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The thing to
understand about inflation is that if one major country does it, all the
others have to do it too. A single country can benefit by making its currency
less valuable, because a falling exchange rate gives its exporters a pricing
edge in global markets. But the pop in exports comes at the expense of
competitors who then demand that their governments join the currency
race-to-the-bottom.
This happened
to Switzerland in September, as global capital poured into what was seen as a
financial safe haven. The Swiss franc soared, traumatized local exporters
complained, and the government pegged the Swiss franc to the euro, in effect
putting it on the same road to oblivion as Europe's doomed common currency.
Now it's
Japan's turn:
Toyota Slams on the Brakes
Car Maker
Cuts Profit Goal by 54%; Strong Yen Is 'Destroying' Japanese Industry
TOKYO: Toyota
Motor Corp. slashed its profit outlook by more than half, reflecting the
corrosive effect of the strong yen and signaling a deeper threat to car
maker's recovery.
The Japanese
auto giant Friday also lowered its global sales outlook to 7.38 million
vehicles for the fiscal year ending March 31, an admission Toyota could lose
its crown as the world's largest car maker this year, a title it took from
General Motors Corp. three years ago.
Toyota has
been wounded by two natural disasters and the rise of the yen against other
currencies. Just as the company's production was rebounding after Japan's
massive earthquake in March, it was hit by flood damage to key component
suppliers in Thailand and a record yen.
Those
setbacks have eroded Toyota's position against global rivals including
Hyundai Motor Co. and Volkswagen AG, and pose longer-term worries for one of
Japan's most important industrial giants. Toyota has lost 2.5 percentage
points of the U.S. auto market for the 12 months ended in November. Its stock
price in New York has fallen 33% since the end of February.
Toyota
officials have said that at exchange rates below 80 yen to the dollar, the
company loses money on subcompact exports such as the Yaris. The dollar and
euro weakness against the yen reduces the price competitiveness of Japanese
exports in overseas markets and erodes the value of foreign profits on
corporate Japan's balance sheets.
Satoshi
Ozawa, Toyota's chief financial officer, said one of the reasons the auto
maker was exposed to the Thai floods was because so much of Japanese industry
has been shifting manufacturing operations offshore to escape the high yen,
including auto parts makers.
"The
fact that production of some electronic parts has been offshored [to
Thailand] signals how the destruction of Japan's industrial base is
proceeding apace. I find that very shocking," he said.
Toyota still
makes in Japan nearly half the vehicles it sells globally, leaving it more
exposed to currency risk than Japanese rivals Nissan Motor Co. and Honda
Motor Co., which make about a third of their respective output in Japan.
For its
current fiscal year, which runs through next March, Japan's biggest car maker
by volume said it now projects a net profit of ¥180 billion ($2.32
billion), down 54% from a previous estimate announced in August and less than
half the ¥408 billion it earned last year.
Toyota
expects the shortage of parts from Thailand suppliers to be fully remedied by
next March. But it projected continued yen strength next year, which bodes
ill for a quick earnings rebound.
The Toyota
City-based company's new forecast assumes an average exchange rate of ¥77
to the dollar from this month through March, and ¥105 against the euro.
That is up from ¥86 to the dollar and ¥113 to the euro in the last
fiscal year. The rate was 77.6463 yen to the dollar at the end of Friday's
trading.
At current
exchange rates, the company forecasts a parent, or unconsolidated, loss of
¥80 billion yen, which would mark its first dip into the red in reported
after-tax income.
If mighty
Toyota can't turn a profit with the yen at current levels, the Japanese
government has no choice but to lower the value of its currency. It will
accomplish this by creating hundreds of billions of dollars
worth of yen and using them to buy euros and dollars, sending the
dollar and euro up and yen down in relative terms.
Once a
process like this gets going it can't be stopped because no single central
bank can step off the track without seeing its currency soar and its export
industries implode. The ultimate end, of course, is the descent of the
world's major currencies to the value of the paper on which they're printed.
As crazy as
this seems to modern sensibilities, it isn't historically unique. Just the
opposite. All fiat currencies end this way, a victim of politicians' (or
kings') need to satisfy powerful constituencies. Give a government a printing
press, in other words, and it will use it as long as it can.
Meanwhile, in
each and every past case of currency destruction, the owners of gold and
silver were not only spared the worst of the trauma, they were enriched.
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