Japan Inc. struggles with yen rise, Thai floods

By Isabel Reynolds

From Nintendo to Panasonic, Sony and Honda, Japan Inc. is struggling to fend off competition from the likes of Samsung and Hyundai, which have been steadily nipping at their heels, as the soaring yen and supply disruptions undermine their recovery attempts.

"To put it bluntly, we're really in a tough spot," said Fumihiko Ike, chief financial officer at Honda Motor Co after the company declined to give its annual forecast in an unusual move. "We're in a much more difficult position because our car factory (in Thailand) is inundated."

Even after a slide in the value of the yen triggered by what appeared to be another round of government intervention on Monday, the Japanese currency stood at about 79.2 yen against the dollar, after a relentless rise from more manageable levels of about 100 yen three years earlier.

Attempts by many Japanese manufacturers to sidestep the yen and other high domestic costs by shifting production to Thailand have also run into difficulties.

Japan sold the yen on Monday for the second time in less than three months after it hit another record high against the dollar, pushing the U.S. currency up more than 4 percent against the yen to above 79 yen.

"Frankly, my reaction was, 'finally, they intervened.' But I'm also aware that a solo intervention has a limited impact," Honda's Ike added. "Will we able to keep these levels? I'm not all that hopeful."

This month's disastrous flooding has forced many firms to close plants that are either under water or lack necessary parts, in an echo of the supply chain woes that threw Japan's manufacturing into chaos following the March 11 earthquake and tsunami.

After game giant Nintendo Co Ltd, which generates 80 percent of its sales overseas, announced last week it expects to make its first annual net loss ever for the year to March 2012, further gloom is expected from this week's earnings.

Panasonic Corp on Monday cut its annual TV sales forecast by one-fourth to 19 million units and warned it may report its worst annual net loss of 420 billion yen ($5.5 billion) in a decade, a sharp revision from its previous forecast of 30 billion yen in profit.

"What we need to tackle is the television and related semiconductor business," Panasonic's chief financial officer, Makoto Uenoyama, said. "If we downsize these, our profits will be completely different."

Panasonic plans to cut 17,000 jobs and close up to 70 plants.

Hit by the cost of layoffs as it tries to cut costs and strip out overlapping businesses following its buyout of subsidiary Sanyo, the company will likely cut its sales target as consumers turn conservative, the paper said.

More than 60 percent of global consumers said it was not a good time to spend and one-in-three North Americans said they had no spare cash in a survey by Nielsen published at the weekend.

"A historically high yen and a slowdown in demand in major markets are creating an increasingly difficult external environment for the companies," ratings agency S&P said in a statement about Japan's electronics firms released on October 26.

"As a result, downward pressure on the ratings on the companies may build if we see a higher likelihood of flood damage to factories or supply chains having a prolonged impact on production and slowing recovery in their earnings and financial profiles."

Once unrivalled, Japan's consumer electronics and automakers are facing increasing competition from cheaper Korean and Chinese producers in particular.

South Korean rival Samsung Electronics Co, far quicker than Japanese firms to jump into the growing smartphone market, said it remained "cautiously optimistic" about the vital October-December period.

Later in the week, Sony Corp and Nikon Corp are also expected to reveal more information about the effects of Thai flooding on their operations, particularly camera manufacturing.

Just as in the aftermath of the earthquake, the auto industry, which relies on an uninterrupted supply of up to 30,000 parts per vehicle, may be among the worst hit of Japan's industries.

Honda, the first of the Japan's top three automakers to report earnings, withdrew its annual earnings guidance on Monday due to uncertainties including the yen and Thailand's floods just as it was starting to recover from the March earthquake and tsunami.

Japan's third-biggest automaker by sales has been hit the hardest by both disasters this year, recovering slowly from the supply disruption in northeast Japan and suffering direct damage at its Thai car factory in the Ayutthaya industrial estate.

It said on Monday car production in Thailand could be difficult in the second half of the automaker's business year that ends in March 2012 and may disrupt production in Indonesia, Philippines, Vietnam, Pakistan at some point.

"Honda didn't provide guidance at all while it assesses the damage from the Thai floods, and other manufacturers' revisions were in line with grim expectations," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"The currency intervention pushed up the dollar and the euro against the yen, helping one of the worries on investors' minds. But the Nikkei was still unable to hold any gains, showing that investors are not confident that the yen will remain down."

Shares in Honda closed down 3.7 percent and Panasonic fell 2.1 percent versus a 0.7 percent drop in the Nikkei index.

($1 = 75.760 Japanese yen)

(Additional reporting by Ran Kim and Lisa Twaronite; Editing by Matt Driskill and Miyoung Kim)