Japanese exports fell by 45.7% in January from a year ago – the steepest decline since 1957 – as exports to three of Japan’s biggest overseas markets fell by record levels. Exports to the United States fell by 52.9%, exports to Europe declined by 47.4%, and exports to Asia dropped by 46.7%, Japan’s Ministry of Finance reported.

The sharp drop in exports has had a crushing impact on Japan’s trade deficit, which grew for a fourth straight month to a record $9.84 billion (¥952.6 billion). But the impact on the nation’s leading corporations has been even more devastating.&

Many Japanese blue chips, such as Toyota Motor Corp. (ADR: TM) and Sony Corp. (SNE), have been saddled with plummeting profits and forced to reduce capital expenditure and employment.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” Yasuhide Yajima, a senior economist at NLI Research Institute, told The New York Times.

While automakers General Motors Corp. (GM) and Chrysler LLC have been emasculated by rising unemployment and slumping confidence in the United States, Japanese carmakers are faring little better. Japan’s auto exports, which account for 20% of all the country’s exports, plunged 66% from last year.

Toyota, the world’s biggest automaker, said earlier this month that it would likely post a $4.9 billion (450 billion yen) operating loss for the year ending March. The company has never before posted an annual loss.

Toyota said earlier this month that it would cut pay for factory executives and eliminate bonuses for all salaried production unit staff. The company has also created an optional program for assembly workers who wish to leave voluntarily and offer voluntary buyouts to plant workers in North America.

Toyota has slashed global production by 43% last month, the most since 1987.

Meanwhile Sony posted a loss of $19.9 million (17.96 billion yen) for its fiscal third quarter ended Dec. 31, with net profit falling 95%. The company has forecast an annual operating loss of $2.9 billion.

Japan’s gross domestic product (GDP) shrank at an annual 12.7% pace in the fourth quarter of 2008, and the unemployment rate jumped half a point to 4.4% in December.

“My friends tell me that factories in the normally highly industrialized Osaka area have shifted to 15-day-a-month production schedules, and many salary men (Japan’s iconic office superheroes) are being encouraged to seek ‘arubaito‘ – or part-time work – to make ends meet,” said Money Morning Investment Director Keith Fitz-Gerald. “And those are the people who are still fortunate to have jobs.”

Shorting the Yen

In addition a dearth of global demand for its products, Japan has also been plagued by a rising yen, which has made its products more expensive to foreign countries. However, the yen has quickly reversed course with deterioration of Japan’s economy.

The yen has tumbled 6.4% against the dollar this year, according to Bloomberg News. Last year, bolstered by its safe haven status, the currency rose the most of 171 currencies tracked by Bloomberg, climbing 23% versus the dollar and 29% against the euro. The yen has traditionally been viewed as one of the world’s “safe haven” currencies.

“With Japan’s trade data deteriorating sharply now, the Japanese yen is finally following suit,” Mansoor Mohi-Uddin, chief currency strategist at UBS AG (UBS) wrote in a note to clients yesterday (Wednesday). “Japan’s currency potentially has a lot further to slide if investors stop perceiving the yen as a safe haven and trade the currency instead on Japan’s worsening export numbers.”

Bob Parker, who helps oversee $600 billion as chairman of Credit Suisse Asset Management (ADR: CS) in London, told Bloomberg that there’s a “reasonable probability of a breakout” that will drive the yen down 3% to 100 per dollar.

“That’s why shorting the yen may wind up being one of the most fundamentally successful investment choices we can make in today’s mad markets,” said Money Morning’s Fitz-Gerald.

Japan’s Exports are Halved by Crisis, Boosting the Odds for a Drop in the Yen

But the news may have bigger implications for Japan’s entire economy, as the country’s exports continue to take a beating from sagging worldwide demand for its products.

Japanese exports plunged 26.7% in November from a year ago. Shipments to the U.S. slid an unprecedented 34%, Japan’s Finance Ministry said. A strong yen, which makes Japanese goods more expensive, combined with deflated consumer spending, is hammering Japanese exporters.

Toyota will post a $1.7 billion (150 billion yen) loss in the year through March, it said in a statement, scrapping a previous forecast of a $6.6 billion. The last time Toyota posted an operating loss was in the year ended March 1938, spokesman Hideaki Homma told Bloomberg News.

