On November 8th, Toyota reported quarterly results that fell short of analysts’ forecasts. Production shortfalls following the Japanese earthquake and tsunami in March were said to negatively impact the quarter. The strength of the Japanese yen also weighed on results for the manufacturing giant, which still makes three million cars a year in Japan, but sells less than half that amount domestically. This makes Toyota a huge exporter of yen-denominated goods, so when the yen strengthens as it has (particularly against the U.S. dollar), Camrys and Sequoias are harder to sell.
In a global economy, currency imbalances can persist for some time, but not indefinitely. If exchange ratios stretch beyond fundamental economic differences, capital eventually begins to flow from stronger currency countries to others where it can be deployed more productively. This benefits the weaker currency economies by boosting investment and employment, which in turn adds to economic growth and lifts the value of the local currency.
Foreign direct investment takes time, and Toyota cannot relocate production facilities overnight. Similarly, currency trends often evolve gradually. The point is that in a global economy, currencies do not move unilaterally or in a vacuum. There are opportunities created by valuation fluctuations, and opportunistic companies will move to capitalize on them. The results, over time, act to equalize and balance global trade and currency exchange rates – like releasing pressure through a pressure valve. On Tuesday, Toyota executive vice president Satoshi Ozawa expressed the frustrations of a global multinational with a strong domestic currency saying, “Recent foreign currency levels threaten to undermine Japan’s standing as an exporter nation.” He also urged the Japanese government to “take resolute measures.”
If the yen remains strong versus the dollar, Toyota will have no choice but to increase its foreign production. Satoshi remarked that Toyota will keep production in Japan as if “clinging to a rock with its teeth.” When it loses its grip, that means investing in manufacturing facilities and assembly plants outside Japan, as well as increased sourcing of non-Japanese parts and equipment. America will get a big piece of the action, and that means jobs, stronger growth, and (ultimately) a stronger dollar.