Imagine your sell someone a house. It’s hard to imagine, I know, but humor me. You settle on a million. You sign. Papers are shuffled, titles researched. Three months later, at the closing, you get a check for $780K. Imagine there’s nothing you can do. Your lawyers are shrugging their shoulders. $220K poof, gone. The same happens every day in international trade. Welcome to the strange world of world currencies. You sell something in Euro, Yen, Won or Rupees. You ask: “How much is that in real money?” And a few days later, it’s all changed. Such is the life of a global automaker.
Japanese automakers are increasingly anxious about the high value of their Yen. Sure, their holidays and green fees in Hawaii will get cheaper. But when the yen is high their profits from abroad evaporate.
For eons, one Yankee dollar was worth more than 100 Japanese yen. In August, the dollar cost 110 yen. A week ago, it was down to 87 yen. The change spills yet more red ink onto Japanese automakers’ ink-saturated books. Against the Euro, the picture is bleaker still. But the Japanese don’t have as much exposure to the Euro as to the greenback.
Toyota is especially jumpy: “High up among Toyota’s problems is the recent surge in the yen against the dollar and euro. Every ¥1 gain against the dollar results in about a ¥40b plunge in profits at Toyota. While the company made its initial forecast based on an exchange rate of ¥100 to the dollar, the US currency appears trapped around the ¥90 level, a 13-year low,” writes the Manchester Guardian.
If you don’t like thinking in yen, here’s the translation [via Business Week]. “For every one yen strengthening against the dollar, Toyota’s operating earnings are reduced by over $450m.” According to CNNMoney, “Toyota expects losses of about $2.2b due to currency exchange rates alone.” Meaning: If the darned yen wouldn’t have surged suddenly, Toyota would still make a small profit, instead expected losses for fiscal ’08 between $1.5b to $1.7b.
Yoichi Hojo, COO for business management operations of Honda, told the Nikkei [sub] “If the exchange rate remains firmly below 90 yen to the dollar, and depending on the number of vehicles we export from Japan, then there is a possibility our consolidated operating profit for fiscal 2008 will be less than the projected 180 billion yen.”
Hojo’s comments also highlight the fact that the exchange rate is a major driver in whether they’ll build cars at home or abroad. “If the exchange rate remains below 90 yen to the dollar, it would be advantageous for us to increase overseas production, and we would be forced to cope with the issue of reducing the labor force at our domestic plants. On the other hand, if the yen significantly weakens, we would have to increase domestic production and reduce costs at our overseas production bases.”
Locating, building and ramping-up of a new car plant takes many years. Who dares to predict where the dollar, euro, yen will be three years from now? If anybody would have predicted in July that the yen, the currency of that non-growth, zero-interest country Japan would appreciate against the Euro by 33 percent within three months, that person would have been committed. Only to be released four months later and bestowed with the Nobel Prize in Economics.
“So yes,” says CNN Money, “the news is history-making and head-turning from Toyota. But it also paints a gloomy picture of how deep Japan’s recession will be and how tough it will be to recover.” Again, the bulk of the loss doesn’t come from Toyota’s weakness, or the weakness of the market, but the strength of the Japanese currency.
All is not lost for ToMoCo’s honchos. The yen rose from 100 to the dollar (at which it is in the books of most Japanese auto companies) to 87 to the dollar in just six weeks, The Japanese fiscal year usually ends in March. With a little luck or some adroit central bank intervention, the dollar may be worth 100 yen again in March, and Toyota would be profitable.
Japanese officials all the way up to Finance Minister Shoichi Nakagawa have dropped hints that an intervention is possible. Nakagawa told reporters in Tokyo ten days ago that he has “the means” to limit the yen’s strength and is “keenly watching” developments in foreign-exchange and other financial markets, as well as the economy. Since then, the rhetoric’s got louder. But there’s been no intervention yet.
According to Bloomberg, the last time Japan intervened on its own, it sold a record 20.4 trillion yen in 2003 and 14.8 trillion yen in the first quarter of 2004, when the yen strengthened to 103.42 per dollar.
