• Honda – Reported income of ¥172.0 billion, down ¥22.7 billion from the year before, even with a gain of ¥82.9 billion from currency effects.3
• Nissan – Reported income of ¥117.8 billion, down ¥2.9 billion from the year before, even with a gain of ¥69.8 billion from currency effects.4
• Mazda – Reported income of ¥36.5 billion, up ¥34.7 billion from the year before, with a gain of ¥29.2 billion from currency effects.5
Hedge Your Currency Exposure
If the yen continues to weaken, Japanese exporters should continue to benefit. On the other hand, a weakening yen is not good for U.S. investors in Japanese equities—unless they hedge the currency. Currency-hedged strategies allow investors to focus on Japanese equities without the worry over currency declines.
Don’t Forget about Small Caps
Japan’s global revenue generators might be in favor due to recent yen weakness, while in the future the focus could shift more toward the domestically sensitive firms. Small-cap stocks typically export less and are more sensitive to the domestic economy than large-cap stocks. I think the majority of the smaller-cap stocks have yet to fully benefit from the structural reforms of Abenomics, which are still a work in progress and will play out over the next two years. WisdomTree has two different small-cap Indexes that track dividend-paying stocks in Japan.
• WisdomTree Japan SmallCap Dividend Index – includes exposure to the yen
• WisdomTree Japan Hedged SmallCap Equity Index – hedges out the currency risk
Conclusion
All the actions by the Japanese government have the same goal: stimulate Japan’s economic growth. The weaker yen has helped start the economic engine, but I feel we are still in the early innings of Japan’s true transformation. If Japan’s citizens are able to benefit from structural reforms and thus increase consumption and investments, and yen weakness continues to provide tailwind, the result could be very positive for Japan’s equity investors. I remain optimistic on the prospects for Japanese equities.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.
1Source: Toyota FY2014 1Q Financial Results (August 2, 2013).
2Source: Bloomberg (08/23/13).
3Source: Honda FY2014 1st Quarter Financial Results (July 31, 2013).
4Source: Nissan FY2013 First-Quarter Financial Results (July 25, 2013).
5Source: Mazda Consolidated Financial Results for the First Quarter of the Fiscal Year Ending March 31, 2014 (July 31, 2013).