It looks like Japan’s newly-elected Prime Minister, Shinzo Abe, will benefit export dependent auto companies such as Toyota Motors (NYSE:TM) and Honda Motors (NYSE:HMC). Under Mr. Abe, the government has raised its inflation target to 2% from 1% earlier and therefore the government plans to devalue Yen by printing ‘unlimited yen’. 
Already we see the effects of devaluation taking place with one US Dollar yielding 87 yen compared to 81 yen in the previous month. This will have particularly have a favorable impact on the Japanese autos such as Toyota and Honda since their products will be more affordable to the foreign customers. Moreover, the same amount of Dollars (and other foreign currency) will now result in more yen which will help boost the top-line (and possibly the bottom-line as well).
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Besides this, a weak yen will also help these companies post higher margins as they have a significant proportion of vehicles being manufactured domestically. A strong Yen had plagued the operations of Japanese autos for some time now since the expenses were incurred in Yen while the revenue was generated in foreign currencies, which translated to a fewer Yen). As a consequence, they had been shifting their production overseas to negate the effects of a strong domestic currency.
Honda, for example, is expanding its capacity in the U.S. and Canada while building a new plant in Mexico to reduce its dependence on Japanese exports. With this move, almost 96% of its total cars sold in the region will be made in North America once the plant in Mexico becomes functional in 2015, up from 85% currently. 
Similarly, in 2012, Toyota also announced its decision to ramp up output in its U.S. and Canadian plants and has poured in more than $1.6 billion since. Until 2012, the world’s largest automaker produced half of its vehicles in Japan. A relatively weaker currency will give these companies the freedom to produce vehicles at the desired destination and in a manner that promotes profitability. ((Toyota to raise prices abroad over yen’s rise, September 15, 2012, japantimes.co.jp))
It had been a double whammy for Japanese automakers as the Yen had risen 40% against the U.S. Dollar in the past five years while the South Korean Won has depreciated 17% over the same period, thus giving automakers such as Hyundai and Kia a pricing edge in the North American markets. So, the recent devaluation comes as a pleasant surprise for them and could potentially help them regain their competitive edge.
We currently have a $91 price estimate for Toyota’s stock, which is slightly lower than the current market price.Notes:
- Could Japan devaluing the Yen kick off a currency war?, December 28, 2012, marketintelligencecenter.com [↩]
- Honda Boosting Production in North America, August 13, 2012, wsj.com [↩]