Sony, Toyota, Apple and The Bank of Japan
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The action by the Bank of Japan to inflate the yen is strong move with unpredictable long-term consequences. By tripling the yen supply the Japanese central bank is attempting to force down its value and get Japan back to the export-led growth model that served it so well as it rose to economic superpower status.
Inflation? Who worries about inflation?
Unfortunately, I think the most likely positive effect will only be short term. 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 implemented significant rate cuts to expand the money supply.
So who wins? Well, Japanese companies will be the first winners in the short term. No doubt about that. 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.
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 as they won't be able to price-compete. It's an interesting time.
Automakers on the Front Line
Japanese Automakers like Toyota (NYSE: TM) and Honda (NYSE: HMC) are likely to be some of the biggest winners. If the move weakens the yen sufficiently that it knocks $5,000 to $10,000 off the price of Japanese cars then the recovery of General Motors (NYSE: GM) could be significantly impacted. GM is already a shaky stock to own, given the problems it has suffered over the last five years.
I don't think GM can afford to cut the price of its vehicles very much, given that its operating margin was only 3% in 2012. A cut in that will further depress an already low EPS of 9.49 and that will lead to an overall drop in value. In comparison, Honda'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 GM isn't. This can only get worse with a weaker yen.
Electronics and Gadgets
The other line of items Japan Inc is famous for is electronics. Here's a spot where Japanese Brands can make real gains against their American competitors. Japanese firms such as Sony (NYSE: SNE) and Panasonic (NASDAQOTH: PCRFY) both stand to benefit enormously from a cheaper yen. From personal computers to home video to MP3 players, all of them will see an increase in sales if the yen declines as the Bank of Japan hopes.
Apple (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. Anything that makes Apple even less price competitive might cause another run on the stock and force it even lower. Savvy investors will be more cautious about Apple'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.
Follow Nate on Twitter: @natewooley
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Nate Wooley has no position in any stocks mentioned. The Motley Fool recommends Apple and General Motors. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!