“I am surprised the Japanese haven’t intervened,” said Dennis Gartman, economist and editor of the Gartman Letter in Suffolk, Virginia. “Intervention to weaken your currency can be very effective.” Especially between the holidays, when the markets are thin. Or in March, when it’s desperately needed.
Forget the Yen. The super-valuation of the Brazilian Real and EURO was more of an issue on a global scale than the Yen over the past 4 years. The Yen/$ issue has been going on for years and has to be taken as a cyclical phenomenon. Then there’s the whole Yuan discussion to factor in but that is a story that will unfold when China will dominate the automotive world.
So the Japanese Government needs to manipulate currency for the sake of exports instead of its own need for tax revenue or controlling inflation? Of course the side effect is another trade barrier to foreign goods, (rice, fuel, etc) being imported…
When we or our friends do it, its called ‘central bank intervention.’ When our enemies do it, it’s called ‘currency manipulation.’
The Fed has intervened/manipulated (your choice entirely) on behalf of the greenback many times.
Correct, for the reason of keeping imported material into the US cheap to counter inflation…totally different end-game. It killed US exports and jacked-up our deficeit, an ugly side effect. On the international trade; I import and export engineered products to Korea, PI, India, etc and work off of a “Guaranteed Letter of Credit”…part of the conditions is a set price in the final currency. Maybe modified tenets of that could be used for the Japanese makers.
An LC doesn’t solve the currency issue. It just makes the bank richer.
Part of our LC agreement is a set amount of the final currency to be deposited in our account. Union Bank of California does it all the time. The onus is therefore on the end user to adjust payment and either receive a discount, or automatically have the additional funds transferred from their escrow account….at the same bank. Yes, you are correct, the bank does not do this for free, but it makes planning easier for the producer, who almost always has the most at risk.
Well, now we’re beginning to address why most automakers try to set up manufacturing operations in most of their major markets.
There are all sorts of currency hedges you can deploy in the business world. Most of which don’t require a bank’s Letter of Credit. But for the long run, the best hedge for currency stability has been to establish parts suppliers, manufacturing operations, and even administrative expenses in the countries at which you perform your business.
Raw materials and long-term legacy costs are usually the only major components that are left open if you chose to do this (well that and parts that can’t be developed in the major market.)
A problem with an LC requiring payment in Yen or equivalent is that the sticker price of cars would be subject to fluctuation. Can you imagine the outrage when people see cars jumping or falling thousands of dollars over a couple weeks?
people have conniptions over milk rising a nickel.
just for fun, i’d like to see some houses priced in euros, some in yen, and some in dollars. maybe the same with food. if people see on their own personal balance sheets and in their own wallets the impact of the paper currency of the world, maybe we could go back to real, hard money.
To Steven Lang’s point, why hasn’t Toyota been hedging all along? I thought all Toyota-sized companies that get a large portion of their sales from overseas make sure that they invest in foreign currency as a hedge against this type of loss. Not hedging is just as dumb as failing to take increasing gas prices into account when planning your car lineup for the next few years
thetopdog…. they more than likely do.
When it comes to hedging, there are so many variables (and in Toyota’s case, currencies) to consider that it’s virtually impossible to make it all work out.
What you can do is protect yourself from wild fluctuations. But the costs involved with some of the small to medium swings make it impractical… other than to build and buy where you sell as much as it’s practicable.
I wouldn’t be surprised if some of Toyota’s issues have come from the collapse of currencies and markets in the developing world. Even if you chose to build cars within places like Russia, India and China, there are other unsystematic risks that can make these places extremely difficult to do business in.
Take a look at what’s happened to the Tata Nano production in the Bengali province. Now take that, and throw in the corrupt and kleptocratic influences within the countries I just mentioned. throw in an unstable economy that is heavily dependent on commodities (Russia, most of Central Asia, the majority of South American and African countries), and you begin to understand why Toyota
only has a limited presence in most of these countries.
The very FACT that currencies can be “manipulated” by central government (any last one of them) shows that we do NOT live in a Democratic society.
During the Vietnam War…and the Korean War…and the Cold War…we (the U.S.) were DETERMINED to STAMP OUT COMMUNISM! Yet, people…WHAT IS MORE SOCIALISTIC than “Centrally Planned” (or Centrally “Managed”) money?
