The yen depreciates. Against the dollar, bien sur. But especially against the euro and other European currencies. Guess what happens?
Japanese exports to Europe rose by nearly 18% (y/y) in May.
No doubt some will argue that the ongoing rise in Japan's trade surplus (at a time when oil is expensive and the US economy has slowed) has no more to do with the weakness of the yen than the ongoing rise in China's trade surplus has to do with the RMB's weakness.
I don't buy it. A forthcoming Marquez/ Schindler study (hat tip, Menzie Chinn) suggests that a 10% appreciation in the RMB (in real terms) would reduce China's trade surplus by between $65-70b (around 2% of China's GDP).
And yesterday's Wall Street Journal illustrated just the yen/ dollar influences trade flows.
Toyota sells a lot of cars in the US. It has to decide whether or not to make those cars in the US, in Japan or somewhere else. Over the past few years, the ratio between Toyota's US sales and its US production has fallen, as Toyota's US production hasn't increased as rapidly as its US sales.
Toyota has plants in the US as a hedge against yen strength -- to be sure. But also as a hedge against a return of the Japan-bashing of the 1980s. The more plants Toyota has in the US, the more votes Toyota has in Congress. But at some point, the financial cost of "political" hedging gets to be too high. Toyota seems to have reached that point.
So long as Toyota makes a lot more money building cars in Japan and shipping them to the US than it makes building cars in the US, it has a strong financial incentive to invest in more Japanese capacity -- not more American capacity. Norihiko Shirouzu in yesterday's Wall Street Journal:
Top Toyota executives are concerned that the car maker may have built too many U.S. factories, in part to build political support by providing new jobs in lots of places. And although Toyota's U.S. sales continue to grow, these executives worry about an uncertain outlook.
At the same time, a cheap yen is making it advantageous for Toyota to increase manufacturing capacity and export cars from Japan. "It's much, much more profitable to produce cars in Japan and ship them all to the U.S. right now, if it wasn't for the political problems that might cause," says a senior executive and management-board member. Toyota has increased shipments to the U.S. of Japanese-made vehicles from 762,000 in 2004 to 1.27 million last year. (Emphasis added)
Guess what. That is what it seems to be doing. Yuka Hayashi in the Journal earlier this month:
Toyota Motor Corp. and Honda Motor Co. both sell more cars in the U.S. than in Japan, but Toyota has invested three times as much in Japan as in North America over the past three years. Honda is building its first auto factory in Japan in nearly three decades.
Decisions about where manufacturing capacity to supply the US (and for that matter global) markets is located now will shape trade outcomes for the years to come. Remember, a big reason why the trade deficit fell in the 1980s was that Japanese -- and to a lesser extent German -- automobile manufactures started shifting production to the US. Right now, the opposite is happening. Japanese producers of hybrids simply aren't rushing to build US plants.
That matters. Japanese exports to the US haven't been growing fast recently (they are actually down in volume terms, according to Bloomberg), thanks to the sluggish US economy. But if the US recovers and Japanese firms opt to supply the US market from Japan, watch out.
UPDATE: Movie Guy notes in the comments that Toyota's US production is growing. Moreover, Toyota has already announced a series of additional investment, so its US capacity can reasonably be expected to continue to increase. Some of that new capacity may cut into the number of cars Toyota makes in Japan for the US market -- remember, Toyota's exports to the US have increased over the past few years, as the growth in its US production hasn't kept pace with the growth in its US shares. And while Toyota no doubt will continue with its existing investment plans, the Wall Street Journal's reporting suggests that Toyota is starting to reevaluate how much more to invest in the US, given the cost advantage (see the quote above) now associated with producing in Japan.