Yen's surge cuts Japanese profits

By Rory McCarthy

TOKYO (AFP): The steady surge in the yen has already starting eating into profits at Japan's biggest companies and threatens to hold back the chances of a swift economic recovery, analysts said Thursday.

Not only has the yen hit a six-month high against the dollar but it has also surged to a record high against the euro and climbed against Asian currencies.

A rise in the yen against all major currencies is a new problem. A strong yen, known as yendaka in Japanese, makes Tokyo's exports more expensive and could stunt growth opportunities.

"This is something for Japan to be worried about," said Ronald Bevacqua, chief economist at Commerz Securities Japan.

"In the last couple of years it has been outside the United States where most of Japan's export growth has come. This will probably eat into export growth."

The yen hit a high of 111.35 yen in Tokyo on Thursday, against 113.07-09 yen here late Wednesday.

Japan's strongest companies are already feeling the effects. Last month the electronics giant Sony Corp. said the sharp rise in the yen hit earnings in latest quarter.

Sony's group net profit was down a steep 55.0 percent in the three months to March.

Canon Inc., another blue-chip favored by foreign investors, said on Wednesday its first half profits this year were hit by the strong yen.

Canon, a top printer and camera maker, took a 26.8 percent fall in parent net profit in the six months to June.

Tokyo's financial leaders are all too well aware of the pain their top firms are feeling. In the past they have been quick to step into the market to sell yen and try to ease the crisis. Not this time.

In June and July the Bank of Japan spent an estimated US$20 billion trying to weaken the yen, which was then trading around 120 to the dollar. But little was achieved.

Now finance officials are warning of more action but there has been no sign of intervention.

"A higher yen at a premature stage is not favorable. We are ready to take decisive measures when appropriate," said Haruhiko Kuroda, vice finance minister.

Many economists believe intervention is now unlikely until the yen climbs to 110 against the dollar.

The yen's rise signals new interest by foreign investors in Tokyo shares and in turn a steady rise in the stock market has kept Japan from intervening again, economists say.

Tokyo's Nikkei stock index has climbed for the past eight trading days, despite the strengthening yen.

"A rise in stock prices is favorable as it is based on hopes for an economic recovery. But the currency rate has to reflect the current economic situation," Japan's Kuroda said.

On Thursday the market index slipped back a little, to close the morning down 185.19 points, or 1.0 percent, at 17,707.07.

"People are a lot more cautious about the U.S. economy now. Japan looks like the big restructuring story," said Commerz Securities' Bevacqua.

Strong growth figures, which showed Japan grew at an 8.1 percent annualized rate in the three months to March, have spurred investors.

"We are clearly experiencing a bottoming and rebound. But there are chronic structural problems still at the macro level," Bevacqua warned.