. That could easily add billions in operating profit to Japanese companies’ bottom lines.

Politically driven currency wars

The impact of a weaker yen is so significant that it has become highly political – and political rhetoric fuels volatility. The result is competitive devaluation and an intensifying currency war as countries take steps to keep their own currencies weak in the face of currency-weakening policies by competitors. We see, for example, U.S. companies telling President Obama, “We need to have our currency under control. We cannot afford to have the currency appreciate so much against the yen. It will really hurt our industries, not just automotive.”

Most recently, after the Bank of Japan pledged to buy government bonds in potentially unlimited quantities – in an attempt to achieve a new inflation target of 2 percent – officials in South Korea, where many manufacturers compete with the Japanese, said that they would consider a policy response to a weaker yen. Bank of Korea Gov. Kim Choong-soo said that a sharp drop in the yen could provoke an “active response to minimize any negative impacts on exports.” [1]

Impact on multinational corporations

In addition to creating competitive advantages for Japanese companies over their global competitors, a weak yen can also significantly impact companies that do business in yen. Imagine, for example, a U.S.-based multinational company that has a yen accounts receivable. When the A/R went on the books, the dollar/yen was at 77, but by the time the customer actually pays the invoice in yen, the dollar/yen is at 85. So the company receives 11% less in cash than it had expected to.

Another example poignantly illustrates the stakes: in his 2012Q3 earnings call, the CEO of a Fortune 500 company said, “For FX, the yen has been relatively stable for most of the year. We’re hopeful there will be no weakening.” He went on to explain that a 1 point drop in the yen would decrease the company’s net income by $6 million. So here’s the math: the 11% yen drop we’ve seen since last quarter would result in a $66 million negative currency impact – that’s 23% of $283 million in reported net income. Currency volatility has a direct impact on earnings per share, and hope is not a strategy.

As I wrote in last week’s blog post, there’s not much companies can do about politically driven currency wars (save for imploring politicians not to engage in them) but companies can take action to protect their balance sheets and cash flows from negative currency impacts. Currency agnostic companies – those that don’t care what happens to any given currency, because they have managed the risk in both directions – insulate themselves from being whipsawed by currency war volatility.

[1] The Wall Street Journal, “Japan Rejects Currency Manipulation Claims,” 25 Jan 2013.