Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Yen's Slide Is Reshaping Asian Auto Supply Chains
Transcript
- Lucas: The yen is trading at 159 to the dollar as of this week, which is basically where it's been hovering for months now. But the story that's not getting enough attention is how this persistent weakness is quietly rewiring auto supply chains across Asia. Luna: I've been watching the Korean and Japanese auto stocks diverge. The Korea ETF, EWY, is up over 8% in the last five days. Meanwhile, Japanese automakers are getting hammered. Lucas: Exactly. Toyota reported a record operating profit of 5.3 trillion yen for fiscal 2025 — that's about 35 billion dollars at current exchange rates. But the market's reaction was lukewarm because the yen's slide is cutting both ways. Luna: How so? I'd think a weak yen would be great for exporters. Cheaper exports, more competitive pricing. Lucas: That's the classic view, and it's partly true — Toyota's overseas earnings, when repatriated, are worth more in yen. But the problem is on the cost side. Japanese automakers import a huge amount of raw materials and components — steel, aluminum, lithium for batteries — and those are priced in dollars. Lucas: So while the yen falls, their input costs in yen terms are soaring. Toyota's cost of goods sold rose about 8% year-over-year in their latest quarter, and a big chunk of that is currency-related. Luna: Right, so the net effect isn't as clean as the textbook suggests. And then you have Hyundai and Kia, based in Korea, where the won has depreciated less — about 6% against the dollar over the past year versus the yen's 12%. Lucas: That relative strength is giving Korean automakers an edge. They're not seeing the same input cost inflation, and they're aggressively expanding in Southeast Asia, which has traditionally been Japan's backyard. Thailand is the key battleground. Luna: Thailand has been the Detroit of Southeast Asia for decades — essentially built on Japanese auto investment. Is that shifting? Lucas: It is. Thailand's Board of Investment reported a 40% jump in applications from Korean auto parts suppliers in the first quarter of 2026. Hyundai just announced a new EV plant in Rayong province, right next to Toyota's existing facility. Luna: That's a direct challenge. And it's not just about assembly — it's about the whole supplier ecosystem, right? Japanese parts makers like Denso and Aisin Seiki have had a lock on that network for decades. Lucas: Exactly. But when your currency is structurally weak, your ability to invest overseas gets constrained. Japanese suppliers are now facing higher costs for any dollar-denominated capital expenditure. Meanwhile, Korean suppliers, with a more stable currency, can offer better pricing to Thai assemblers. Luna: So the yen's slide is essentially acting as a slow-motion disincentive for Japanese companies to invest in their own supply chains abroad. And that opens the door for competitors. Lucas: That's the structural shift I think a lot of trade analysts are missing. The yen has been weak for over three years now, and it's not just a cyclical thing. Japan's interest rates are still near zero, the Bank of Japan is dovish, and the carry trade — borrowing yen to buy higher-yielding assets — is still massive. Luna: We did an episode on the yen carry trade a few weeks ago. It's still alive, but the returns have compressed. The spread between yen and dollar rates is narrower than it was in 2024. Lucas: Right. But the point is, the yen isn't going to strengthen dramatically anytime soon. So Japanese manufacturers have to adapt. Some are shifting production back to Japan to reduce dollar exposure, but that's expensive. Others are trying to localize more sourcing in the countries where they sell — like Toyota building a battery plant in North Carolina. Luna: That's a longer-term hedge. But in the short term, the pain is real. Look at the stock performance: Toyota shares are down about 5% year-to-date in yen terms, while Hyundai Motor is up 15% in won terms. Lucas: And the ETF data you mentioned earlier tells the same story. The Korea ETF, EWY, jumped 8.4% in the last five days. The Taiwan ETF, EWT, is up 4.9%. But the China ETF, FXI, is down 1.1% — partly because China's yuan is also under pressure, but their auto sector is less export-oriented. Luna: So if I'm a supply chain manager at a Japanese auto parts company, what do I do? Just ride out the yen weakness? Lucas: You can't just ride it out. The smartest move is to increase the share of local currency procurement in your key markets. That means buying more from suppliers in Thailand, Indonesia, and India rather than importing from Japan. It's a long-term restructuring that's already underway. Luna: And that has ripple effects for trade finance. Letters of credit and payment terms have to be renegotiated when you shift from yen-denominated to baht or rupiah transactions. Lucas: Exactly. Trade finance is becoming more complex and more regional. We're seeing a rise in local currency settlement agreements between Japanese and Southeast Asian banks. The Bangkok Bank and Mizuho just launched a baht-yen direct settlement facility in April. Luna: If today was actually useful to you — and I know a lot of our listeners work in supply chain or trade finance — this kind of analysis is exactly what we try to bring each day. And the way these episodes stay ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does help keep the conversation going without any sponsor interruptions. So if you've gotten value from today's episode, consider contributing. Luna: Alright, back to the supply chain shift. So we've got Japanese suppliers localizing in Southeast Asia, Korean competitors moving in — what does this mean for the global auto trade balance? Lucas: It means Japan's auto trade surplus is likely to shrink further. Japan's trade balance for passenger cars was already down 15% year-over-year in April, according to Ministry of Finance data. Meanwhile, Korea's auto exports to Southeast Asia rose 22% in the same period. Luna: And this isn't just a Japan-Korea story. Chinese automakers like BYD are also expanding aggressively in Southeast Asia, though they face higher tariffs in some markets. Lucas: Right. BYD just opened a factory in Thailand last year, and they're targeting 150,000 EVs annually. So you have three major auto powers — Japan, Korea, China — all vying for dominance in a region that's traditionally been Japan's stronghold. Luna: And the yen's weakness is the wild card that tilts the playing field. If the yen stays weak, Japan's ability to invest and compete in Southeast Asia will keep eroding. Lucas: There's also a financial angle here. Japanese companies are sitting on huge cash piles in yen, but when they look at dollar-denominated M&A opportunities, their purchasing power has shrunk. Toyota's cash and equivalents are about 6 trillion yen — that's roughly 38 billion dollars at current rates. A year ago, it would have been worth over 42 billion. Luna: So even big companies feel the pinch. What about the broader trade finance ecosystem? Are we seeing a shift in how banks handle yen-denominated trade? Lucas: Definitely. The yen's role as a trade settlement currency is declining. According to SWIFT data, the yen's share in global trade finance dropped from 3.4% to 2.8% over the past year. The dollar and the euro have gained, but also the Chinese yuan — which is interesting given the yuan is also under pressure. Luna: The yuan is at 6.79 per dollar as of last week. That's relatively stable compared to the yen, but China's deliberate devaluation over the past year has made yuan-denominated trade more attractive. Lucas: Exactly. So you have two weak Asian currencies, but the yuan is being managed to support exports, while the yen is being driven by monetary policy divergence. The result is a realignment of trade flows and financing patterns. Luna: Let's zoom out. For a listener who's not in the auto industry, what's the one big takeaway from this episode? Lucas: The one big takeaway: currency trends that persist for years don't just affect trade balances — they reshape the physical footprint of supply chains. The yen's three-year slide is forcing Japanese manufacturers to make long-term decisions about where to build, where to buy, and how to finance it. Those decisions will determine the geography of Asian auto manufacturing for the next decade. Luna: And for anyone working in trade finance or supply chain management, it means you need to think in multi-currency scenarios, not just dollar-centric ones. Lucas: Exactly. The next few quarters will tell us whether Japan's auto giants can adapt quickly enough, or whether the yen's slide will permanently cede ground to Korean and Chinese rivals.