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7 Mar 2014
Flash: Corporate flows to remain JPY negative - Nomura
FXStreet (Bali) - As Nomura FX Researchers note, an annual survey of Japanese corporate behaviour showed an improvement in business sentiment in Japan, with Japanese firms expecting higher growth, while they judge the current level of USDJPY remains profitable (average profitable level is 92.2).
Key Quotes
"Stronger growth expectations with JPY at a weaker-than-profitable level should encourage Japanese firms to produce more domestically, but they have accelerated their shift into overseas production over the past two years. Their overseas production ratio increased to 20.6% in FY2012, and they expect the ratio to have risen to 21.6% in FY2013. Japanese investors' appetite to increase foreign operations remains strong, partly suggested by the elevated FDI outflows from Japan (see "Mixed signals from corporate and investor flows", 10 February 2014). This will be JPY negative as FDIs generate some JPY selling flows and trade balances recover more slowly."
"The annual survey asked the reasons for having production sites outside Japan, and 50.8% of firms with overseas production facilities replied that strong local demand is a major reason. This is an increase from the previous survey (45.8%). By contrast, fewer companies cited lower labour costs as an important reason than the previous year (23.1% to 19.1%). While JPY weakness improved production costs in Japan in relative terms, Japanese firms' strong appetite to capture growing demand outside Japan is keeping the overseas production ratio high. In fact, the share of exports to Japan out of total overseas production (reverse import ratio) has been declining since FY2009, suggesting more overseas production is sold outside Japan."
"Japanese firms' strong appetite to increase their overseas production ratio suggests corporate flows are likely to remain JPY negative, via strong FDI outflows and a slow recovery in the trade balance. While Japanese firms' repatriation flows in March are attracting FX market attention for now, we do not expect corporate flows to send USDJPY lower."
Key Quotes
"Stronger growth expectations with JPY at a weaker-than-profitable level should encourage Japanese firms to produce more domestically, but they have accelerated their shift into overseas production over the past two years. Their overseas production ratio increased to 20.6% in FY2012, and they expect the ratio to have risen to 21.6% in FY2013. Japanese investors' appetite to increase foreign operations remains strong, partly suggested by the elevated FDI outflows from Japan (see "Mixed signals from corporate and investor flows", 10 February 2014). This will be JPY negative as FDIs generate some JPY selling flows and trade balances recover more slowly."
"The annual survey asked the reasons for having production sites outside Japan, and 50.8% of firms with overseas production facilities replied that strong local demand is a major reason. This is an increase from the previous survey (45.8%). By contrast, fewer companies cited lower labour costs as an important reason than the previous year (23.1% to 19.1%). While JPY weakness improved production costs in Japan in relative terms, Japanese firms' strong appetite to capture growing demand outside Japan is keeping the overseas production ratio high. In fact, the share of exports to Japan out of total overseas production (reverse import ratio) has been declining since FY2009, suggesting more overseas production is sold outside Japan."
"Japanese firms' strong appetite to increase their overseas production ratio suggests corporate flows are likely to remain JPY negative, via strong FDI outflows and a slow recovery in the trade balance. While Japanese firms' repatriation flows in March are attracting FX market attention for now, we do not expect corporate flows to send USDJPY lower."