You have the “Masestros” behind their closed doors setting policy which affects YOUR LIVELIHOOD …and you have NO SAY SO in the matter whatsoever.
A single $1 today is now worth 2 cents (or less) compared to what it was worth in 1913, the year the Federal Reserve was created. That destruction of purchasing power was taken from the economy at large…ie, YOUR WALLET.
When you wake up and realize we do NOT live in a Democratic nation …and when you wake up and realize you are being ROBBED BLIND, then maybe you’ll join the “END THE FED” movement.
Rub those two pennies together people, because that is what a dollar has become…and it is NOT BY ACCIDENT!
http://www.endthefed.us/
There are only three sources of REAL money: Gold, Oil, and (unfortunately) Drugs.
Bring back sound money and bring back a dollar backed by Gold. You can wipe yourself with paper.
You guys are correct; the LC with a guaranteed amount in end currency works well for a company as mine….single, large shipments of a specialized item. For someone like Toyota, it is the reality of the rough and tumble world of free-trade. If we carp at GM, Ford and Ram…er, Chrysler for needing help, we should not allow Toyota to make a victim of themselves either.
Here’s the Honest-to-God’s truth:
Whereas money USED to have “positive” value, it now represents DEBT.
If that isn’t a TOTAL ABSURDITY then I don’t know what is.
That’s right, if the $9Trillion debt were to vanish (be paid off)… so too would our currency….it would cease to exist. THAT is how bastardized our economy has become…and it’s all due to the Federal Reserve (a private organization which is NOT part of the Government, and which is run by private bankers). Yes, by God, you are being robbed blind.
When we or our friends do it
What you mean “we”, kemosabe? I thought you were a citizen of the world.
Well, now we’re beginning to address why most automakers try to set up manufacturing operations in most of their major markets.
Steven, build where you sell has been the model since Isaac Singer set up a sewing machine factory in Scotland.
Perhaps, but it’s very difficult to place emphasis when you are typing.
As far as the level of reasoning goes, there is no fault with what I typed above….because it’s the absolute truth.
I hear one of the headaches in China is their “wage inflation”….at least in the tech industry. An electrical engineer or a computer scientist makes $450-500 a month….so when they hop from one job to another and squeeze out an additional $50 per month, the company managers go bezerk…because as a percentage, that’s huge.
I don’t know if that’s true for the low-level manufacturing business. Probably not, as out in Western China, where the inroads of capitalism are next to nill, there are untold numbers (in the hundreds of thousands) of unskilled workers who will still work for 3 cents/hour. I hear some of those companies are going so far away as Mongolia to recruit people who have not been “tainted” with the idea that you can quit your job and make a better living at another company.
WHAT! :D @ Ronnie.
Well, Toyota could raise their price to cover expenses, or go back to workers and ask them to take a pay cut, or back to suppliers and force them to accept less than billed….None of it is nice.
On another general note: Many Chinese companies, to guarantee supply, signed material futures; in steel, aluminum, (aluminium), silica, etc. Of course the futures were high, and then the price crashed. The Chinese did what Chinese always do; they reniged on all futures to get a lower market price. This has caused mis-trust from many supplier, will be interesting to watch in future.
BTW: I worked in Mainland and HK for years, and had them back out of signed contracts…the response from them is “sue me”.
“How much is that in real money?”
The answer to that question will not come through any “analysis” or comparison of Yen vs. Dollar, or Yen vs Yuan, or Dollar vs. Ruble. Are you starting to see something wrong the above comparisons? They all are tampered with, manipulated, etc by their respective host nations.
The only answer to your question is “How much gold will this allow me to purchase?” …or “How many barrels of oil is this the equivalent of?”…or yes, even…”How many kilos of cocaine is this worth?”.
Why? Because, unlike debt-based currencies, these three commodities have “positive” value…ie, people WANT them. And while oil isn’t tamper-proof with respect to its value, it has very little substitute. …ie it is not very elastic in economic terms.
how long before businesses start asking for a fixed global currency, or fixed ratios of current currency? perhaps the next big step of a global market.
