Japanese stocks soared last year as a result of “Abenomic” policies, which are all aimed at one thing: promoting economic growth in Japan. The unprecedented monetary easing by the Bank of Japan—which I believe has become the most aggressive central bank in the world as the Federal Reserve has started to taper its balance sheet expansion—has improved sentiment in Japan, caused the yen to weaken and strengthened the markets.
Weaker Yen Has Benefited Exporters’ Earnings
Thus far, the monetary stimulus has coincided with a weaker yen. A weaker yen ultimately helps large multinational companies that sell products overseas. Products of these companies generally become more attractive to foreign buyers when the yen weakens. Also, overseas sales converted back to a weak yen translate to more yen revenue, ultimately adding to the bottom line. The chart below illustrates the positive effect a weaker yen has had on Toyota’s net income.
Toyota Motor Corporation Consolidated Net Income
• Yen Depreciation Dramatically Contributes to Earnings – The depreciation of the yen accounted for ¥260 billion of the ¥425.5 billion growth in net income over the same reporting period compared to last year. It is important to realize that Toyota’s gain from the yen depreciation represents over 60% of the total growth in net income for the period.
• Further Yen Depreciation Can Add to Future Profits – If the yen continues to depreciate, it could potentially continue to add to Toyota’s bottom line. Toyota has forecasted to sell 9.1 million vehicles over their 2014 fiscal year, and 6.8 million (approximately 75%) of those are expected to be sold outside Japan.1 This continued overseas sales converted back to a potentially weaker yen translate to even more yen revenue.
• Toyota’s Stock Performance Also Strong – Market participants have recognized the benefit a weaker yen has had on Toyota’s bottom line. Toyota’s total return was approximately 64.0%, while the broader Tokyo Stock Price Index (TOPIX) for Japan was up 54.4%, over the 2013 calendar year. The yen is down 17.6% over this same period.2
Other Automakers Also Benefit from a Weaker Yen