Sony Corporation (ADR) (SNE), Toyota Motor Corporation (ADR) (TM), Honda Motor Co Ltd (ADR) (HMC): How to Play the Japanese Yen the Shinzo Abe Way

The Bank of Japan has been inflating its economy quite aggressively, with the Central Bank piling assets onto its balance sheet. As a result, Japanese American depositary receipts like Sony Corporation (ADR) (NYSE:SNE), Toyota Motor Corporation (ADR) (NYSE:TM), and Honda Motor Co Ltd (ADR) (NYSE:HMC) have reported or will report inflated earnings.

Economic effect

Source: YCharts

Since the beginning of 2013, the Bank of Japan has increased its outstanding reserves by 48.85%. While this was happening the iPath JPY/USD Exchange Rate ETN has declined by 7.65%. The central bank has increased the size of its asset purchase program in order to improve the GDP growth of the sluggish economy.

I anticipate the iPath JPY/USD exchange rate ETN to continue to decline in valuation over the next several years due to Japan’s continued pursuit of inflationary monetary policy. The Japanese central bank is hoping to keep the value of the Japanese Yen depressed in order to increase its exports, which directly contributes to the country’s GDP.

In the first quarter of 2013, the Japanese economy was able to log a 0.40% gain in its GDP. Implying that its inflationary monetary policy is at least increasing its GDP over the short-term, which will encourage the continued use of expansionary monetary policy.

The asset purchase program has decreased the value of the Japanese Yen against the United States dollar by 7.65%. This may not sound like much, but in the world of foreign exchange it’s humongous, especially over the course of five months. Putting this in perspective I included a five-year chart of the USD/JPY currency pair.

Source: FreeStockCharts

Japanese ADRs report their financial results in Japanese Yen, and as a result the companies will be able to generate inflated earnings growth for the quarter.

Inflated growth

The inflated growth had a considerable impact on the financial performance of Japanese American Depository receipts. For example, in Sony’ most recent quarterly earnings report the company was able to report a profit for the first time in five years. Now to be fair, Sony also reported significant growth in its mobile division, which helped to boost the valuation of the company. The company added to that strength in performance through the strength of its lending practices in Japan.

Sony Corporation (ADR) (NYSE:SNE) reported a 314.1% improvement in its operating income. The company’s year-over-year revenue growth of 4.7% was enough to make a significant improvement on its bottom line operating income (it went from having negative operating income to a positive operating income, which was driven by currency market fluctuations). Sony Corporation (ADR) (NYSE:SNE)’s share price has appreciated by 74.54% since the beginning of 2013.