“The only answer to your question is “How much gold will this allow me to purchase?” …or “How many barrels of oil is this the equivalent of?”…or yes, even…”How many kilos of cocaine is this worth?”.
Why? Because, unlike debt-based currencies, these three commodities have “positive” value…ie, people WANT them. And while oil isn’t tamper-proof with respect to its value, it has very little substitute. …ie it is not very elastic in economic terms.”
The fallacy with this argument is that it presupposes that gold or oil or cocaine are somehow immune to price manipulation. This is, of course, completely wrong. People want all sorts of things at any given point in time. The value of anything (including currency) is determined solely by the market. Yes, it’s easier to print money than to mine gold or grow coca plants. But the difference is purely one of degree.
I believe they have done that before. And if the idea of a centrally “managed” money at the national level is repulsive, …just imagine it on a global scale.
But as any game theorists knows, there are incentives to break monopolistic agreements. So the only way to absolutely control the money on a global scale (which you hit the nail on the head, as that is the ultimate goal) is to have a single currency.
There is already talk of an Amero…the elimination of the US Dollar, the Canadian Dollar, and the Mexican Peso with the same nonsense they have pulled in Europe.
http://en.wikipedia.org/wiki/Amero
But in order to have a nation give up its beloved national currency (in which there is a modicum of control…if only imaginary), there has to be come sort of “Crisis” in which …afterwards…they (the bankers) propose a “solution”….ie the monetary union of the U.S., Canada, and Mexico.
All you have to do is look across the pond for an example of what they wish to implement here in North America.
No, it’s not one of “degree”…and here’s why:
The idea of inflating a currency is by DESIGN. It’s the very REASON why they issue paper. Inflation is not some “accident”…nor is the ever-increasing rise in prices some “natural law”.
That’s what people need to understand.
Yes, nothing is perfect…and I’m not saying that to dismiss some of the truth you state. But the question to ask is “WHO does the manipulating, and to what extent?”. The answer, from a Gov’t perspective is “WE DO!”.
Don’t believe me? Well, I’m sure one day you’ll be on a fixed income. You, as a working man, …if you havn’t seen the destruction of your purchasing power …it’s because you have not been paying attention. Regardless, when you are on a fixed income in old age…you’ll CERTAINLY see it.
I would caution TTAC from putting “currencies” in a headline. Invariably, the discussion will degrade into a rant about the gold standard, even though the article never brought it up.
A single $1 today is now worth 2 cents (or less) compared to what it was worth in 1913, the year the Federal Reserve was created. That destruction of purchasing power was taken from the economy at large…ie, YOUR WALLET.
This is wrong on a lot of levels, but I’ll focus on just one.
Look around your world in 2008, and compare to the world in 1913. If this were 1913, chances are good that you would be working 12 hour days, six days per week, and in exchange for that, you’d get housing in a tenement flat, crammed together with strangers, with few material possessions of your own, praying that your children do well enough to support you in what little you see of your old age.
The benefits of a monetary policy liberated from the tyranny of the gold standard is that it allows for economic expansion. Wealth is not a zero-sum game, it’s a quantity that grows over time. There is far more wealth in the world today in 2008 than there was in 1913.
The key to a successful monetary system is not to tie it to gold, but to have it led by a responsible government that pays its bills. If you pay your bills, you get low interest rates, which prevents inflation most of the time. Obviously, you don’t want Robert Mugabe running that show, but there are other guys better suited to the job.
Or you could have taken your money out of your mattress in 1980, used it to buy gold, and made absolutely nothing on it. I know that there are guys on the internet selling gold coins to suckers who will tell you that this is genius thinking, but ask yourself why they are so willing to trade your worthless dollars for gold if they love their gold so much.
“Tyranny”? That’s an interesting term to use for someone who supports the destruction of his/her own purchasing power. Most level-headed individuals would argue the opposite…that “tyranny” is working for a living, only to have to work even MORE just to break even.
THAT is the very definition of Tyranny, my good fellow.
Re. your comment: led by a responsible government that pays its bills.
There is no SUCH THING!! THATS(!!) the gist of the argument FOR a commodity-based currency.
