The US dollar took a fast dive on May 3, with Japanese yen reaching an 18-month high at 105.55, strengthening by 12 percent against the dollar since the start of 2016. The question around the world is how far the Japanese currency will go? For the Pakistani auto industry, future earnings hang in the balance.
Auto assemblers are highly sensitive to exchange rate fluctuations given majority of their raw material is dependent on imports from abroad, 57 percent of which comes from Japan. In FY13, Pakistani auto industry enjoyed soaring margins, as yen fell against dollar and its effects trickled down to rupee. Even though car sales alone have increased by 35 percent between July-March 2016, in the past, margins have increased despite a fall in sales owing to yen weakening.
This column last year talked about how rising car sales were not across the board and mainly credited to Toyota Corolla and Suzuki Bolan. However, major shake-ups in the dollar-yen parity do impact Pakistani auto industry alone and is felt around the world. The same concern is circling the much larger auto sector in India.
There isn't a consensus amongst local analysts here as to the impact of the rising yen on forecasted margins for the next three years. KASB Securities predicts potential weakness in JPY likely to be witnessed in the medium term while analysts at Foundation Securities believe this currency trend could be an emerging threat. There is a definite precedence for concern: continued surge would exert pressure on earnings.
Japanese PM said last month that volatility in the markets and disorderly moves hurt the economy and they would avoid arbitrary intervention in currency markets. However, it might be inevitable that some measures are taken to stabilize the surge. Global analysts believe that if Central Bank Japan announces stimulus measures, the pressure on Yen may be released in the mid-term but until such a roll-out, Japan's currency will continue to strengthen and not just in the short-term.
Auto companies here at home should hold on tight.
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