Euro-dread hovers over Japan

By David Ibison and Alexandra Harney in Tokyo Published: October 25 2000 22:56GMT | Last Updated: October 26 2000 00:39GMT

As Japan's reporting season kicks off in earnest on Thursday, attention will be fixed on the impact ofthe weakening euro on the country's electronics manufacturers and carmakers.

Matsushita Electric Industrial this week decided to relocate production out of the UK into the Czech Republic because of the depreciation of the euro against sterling. The euro has lost nearly 30 per cent against the dollar and the yen since its January 1999 launch.

Sony, Toyota, Nissan and electronics maker Pioneer have all voiced concern.

Kunio Nakamura, Matsushita president, said: "If the currency fluctuates that will give us the biggest problem. If the current situation continues - we may see difficulty in maintaining our operations in the UK."

The situation puts electronics makers in a bind.

Because most of the products sold in Continental Europe come from outside the region, production costs are usually in a stronger currency. However, revenues are in euros, which squeezes profits.

As a result, a Y1 movement against the euro lowers Sony's operating profits by Y3bn ($27.7m) to Y5bn. At Canon, pre-tax profits fall Y2.9bn for every 1 per cent movement in the currency.

Most companies hedge against currency risk with derivatives but some, like Sony in 1998, have been burned by taking overly speculative positions. Electronics makers can also increase prices - but they are likely to lose sales volume.

"There's not a lot they can do," says Alan Bell, Japanese electronics analyst at Credit Suisse First Boston in London. Moreover, he says, they are also hit by decelerating demand in the euro- zone. He points out that average discretionary income is expected to fall $1,000 this year as a result of the increase in commodities prices. "That's equivalent to one PC," he says.

Carmakers are in a similar situation. According to Koji Endo, auto analyst at Credit Suisse First Boston, each time the euro weakens Y1, it takes Y3bn off Mazda's forecast operating profit.

At the beginning of the year - when the European Central Bank was saying the currency's weakness could not continue - Japan's carmakers compiled forecasts based on a stronger yen/euro rate.

Nissan, for example, assumed a rate of E1 to Y114, while Mazda predicted Y102 for the first half of the year and Y108 for the second.

Those assumptions now look dangerously high. On Wednesday the euro was trading at almost a record low against the yen of Y89.5. Even when averaging out the euro's decline over the year, the impact on Japan's carmakers is severe.

Mr Endo is expecting Mazda's operating profits for the year to March 2001 to be reduced from Y35bn to Y20bn, a 43 per cent decline.

Based on his calculations, Mitsubishi is looking at a Y15bn reduction in profits from its currency exposure as well as a further Y15bn from lower-than-expected sales, reducing its full-year operating profit forecast from Y50bn to Y20bn.

Toyota, which has had a banner year so far, looks to be the only carmaker to have called it right. According to Stephen Usher, auto analyst at Jardine Fleming Securities, the company assumed a rate of Y100 for the first half of the year, which has averaged out at around Y95.

He said this could be close to the average exchange rate for the year, indicating Toyota could escape the rout relatively unscathed.

But this is of little comfort to the executives grappling with the weak euro - nor to investors awaiting their companies' results. Additional reporting by Bayan Rahman

http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT34RIAKREC&live=true

-- Martin Thompson (mthom1927@aol.com), October 25, 2000

Answers

10/25 18:21 Euro Sinks to Records as Buying From Central Banks Not Expected By Angela Jones

Sydney, Oct. 26 (Bloomberg) -- The euro sank to records against the dollar and yen as traders speculated chances are fading that central banks will buy the currency to prop it up, as they did a month ago.

The euro fell as low as 82.48 U.S. cents, from 83.59 in New York trading Tuesday, and sank to 88.995 yen, from 90.06. It recently traded at 82.75 cents and 89.55 yen. The 11-nation currency has tumbled 29 percent against the dollar and 33 percent against the yen since its January 1999 debut.

``The market is, in many ways, trying to push officialdom's hand and is pushing for the next round of intervention,'' said Richard Yetsenga, a currency strategist at Deutsche Bank Securities. Until ``the U.S. economy slows substantially, it is difficult to see intervention as much more than a liquidity injection.''

The ECB and the central banks of the U.S., Japan, the U.K. and Canada bought euros Sept. 22, starting at a level of about 87 cents. The purchases came two days after the euro had fallen to a record of 84.43 cents, and they briefly drove the currency to as high as 90 cents.

Officials from the nations that bought euros a month ago are among attendees at a two-day meeting of the world's 20 biggest economies in Montreal.

The euro weakened today as speculation built that the group would offer no measures to stem the currency's slide. That speculation was confirmed as the statement the G-20 issued upon the meeting's breakup omitted mention of the euro.

Speculation also brewed that the U.S., whose participation analysts say is crucial for euro-buying efforts to succeed, doesn't want to weaken the dollar with the Nov. 7 presidential election looming.

The dollar rose to as high as 1.8226 Swiss francs from 1.7983 Tuesday, the strongest since June 1986.

Traders also said that the euro's decline came amid speculation that a Dutch bank had sold euros as part of activity related to mergers and acquisitions.

Benchmark U.S. interest rates at 6.5 percent have proven more attractive to investors than the euro-zone's key rate of 4.75 percent.

The U.S. wins out on the growth front as well. The world's largest economy is projected to grow at 5.2 percent this year, compared with 3.5 percent in the euro-area, according to the International Monetary Fund.

In other trading, the dollar strengthened to 108.28 yen, from 107.75 in New York trading Tuesday. It rose against the British pound to $1.4325 per pound from $1.4500, and was little changed against the Canadian dollar at C$1.5174 from C$1.5159 Canadian dollars Tuesday.

http://quote.bloomberg.com/fgcgi.cgi?ptitle=Top%20Financial% 20News&s1=blk&tp=ad_topright_topfin&T=markets_bfgcgi_content99.ht&s2=b lk&bt=ad_position1_topfin&middle=ad_frame2_topfin&s=AOfdc.BaJRXVybyBT

-- Martin Thompson (mthom1927@aol.com), October 26, 2000.