Related Companies: Apple Inc. (NASDAQ:AAPL), Sony Corporation (ADR) (NYSE:SNE), Toyota Motor Corporation (ADR) (NYSE:TM)
The Bank of Japan’s decision to inflate the yen is a strong move, but one with the potential to backfire horribly.
It’s also an unpredictable strategy … with the potential to set two countries that should be partners at each others’ throats. Can every nation afford to follow the same policies and expect worldwide growth? That’s silly and counterproductive.
Inflation? Who worries about inflation?
Unfortunately, I think the most likely positive effect will only be short-term. With a cheaper yen, Japanese products will definitely become more competitive against American-made items. That’s good for them, I suppose, but bad for the U.S. and other countries that want to lead an export-driven recovery.
Both the European Central Bank and the U.S. Federal Reserve either are considering or already have expanded their respective money supplies. By doing so, they weaken the dollar and the euro and hope to capture more of the available export market
So who wins? Well, Japanese companies will be the first winners in the short term — but a race to the bottom will serve only to make sure no one wins overall. That’s the real fear of perpetual inflationary policies out of the major central banks.
Photo: Apple Inc. (NASDAQ:AAPL)
Also in the short term, companies that compete with Japanese exporters will feel the pinch. Those in the electronics and other industries are going to find themselves potentially cut out of several large markets, since they won’t be able to price-compete. It’s an interesting time.
Automakers on the Front Line
Japanese Automakers like Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC) are likely to be some of the biggest winners. If the move weakens the yen enough to knock $5,000 to $10,000 off the price of Japanese cars, then General Motors Company (NYSE:GM) could be in real trouble. General Motors Company (NYSE:GM) is already a shaky stock to own, and its overseas competition suddenly being cheaper won’t do it any good.
I don’t think GM can afford to cut the price of its vehicles very much, given that its overall margin was still -20% in 2012. A cut in that will further depress an already low EPS of $9.49, which will lead to an overall drop in value. In comparison, Honda Motor Co Ltd (ADR) (NYSE:HMC)’s EPS is $18.11, and Toyota’s is $20.18. That tells me that the market already thinks the Japanese firms are ready to grow, and General Motors Company (NYSE:GM) isn’t. A weaker yen would only make this worse.
Electronics and Gadgets
The other line of items Japan is famous for is electronics. Here, Japanese brands can make real gains against their American competitors. Japanese firms such as Sony Corporation (ADR) (NYSE:SNE) and Panasonic Corporation (ADR) (NYSE:PC) — both of which make tablets, MP3 players and smartphones that directly compete with Apple Inc. (NASDAQ:AAPL) — stand to benefit enormously from a more competitive price structure. Even with some manufacturing down outside of Japan, a cheaper yen decreases the overhead and home office expenses and lowers the price of every piece of both company’s electronics.
Apple Inc. (NASDAQ:AAPL) is particularly vulnerable. The company – which I think highly of – already has a very high price point for its music players, phones and tablet computers. That the company knows this is indicated by the swirling rumors that the next-generation iPhone will have a model that is significantly cheaper. Anything that makes Apple Inc. (NASDAQ:AAPL) even less price-competitive might cause another run on the stock, and force it even lower. Savvy investors will be more cautious about Apple Inc. (NASDAQ:AAPL)’s stock until the full impact of a weaker yen becomes clear.
What It All Means
A weaker yen isn’t the problem. The real problem is the race to the bottom inspired by competing central banks all trying to export their countries out of economic doldrums. It simply can’t be true that all nations can use the same path to prosperity. As long as there’s competition for the same markets there will be winners and losers. You, as an investor, have the opportunity to take advantage of it. Keep an eye out for a weakening yen and see what Japanese firms you can get into quickly.
Nate Wooley has no position in any stocks mentioned. The Motley Fool recommends Apple and General Motors. The Motley Fool owns shares of Apple.