Yen Effects

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

Any positive effect of the previous yen strengthening on U.S. businesses, economically or accounting-wise, has been partly muted by the worldwide economic downturn. A strong yen is usually good news for U.S. luxury-goods makers, for example. Tiffany reported a 4% increase in sales in Japan in the second quarter, which it attributed to a rise in the average price per unit sold. But the boost was partly offset by a decline in units sold. Comparable store sales in the quarter actually fell 1%.

The globalization of U.S. businesses is another reason why a stronger yen hasn’t had huge effects. Rarely now is the value of a company purely tied to one currency pair, says Wolfgang Koester, chief executive of FireApps, a developer of forex exposure management software. The average company has exposure to between 40 and 300 currency pairs, he says. “I don’t know any company with more than $500 million in revenue that has less than 20 currency pairs,” says Koester. “If you looked at [the yen's rise] in a closed [dollar-yen] system, it’s a positive for many U.S. companies, but that’s an impossible assumption.”

Despite Japan’s intervention in the yen-dollar exchange rate, there’s skepticism this time around about how effective it will be. With the U.S. economy still ailing, the Obama Administration is unlikely to assist Japan in managing the yen-dollar rate — at least in the near term. In addition, low interest rates in the United States have helped strengthen the yen as investors move money out of dollars. So any quantitative easing by the Federal Reserve could counteract the intervention.

Still, the yen is more likely to weaken than return to pre-intervention levels, Gibbons says. CFOs have some time to let the situation play out before final budgets for 2011 are due, but for those starting the budgeting process now, Gibbons recommends being at least 5% more conservative with yen-dollar exchange-rate projections. “I would set my budgets closer to 90 [yen to the dollar],” he says.

China’s yuan, of course, also needs to be on the radar screen for CFOs, but for the opposite reason. Koester points out that the larger exposure for many U.S. companies is with the yuan. “Quite a few CFOs are not looking at China as an exposure,” he says. “If they do their [value at risk] calculations and look at historical volatility, it will tell them they have no risk.” But companies have to consider how much the Chinese currency could appreciate overnight if the government suddenly lets it float freely against the dollar. “A lot of research puts the appreciation at north of 10%,” Koester says.


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