by Justin Dove, Investment U Research
Wednesday, August 24, 2011
It was good news to see Toyota Motor Corp. (NYSE: TM) increase its FY 2011 guidance earlier this month.
It’s been almost six months since Japan was rocked by a series of earthquakes, tsunamis and a nuclear disaster. And Toyota announcing that they had recovered from the disruption quicker than anticipated provided some optimism for the country.
But just as the supply side of the equation starts to work itself out in Japan, lack of demand is rearing its ugly head.
“The supply chain [in Japan] was able to adapt fairly quickly to any disruptions,” International Data Corporation analyst Shane Rau told Computerworld. “The longer-term issue has been more on the demand side … This has affected people’s ability to function and survive. When they’re trying to find homes and necessities, they’re not thinking about buying PCs.”
The Two Biggest Hurdles to the Japanese Economy
There are two major things standing in the way of demand for Japanese products:
- The rise of the yen against other currencies – A high yen means that Japanese manufacturers such as Sony (NYSE: SNE), Toyota and Hitachi (NYSE: HIT) are suffering smaller margins. The high cost and relatively low value of currencies abroad make Japanese products less attractive. Japan moved to inflate its currency earlier this month by selling yen in exchange for U.S. dollars. This only stalled the steady upward rise in yen values, which have been approaching post-WWII highs. Luckily, Finance Minister Yoshihiko Noda has expressed a strong desire to get deflation under control.
- Japanese consumers still aren’t buying luxuries, such as electronics – This has been especially concerning for semiconductor manufacturers throughout Asia. But it’s also hurting companies like Sony and Panasonic, which normally benefit from strong electronics demand in Japan. Now reports are emerging that residents may not be able to return to some residential areas for decades. This may further reduce Japanese consumers’ disposable incomes. The government may pay landowners rent for land contaminated by radioactivity. This would help ease the blow.
Japanese Economy Isn’t All Doom and Gloom
Some companies have even taken advantage of the hard times. Japanese heavy machinery makers Komatsu and Hitachi Construction Machinery reported big net profit increases.
Honda Motor Company (NYSE: HMC) and Nissan are also better suited to deal with a high yen than Toyota. Honda and Nissan produce about 25 percent of cars domestically to Toyota’s 50 percent.
While there are still some things holding the Japanese companies back, don’t give up on them. It just may take a bit longer to rebound than anticipated. After the recent market sell-offs, there are plenty of dips to look into.
For example, Sony is selling at its lowest levels since the ’09 recession. Toyota is about 24 percent lower than its 52-week high.
The problems above will definitely test these companies going forward. But it’s a good sign that the supply side of the equation is ready and waiting for demand to pick back up.