Across The Border

Chinese high-end manufacturers start to reap the benefits of a stronger Japanese yen

Specialist firms able to produce quality products are hoping the currency’s growing image as a safe haven will continue

PUBLISHED : Tuesday, 13 September, 2016, 1:25pm
UPDATED : Tuesday, 13 September, 2016, 10:15pm

The appreciation of the Japanese yen is already benefiting some high-end Chinese manufacturers thanks to their pricing competitiveness over overseas rivals, and many are hoping the currency’s strength will continue for some time yet.

Haitian International, for instance, a plastic injection moulding machinery (PIMMs) maker, is one of those expected to enjoy the rewards.

Its PIMMs are used to produce new energy vehicles, home appliances, electronic products and medical equipments.

The company’s management told analysts at a recent meeting that it had already seen a sharp increase in orders in April, but they refused to say how directly that was being driven by the yen’s rise in value, Xiang said.

“Haitian is the only non-Japan manufacturer that can produce full-electric PIMMs in volume in Asia. It’s almost certain the company will benefit in the second half if the yen maintains its strength, ” said Sean Xiang, an analyst with Guotai Junan International.

“The company is now strengthening and promoting its full-electric PIMMs, and their selling price of is usually three times that of traditional machinery,” Xiang said.

In the first half, Haitian’s net profit surged 18 per cent year on year to 690 million yuan, with revenue rising 0.3 per cent, boosted by the growing demand for new energy vehicles.

After excluding non recurring items, the profit growth was actually a historic high of 18.5 per cent .

Into the second half, the management said the trend continued into July and August, with orders better than expectation, Nomura analysts Wang Zhuoran and Patrick Xu said in a research note.

With the yen continuing to appreciate against the US dollar, Nomura is now predicting Haitian’s all-electric PIMMs’ competitiveness to remain strong.

Market watchers say the situation is also especially beneficial to three other Chinese manufacturers: Johnson Electric Holdings, Techtronic Industries Company and VTech Holdings.

But Lo Ka-leong , an automobile analyst at Kim Eng Securities (HK), says for many Chinese firms, the yen must remain strong for a time yet, for them to fully benefit.

That’s because many Japanese manufacturers who engage in upstream businesses do not adjust their selling prices often, and so a jump in the yen would squeeze their own profit margin but would not have much of a direct impact immediately.

For downstream businesses, many Japanese firms build factories overseas and their historically high levels of localisation has helped relieve currency pressure at home from the strong domestic currency, Lo said.

The strong appreciation has largely been driven by two factors: market perception that the BoJ is lacking ammunition to provide further monetary policy easing, and delays to the US rate hike cycle that have weakened the dollar
Lynn Song, analyst at China Merchants Securities

The yen is currently hovering around 101 to the US dollar after jumped over 15 per cent so far this year, as the Bank of Japan (BoJ) introduced negative interest rates in late January, boosting the currency to levels not seen since early 2014.

“The strong appreciation has largely been driven by two factors: market perception that the BoJ is lacking ammunition to provide further monetary policy easing, and delays to the US rate hike cycle that have weakened the dollar,” said Lynn Song, analyst at China Merchants Securities.

Song said the Japanese currency is now expected to ease in coming months as the BoJ is well-aware of the risks involved in an ever-appreciating yen, and that US interest rates are also likely to rise.

Both the Japanese central bank and US’ Federal Reserve are due to have their next monetary policy meetings on September 21.

“Our baseline scenario still sees a slight depreciation of the yen by the end of the year from its current level, but the risks of a more sustained appreciation in 2017 should pick up again, as the US rate hike cycle is likely to remain slow, and as the BoJ depletes its policy ammunition,” Song said.

He expects the yen to stand at 105-110 against the greenback at the end of the year, assuming monetary policy continues as expected, but adds the BoJ is approaching its limits.

If the BoJ fails to provide enough stimulus to satisfy the markets after the September meeting, Song says there is risk of further appreciation, possibly pushing the currency past the 100 point of resistance.

Credit Suisse expects to see more strength as the currency continues to be seen as a “safe-haven”, adding that it still views its valuation as reasonable, making it attractive as part of a portfolio acting as a hedge against risk.

“The yen is likely to strengthen further as the rate spread remains historically low and Japan’s external surplus is high,” Credit Suisse analysts wrote in research report on August 31.

“Verbal intervention by the Japanese authorities has increased since the yen strengthened towards 100 to the US dollar, but current spot levels are unlikely to trigger official yen selling.”

Their prediction is that despite probable volatility resulting from a possible September US interest rate rise, and some form of further BoJ easing, the yen is likely to rise to around to 96 to the dollar within three months, and to be at 93, 12 months from now.