Yen Effects

By intervening to stop a strengthening yen, Japan's central bank throws uncertainty into the forex strategies of U.S. companies.

To all the headaches that finance chiefs have to worry about, add one more: Japan’s intervention in the currency markets last week to weaken the yen. While big Japanese exporters such as Sony and Honda cheered the Japanese central bank’s efforts to halt the yen’s five-month climb against the dollar, the intervention presents quite a different set of issues for U.S. CFOs.

The yen stood at 85.70 to the dollar Monday morning, and another round of intervention is possible. An executive at Nissan Motor said Thursday that many companies in Japan are not profitable even at the rate of 90 yen to the dollar, and a continued strong yen could mean domestic job losses.

U.S. automakers, of course, welcomed a strong yen, because it makes Japanese cars less price-competitive in the United States. But it also means higher costs for U.S. manufacturers importing large machinery or parts from Japan.

Ryan Gibbons, managing director of GPS Capital Markets, says the Japanese central bank’s move to flood the markets with yen is a wake-up call to U.S. CFOs who have been riding the profits from the currency’s appreciation the past few months. “Take a more conservative approach now,” counsels Gibbons. “If you’re in the money on hedges, you should lock into those.”

The important thing is to recognize that it’s no longer only traders and other private-enterprise players in the market who are making the yen move, says Gibbons, adding, “If you bet against central banks, you lose.”

For many U.S. companies, though, the situation is more complex. Consider Columbus, Georgia-based health insurer Aflac. Its Aflac Japan unit accounted for 76% of the company’s revenue in the first half of 2010 and roughly 80% of its assets. Aflac Japan does little converting of yen into dollars: the unit operates in yen, pays claims in yen, and collects premiums in yen, and most of its expenses are yen denominated, as are the bulk of its investments. So yen movements against the dollar have little economic effect, says Aflac CFO Kriss Cloninger. But when the Japanese unit’s results have to be translated into U.S. dollars for GAAP reporting, a large, sustained movement in the yen can “distort” the apparent growth rates of Aflac’s operations, he says.

Before the effect of foreign exchange, for example, Aflac is projecting earnings-per-share growth of 9% to 12% year-on-year, Cloninger says. But the yen’s movements can affect the as-reported figures substantially, according to a table in Aflac’s second-quarter 10-Q. If the weighted average yen-to-dollar exchange rate for all of 2010 is 85, for example, Aflac’s net EPS will grow between 16% and 18% over 2009. But if the currency weakens to 100 yen to the dollar, Aflac’s posted earnings will grow only 5% to 7%. “Within a range we are fairly neutral on what happens to the yen,” says Cloninger.

For Aflac, the nuance occurs in the risk capital that Aflac Japan has to hold to comply with regulators. Because Aflac Japan hedges a portion of its capital account by investing in U.S. dollar securities, the dollar-denominated investments have to be converted back into yen for reporting of the company’s risk-based capital ratios. So a strong yen can slightly reduce the solvency ratios that Aflac Japan reports to regulators. “We have to be cognizant of the effect of that,” says Cloninger.


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