Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Yen Is Rewiring Asian Auto Supply Chains
Transcript
- Lucas: The yen is at 159 to the dollar as of last week. And if you're a Japanese auto executive, that number is rewriting your entire supply chain math. Luna: We've talked about the yen carry trade unraveling. But for the actual business of building cars, what does a weak yen really change? Lucas: It changes basically everything. Japanese automakers have spent two decades moving production overseas—to the US, to Mexico, to Southeast Asia—partly to hedge against a strong yen. But now the yen is cheap. And suddenly, making parts in Japan and shipping them abroad looks a lot more profitable than building a whole factory in Tennessee. Luna: So they're bringing production back home? Lucas: Not exactly a wholesale reshoring. But Toyota just announced it's consolidating its North American engine production at a plant in Alabama—and it's sourcing more of the components from Japan. The logic is simple: when the yen buys 30% less than it did three years ago, a Japanese-made engine is suddenly a lot cheaper in dollar terms. Lucas: Honda is doing something similar. They've increased the proportion of yen-denominated procurement for their US plants. They're basically reducing their currency risk by buying more from Japan. Luna: That feels like a short-term fix. If the yen strengthens again, they'd be stuck with a more expensive supply chain. Lucas: Exactly, and that's the tension. But right now, nobody expects the yen to strengthen significantly anytime soon. The Bank of Japan is still keeping rates near zero while the Fed is at five-plus. The carry trade may be disrupted, but the fundamental rate differential hasn't changed. Luna: Speaking of rates—before we go deeper, I want to mention something. This show stays ad-free and independent because of listeners who find it useful. If today's conversation moves your thinking forward a little, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, that's right. No pressure, no perks—just a way to keep this going. And honestly, it makes a difference. Lucas: So back to the supply chain shift. The other side of this coin is what's happening in Korea. The Korea ETF, ticker e w y, is up 8% in the last five days alone. That's a massive move for a country fund. Luna: And that's not just because of the yen. What's driving that? Lucas: Part of it is that Korean automakers like Hyundai and Kia are direct competitors to Japanese brands. When the yen weakens, Japanese exports get cheaper. But Korean exports are priced in won, which hasn't weakened nearly as much. So Hyundai actually loses competitiveness when the yen drops—unless they adjust. Luna: So the ETF surge is about something else. Maybe the broader trade realignment? Lucas: I think it's more about capital flows. With the yen carry trade collapsing, global investors are rotating out of yen-funded positions and into other Asian markets. Korea is a liquid, high-beta play. And if you believe the yen stays weak, Korean exporters actually benefit from a different dynamic: they can source more components from Japan cheaply. Luna: So it's not a straight win-lose. The supply chains are intertwined. Lucas: Exactly. A Hyundai has Japanese sensors and steel in it. A Toyota might use Korean semiconductors. The border between 'Japanese' and 'Korean' cars is blurry. But the currency moves create winners and losers even within the same factory. Luna: Let's talk about the yen carry trade disruption again. We covered that in episode 20, but how does it directly affect trade finance? Lucas: Well, for years, Japanese banks lent yen at near-zero rates to finance trade across Asia—a shipper in Singapore could borrow yen, pay for goods in dollars, and pocket the interest differential. That trade is now much less attractive. The volatility in yen has made those loans riskier, and banks are pulling back. Luna: So exporters who relied on cheap yen financing are now scrambling for alternatives. Lucas: Right. And that's where you see Chinese banks stepping in with yuan-denominated trade credit. Or Singapore's DBS offering dollar loans. The whole plumbing of Asian trade finance is shifting. It's not just about cars—it's about how every container ship gets paid for. Luna: One number that stood out to me: the trade-weighted dollar index is at 118.9. That's down slightly from 119, but still historically high. So the dollar is strong, the yen is weak—what does that mean for American consumers buying Japanese cars? Lucas: In theory, a weaker yen should make Japanese cars cheaper in the US. But in practice, automakers don't always pass through the full currency benefit. They might pocket the margin, or reinvest it in R&D. Toyota's operating profit margin last quarter was over 12%—that's partly thanks to the yen. Luna: So the savings don't necessarily show up at the dealership. Lucas: Not directly. But it does mean Japanese automakers can afford to hold the line on prices while still investing heavily in electric vehicles. And that's a competitive advantage over, say, Stellantis or Ford, who are dealing with higher domestic costs. Luna: There's a geopolitical angle too. The US has been pressuring Japan to reduce its trade surplus. If Toyota starts shipping more finished cars from Japan instead of building them in the US, that surplus could widen. Lucas: Yeah, that's the irony. A weak yen helps Japan's trade balance in the short run, but it might provoke more protectionist measures. We've already seen the Commerce Department take a harder line on auto imports. If the yen stays at 160, you could see tariffs or quotas aimed specifically at Japanese vehicles. Luna: And that would hurt the Japanese automakers who are actually trying to localize production. Lucas: Precisely. Toyota's Alabama engine plant is a hedge against that risk. They're showing they're a domestic manufacturer, not just an exporter. But the currency math still points to more concentration of production in Japan. Luna: Let's zoom out. Is this a temporary adjustment or a structural shift? Lucas: I'd argue it's structural—at least for the next few years. The Bank of Japan has signaled no rush to normalize rates. The Fed is likely to hold steady or cut slowly. So the rate differential persists. And that means the yen stays cheap. Japanese companies will keep optimizing for that. Luna: But what if the yen suddenly strengthens on a geopolitical shock? Say, a crisis that drives safe-haven buying into yen? Lucas: That's always possible. But remember, Japan is a net creditor nation with a huge current account surplus. In a true crisis, the yen usually does rally. But the current environment—where the US economy is still strong and interest rates are attractive—doesn't scream 'flight to yen.' So I think the risk is asymmetric: more downside for the yen than upside. Luna: One more data point: China's yuan is at 6.77 per dollar. That's relatively stable. How does that fit into the Asian auto supply chain picture? Lucas: China is both a huge market and a huge producer. Japanese automakers have massive joint ventures in China. But the yuan's stability against the dollar means that Chinese-made components aren't gaining a cost advantage relative to Japanese ones. If anything, the weak yen makes Japan a more attractive sourcing base than China for certain high-value parts. Luna: So the yen's weakness is pulling supply chains away from China and back to Japan? Lucas: In some cases, yes. But China still dominates in batteries and electronics. So it's not a simple substitution. It's more like a rebalancing. The cost gap between Japanese and Chinese production has narrowed significantly because of the yen. Luna: Let's bring it back to the listener who might be in procurement or supply chain management. What's the one takeaway? Lucas: I'd say: if you're sourcing from Asia, don't treat the yen as a one-off variable. It's reshaping the entire cost structure of the region. Re-bid your Japanese suppliers. And watch the Bank of Japan's every move—because when they finally do hike, the whole calculus flips again. Luna: And for investors? Lucas: Look at the automakers' currency hedging disclosures. Toyota hedges years out. Honda hedges less. That difference matters. Also, the Korea ETF rally might have more room if the yen stays weak, but it's a crowded trade now. Luna: Good note to end on. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.