Toyota and Honda increasing factory capacity in Japan

Brad Setser points to a WSJ article to the effect that "Toyota has invested three times as much in Japan as in North America over the past three years. Honda is building its first auto factory in Japan in nearly three decades. " The context of Setser's discussion is that exchange rates result in greater profits for these two companies from cars manufactured in Japan and sold in the US than from cars produced at US plants and sold in the US. The WSJ article notes that "Toyota has increased shipments to the U.S. of Japanese-made vehicles from 762,000 in 2004 to 1.27 million last year."

The key to this lies in the fact that a portion of the cash cost of producing cars at US plants has to be remitted from the companies' Japanese accounts to their US operations. So the weak yen increases the total cost per car produced in the US. The revenue per car sold in the US is the same whether it is produced in Japan or the US.

I don't see this as really being a political issue in the US as long as Toyota and Honda don't actually cut production at their US plants. Since both companies are gaining market share vs the Detroit automakers I don't think that they would need to cut US production. Certainly, the US trade deficit with Japan has and will increase as this trend continues, but the US focus on China at this point has really put Japan on the back burner as far as trade issues go.

Summer Bonus Season

Just following up on Scott's point here, there is more news from Bloomberg this morning:

The yen traded near the weakest in more than four years versus the dollar and a record low against the euro on speculation Japanese workers being paid bonuses this month will invest overseas for higher returns. Finance companies will market more than 1.5 trillion yen ($12.1 billion) of foreign-currency investment trusts before the end of June, according to data compiled by Bloomberg. The lowest borrowing costs in the industrialized world have prompted investors to take out loans in Japan to buy higher-yielding securities in so-called carry trades.

Workers in private companies are expected to receive summer bonuses totaling 15.6 trillion yen, up 3.1 percent from a year earlier, according to Mitsubishi UFJ Research and Consulting Co., Ltd. Per-worker bonuses may average 423,000 yen, up 1.7 percent from a year earlier, said senior economist Shinichiro Kobayashi.

Japan's Shifting Trade Surplus

The big headline today is the increase in Japan's trade surplus, but the important news behind the headline is the shifting composition of Japan's exports. According to the Financial Times:

Japan’s exports rose 15.1 per cent to a record high for May, but brisk imports and sluggish shipments to the US meant the trade surplus rose a slower-than-expected 9.3 per cent from a year earlier.

Exports rose to Y6,565bn, the 42nd consecutive monthly increase, according to preliminary finance ministry figures released on Thursday. But imports rose an even faster 15.5 per cent, to reach a record Y6,176bn. Economists say the heftier import bill largely reflects higher prices resulting from a weaker yen rather than stronger demand.

Examining the data more closely we find that exports to the US in value terms rose by only 0.4% (m-0-m), following a fall in April. As a result Japan’s surplus with the US fell 13%, the second month of decline. It is also worth noting that these exports are being propped up to some extent by the weaker yen, and it seems demand from the U.S. may remain slow in the coming months. Shipments to the U.S. measured by volume fell 13.2% in May, little changed from the 13.1% drop in April.


On the other hand exports to the rest of Asia and Europe seem to be booming. The trade surplus with the rest of Asia widened 22.6% to Y534bn in May. The trade deficit with China also shrank slightly to Y210bn on the back of a 25% surge in exports. At the same time exports to the European Union surged 17.9%, the fastest pace since August 2006, to 971.1 billion yen.

It is important to note that net exports - the difference between exports and imports - were the biggest contributor to GDP growth in the first quarter, helping Japan's economy expand at an annual 3.3%. This dependence is likely to continue going forward and it still remains to be seen what the real longer term impact of slower export growth to the US is going to be.

More on Japanese retail investors participating in carry trade

According to Marketwatch,

"Analysts said the yen has also been pressured by growing appetites for risk among Japanese individuals who are borrowing in yen to fund positions in higher-yielding currencies. Currency trading by Japanese individuals rose to record $11 billion per day in the fiscal year ended in March -- a threefold increase from a year earlier, according to figures from Tokyo firm Yano Research Institute Ltd. as cited in a Bloomberg report Yano Research publishes an annual report on Japanese currency trading."

It is one thing to take yen that you've saved up to speculate in foreign exchange; it is quite another to speculate on margin. This isn't likely to end well for a significant number of these individuals...