The Plunging Yen Could Decimate These Stocks

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The Japanese yen has fallen precipitously since mid-December, depreciating about 11% against the euro and 15% against the U.S. dollar. Many equity investors likely pay little attention to the day-to-day moves in the currency markets, but when a currency shifts in value as quickly as the yen, it can have detrimental effects on individual stocks and ETFs.

Ford (NYSE: F), General Motors (NYSE: GM) and Caterpillar (NYSE: CAT) could all suffer at the hands of the falling yen, while country specific ETFs like iShares’ German and South Korean  funds could be pressured as well.

Japan’s new government has pushed for a weak yen
Japan has suffered under a deflationary economic environment for roughly two decades, as asset valuations have languished, never coming close to the levels seen in the late 1980s.

Newly elected Prime Minister Shinzo Abe believes that by pursuing aggressive monetary stimulus, Japan’s economy can escape the trap of deflation once and for all. This was the policy recommended by famed economist Milton Friedman in the late 1990s.

Because of its limited natural resources, Japan remains dependent on its exports of high tech goods -- electronics, automobiles, and machinery. These goods, when priced in a weaker yen, appear to be cheaper to foreign buyers, thus increasing their demand. This effect could work to the detriment of companies that compete against Japanese exporters.

The American auto renaissance might be short-lived
GM needed a bailout to survive the financial crisis, but the company now looks stronger than ever. Major investors like Warren Buffett and David Einhorn have gotten behind the automaker, and shares have rallied nearly 25% in the last six months.

For its part, Ford was able to make it through the crisis without requiring a bailout. Its shares are up almost 30% in the last six months.

But both companies might see renewed competition from their Japanese rivals Honda, Toyota, Nissan and Subaru. A weaker yen could allow Japanese car companies to slash prices, stealing customers from domestic automakers. If the domestics opt to lower their own prices, it could compress margins. Either way, it wouldn’t be good for shareholders.

Caterpillar’s biggest rival is Japan’s Komatsu
Caterpillar is the world’s largest maker of construction and mining equipment. But the second largest maker is Komatsu, a Japanese company.

Just like the Japanese automakers gaining an edge over their domestic rivals, Komatsu could gain an edge over Caterpillar. However, it is important to note that -- as Doug MacDougall of The Street points out -- Caterpillar is an active currency hedger, using futures contracts to mitigate its risk to fluctuations in the U.S. dollar.

Still, Komatsu getting a currency tailwind is certainly no help to Caterpillar.

Korean electronic companies could suffer from a weak yen
There are few U.S. electronic makers left. Instead, Japan’s rivals on this front -- LG, HTC and Samsung -- are located in South Korea.

A weak yen would benefit Sony, Panasonic and Sharp over their South Korean rivals -- consumers might opt for a relatively cheaper Sony Bravia over a Samsung LCD.

The Korean electronics makers aren’t directly traded on U.S. exchanges, but traders can get access to them through iShares South Korea Index Fund (NYSEMKT: EWY). Samsung is a major holding within the fund, as are Korean automakers Hyundai and Kia. As with the U.S. car companies, Korean car companies should be susceptible to emboldened Japanese competition.

Germany’s exporters also compete with Japan
Like South Korea, Germany too faces export competition. The iShares Germany Index Fund (NYSEMKT: EWG) holds companies such as Volkswagen, Porsche, Siemens and BASF.

As car companies, Porsche and Siemens face the same risks as GM, Ford, Kia and Hyundai. Likewise, Siemens and BASF face competition from a host of Japanese competitors in the industrial and chemical markets.

Currencies matter to exporters
With the recent shift in the relative value of the yen, Japanese exporters will receive a currency tailwind, boosting their profits. That might lead to price cuts, much to the detriment of those companies that directly compete. Non-Japanese electronic, auto and industrial makers all could suffer.

Bottom line, investors with stakes in companies that are reliant on exports should pay attention to trends in the currency market.


joekurtz has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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!

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