If you can point out a single nation which has upheld your belief, I’m more than willing to listen. Until then, keep searching.
That’s an interesting term to use for someone who supports the destruction of his/her own purchasing power.
You have more purchasing power without a gold standard than you’d have with it. Because now you actually have a shot at getting your hands on some money, whereas in the “good” old days, you probably would be too low on the totem pole to get anywhere near much of it.
The goldbugs act as if the economy is a fixed system that doesn’t grow. If that was true, they’d have a point, because that would mean that we’re just slicing the economy into a lot of smaller pieces when we increase the money supply.
But that isn’t what’s happening at all. A modest amount of growth in the money supply encourages people to go for more. Going to work seems better when you could get a raise. Running a business becomes more enticing when your profits can go up. That encourages changes in behavior that create more spending and more wealth. In that case, money is more similar to water for a plant, allowing the plant to grow larger and stronger.
When we had a gold standard, we had depressions. Lots of them. You would have experienced several of them in your lifetime, had you lived before 1929. Banks failed by the hundreds during this golden age for which some are so nostalgic.
Also, please, ease off of the all-caps stuff. That’s the internet equivalent of shouting, which doesn’t do anyone any good.
Anyone, and I mean anyone who thinks the age of Trillion dollar bailouts, printing “money” out of thin air, is in-line with their interests is either a Central Banker himself, or he has been doped up to the point where he can’t think clearly.
…because the Trillion$ are nothing more than entries in a computer and will eventually come out of your wallet through inflation and a depleted level of purchasing power.
If you think for one moment the monetary system we now have is somehow regressive to one which has built-in checks and balances to prevent this from happening, then enjoy your depleted standard of living.
Here’s food for thought: You stated wealth is “created”. There are degrees of “creation”…in days past, it required “labor”..such things as “work”…but nowadays its “created” at the stroke of a keyboard. To those who benefit (being those who do the “creating”)…things are indeed wonderful. But for those of us who work for a living…it’s a complete bastardization of the very idea of wealth creation.
Wealth is not the same as money, luscious. I could have 3 tons of gold to myself on a desert island, and I’d be ratfink poor. I could issue money based on my gold stock, but I’d still be poor, because I’d be living in isolation. But, if I also had a ton of bananas and coconuts, I’d be wealthy, because I could eat. If I had a leanto and a plush hammock as well, hey, I’d be more than wealthy, I’d be rich. And have an excellent tan.
Money is just a means of acquiring things in a society. It is an abstract concept to facilitate trading, something possible since we’re human beings and not chimps, and fully discussed at school when I was about 8 or 9. Made sense.
Since we are human beings and inclined to shaft the next guy for our own personal advantage, countries try to make their exchange rates favorable for themselves. Natural.
All this hoohah you’re going on about has been conspiracy theory fodder for decades. You’re bring up a recursive argument. Visit federalreserve.gov for the latest in “private” banking.
Isn’t this the whole reason derivatives exist? If Japan’s major corporations’ profits hang on the value of the yen relative to the dollar, then why aren’t they hedging against a rise in the value of the yen?
Wmba, well done. That was a good summary of the issue.
Mr. Lang is correct. There has been some effort to hedge, but the best hedge comes from building cars in the markets where they are sold. Toyota and Honda have done an effective job of doing this, but some of the other manufacturers are too small to make that work.
In a way, some of these issues are overstated by the accounting. Take an example of a Toyota Camry. The car built in Kentucky is purchased by a US dealership, which pays for it in dollars. US workers, many of the vehicle’s parts and assemblies, and taxes are all paid in dollars. Some of the remaining dollars are also used to fund additional R&D and build new factories elsewhere in the US, which are also paid for in US dollars.
This story of the Camry may turn into yen on the financial statements, but in practice, most of it never entered the foreign exchange system. It does affect whatever profits are returned to Japan, but those comprise just a small fraction of the total amount of money generated by the Camry in this example.
Where it really hurts are with the cars that are built in Japan, such as the Lexus LS, but the bread-and-butter stuff such as the Corolla and Camry are largely untouched. If the yen-dollar exchange rate becomes an ongoing issue, you can expect more production to get moved to North America.
