WisdomTree: Yen Weakness Continues to Support Exporters’ Earnings, Latest Quarterly Results

Other large Japanese automakers have all benefited from a weakening yen due to their export-oriented business models. The list below shows the major automakers and the amount of reported income during their most recent earnings period compared to the same period of the preceding year.

• Honda – Reported income of ¥216.5 billion, up ¥126.8 billion from the year before, with a gain of ¥83.1 billion from currency effects.³

• Nissan – Reported operating profit of ¥106.1 billion, up from ¥62.1 billion from the year before, with a gain of ¥78.5 billion from currency effects.⁴

• Mazda – Reported operating profit of ¥50.6 billion, up ¥42.5 billion from the year before, with a gain of ¥36.7 billion from currency effects.⁵

Chinese Auto Sales Gear Up

One factor that weighed on Honda and Nissan in 2013 was weak Chinese sales due to a flare-up in political tensions and talks of slower growth in China. It is very positive to see the turnaround in the Chinese growth for some of the autos in their latest reports.

• Honda – Reported a record number of automobile sales to China for the 2013 calendar year, over a 26% increase from 2012.⁶

• Nissan – Reported Chinese sales were up 17.2% for 2013, year-over-year, enough for an all-time calendar-year record.⁷

• Mazda – Recently reported Chinese retail volume had increased by 9.3% for the first nine months of the fiscal year ending March 31, 2014, and they expect full-year volume to be up 14.5% over the previous fiscal year.⁸

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.

Conclusion

All the actions by the Japanese 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, potentially in the form of wage increases, from this increased profitability described above, this could further help increase consumption and investments.

A positive wage surprise— which is Prime Minister Abe’s focus for this year—could benefit small-cap stocks, which are more sensitive to the domestic economy. 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 – seeks to hedge out the currency exposure

Also, if 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. Please see our Japan Strategist Roundtable for further insights on Japan here.

For current holdings of the WisdomTree Japan SmallCap Dividend Index (including Toyota, Mazda, Nissan, and Honda), please click here.

For current holdings of the WisdomTree Japan Hedged SmallCap Equity Index (including Toyota, Mazda, Nissan, and Honda), please click here.

¹Source: Toyota FY2014 3Q Financial Results (2/4/14).
²Source: Bloomberg.
³Source: Honda FY2014 3rd Quarter Financial Results (1/31/14).
⁴Source: Nissan FY2013 Third-Quarter Financial Results (2/10/14).
⁵Source: Mazda FY2014 Third-Quarter Financial Results (2/5/14).
⁶Source: 2013 Honda Sales & Production Results (1/29/14).
⁷Source: Nissan Production, Sales and Export Results (1/29/14).
⁸Source: Mazda FY2014 Third-Quarter Financial Results (2/5/14).