Some comments:
Hedging: Hedging is no panacea. If you know you need a million Euros in September 2009, and if you don’t want to run the currency risk, you can buy a contract for a million SEP09 Euros – for a price. It’s like insurance. The premiums change with the real or perceived risk. When currencies swing wildly, the premiums can get higher than the insurance of a Porsche in Modesto, CA. Most auto exporters employ some hedging to some degree, although it’s going a bit out of style. Many years ago, they found out that hedging cannot only be an insurance, it can also be a money maker. Say you bought yourself a contract for the delivery of a million Euro at the currently going price of $1,400,000. Come November, the Euro costs $1.60, you made $200K! That wasn’t lost on automakers. They set up option trading departments, which made them a lot of money – until they placed the wrong bets. Whooops! Huge losses in the currency dept. In come the auditors. In 1986, Burkhard Junger, and several others of VW’s currency department incurred losses, got caught with side bets, and went to jail. Had they continued making money for their employers, most likely, nobody would have come looking. The export trade always subjects you to currency risks, one way or the other.
The market: Just because the yen goes up, you can’t just ask more dollars for a Toyota. The market sets its price. If your home country’s currency is soft, you can undercut the competition, still make a lot of money, and be accused of dumping. If your currency is strong, you lose money and/or market share and gain unsympathetic shrugs.
Foreign production: Foreign production also doesn’t completely shield you from currency risks. First, foreign production typically starts as CKD, completely knocked-down, cars as kits. Exported. Assembled abroad. Somebody’s got to pay for the kits. Same currency problem. Then, over time, the cars acquire more and more local content and become less and less of a currency risk.
The day of reckoning: There is a time when the ugly currency rears its not-so pretty head, and that’s at the end of the year. The CFO of a global company collects the P&Ls and balance sheets of the foreign subsidiaries. They all keep their books in their local currency. Which then must be converted into the currency of the mother ship. And gotcha! Depending on the rules of his country, the CFO can either use the end-of-reporting-period rate, or an average for the year. In any case: If his local currency is high, the consolidated profits from abroad come in lower. Even if no profits are transferred, it’s in the books. With a high local currency, the books will be an ugly read. People don’t like it. Stock goes down. Careers end.
The solution? Devalue the currency, or relocate the company HQ to a country with a softer currency. Sound outlandish? Honda already said they might don it if the yen doesn’t get cheaper real soon.
The value of gold is solely what people think it is. There’s nothing magic about it at all.
It’s particularly easy to criticize the financial institutions these days. They certainly deserve an awful lot of it. But to dismiss their role in how the world works (inventing efficient ways for capital to be utilized to produce goods and services) is just plain dumb.
If you doubt this, just look at what happened to the Spanish empire, once the richest in the world. Built on a love of gold, it declined rapidly when faced with competition from the countries that invented modern finance. They just couldn’t compete with the efficient movement of capital made possible by paper instruments that represent wealth.
Of course, none of this excuses the mistakes made. But to suggest abandoning our system is completely wrong.
Don’t forget about the carry trade. It’s pretty much dried up now, but almost all the cash going to the Bank of Japan from exports came right back to the US in the form of the carry trade, where institutions borrowed near-zero-percent interest in yen and invested it in higher yielding US assets… crap like mortgage backed securities.
So to those whining about Japanese perfidy in manipulating their own currency, Wall St. benefited greatly from the process, and they could have taken that money and invested it wisely (in the Big-3 perhaps) but decided to place their bets on more speculative adventures.
If anybody would have predicted in July that the yen, the currency of that non-growth, zero-interest country Japan would appreciate against the Euro by 33 percent within three months, that person would have been committed. Only to be released four months later and bestowed with the Nobel Prize in Economics.
Similar actions regarding straight jackets and Nobel Prizes would followed anyone thinking oil would go from 70 to 140 to 40 in a year.
This is a function of how seriously the wheels have come off the world’s financial system.
Governments should concern themselves with stability (especially PRICE stability). Whether it’s housing, oil, or currencies, huge price swings are not healthy.