“The environment we’re in is extremely tough,” President Katsuaki Watanabe told reporters in Nagoya. “We’re facing an unprecedented emergency situation. Unfortunately, we can’t see the bottom.”

U.S. auto sales are down 16% this year, led by declines of 28% for Chrysler LLC, 22% for General Motors Corp. (GM) and 19% for Ford Motor Co. (F), Bloomberg News reported. The three U.S. automakers will close about 59 factories over the next month as they struggle to avoid bankruptcy.

“It is difficult to envision any swift recovery from the present damage in the U.S., Toyota’s core market, and we anticipate increasing cuts in overseas local production,” wrote Barclays Capital (BCS) analyst Tsuyoshi Mochimaru in a research note on Dec. 19, according to MarketWatch.

Compounding the demand problem is a surging yen, which erodes overseas profits for Japanese exporters. The yen has gained 25% against the dollar this year.

But Toyota’s problems may just be the tip of the iceberg for Japan’s economy. The November export plunge was the biggest drop on record, as global demand for cars and electronics collapsed.

Earlier this month, Sony Corp. (ADR: SNE) announced it was cutting 8,000 jobs, or about 4% of its worldwide workforce. Sony recently blamed a 72% profit plunge in the third quarter partially on a resurgent yen. Electronics company Sanyo Electric Co. (OTC: SANYY), facing tough market conditions around the globe, agreed Friday to sell itself to rival Panasonic Corp. (PC).

“Japan’s economy has never weaned itself off of the overbearing reliance on exports, and especially to the U.S.,” said Kirby Daley, senior strategist and head of capital introductions at Newedge Group. “Japan did nothing to prepare itself” for the collapse in demand from abroad, he told Bloomberg News.

Like the U.S. Federal Reserve, The Bank of Japan has been hacking away at interest rates in an attempt to stanch the economic bleeding. Japan’s central bank lowered rates to 0.1% on Friday.  But the rate cuts haven’t been enough to kickstart the Japanese economy, as the yen has remained stubbornly strong.

Source: Toyota’s First Operating Loss Since 1938 Spells Trouble for Japanese Economy

The dollar rose against the yen on Monday after the Bank of Japan followed last week’s interest rate cut with a warning that the health of Japan’s economy has deteriorated and is likely to get worse.

But investors’ equally dim view of the U.S. economy hurt the greenback against the euro, which rose broadly in holiday-thinned trade. Doubts about whether a U.S. automaker bailout would steer the economy out of recession also hit the dollar.

Traders said volumes were razor-thin in the lead-Up to the Christmas holidays, aggravating even the slightest moves in the currency markets. Still, many said demand for dollars remained low.

“The dollar view is so opaque at the moment, and the risk reward at this time of year is not worth it unless you really have to trade,” said Maurice Pomery, head of foreign exchange at IDEAglobal in London.

The dollar managed to rise above 90 yen for the first time in nearly a week after BoJ Governor Masaaki Shirakawa said yen strength and a global slowdown may force Japanese exports still lower even after a record plunge in November.

“All Asian exporters are at risk in this global economic slowdown, but Japan is at the top of the list,” said Dustin Reid, senior currency strategist at RBS Global Global Banking & Markets in Chicago. “The stronger yen has been playing havoc for Japanese exporters, and the auto companies in particular are likely to be significantly affected.”

So far this year, Japan’s currency is up nearly 20 percent against the dollar and more than 22 percent against the euro.

Early in New York, the dollar was changing hands at 89.85 yen , up 0.8 percent, after earlier rising to 90.23. The BoJ cut Japanese interest rates last week to near zero.

The euro also rose 1.3 percent to 125.79 yen after earlier hitting a session peak of $1.4123. Sterling fell 0.8 percent to $1.4814 , while the euro rose 1.1 percent to 94.35 pence , near a record high of 95.56 pence touched last week.

A move by China’s central bank to cut lending and deposit rates by 27 basis points — its fifth cut since September — shed more light on the scope of the global slump.

GRIM U.S. OUTLOOK

After coming under steady pressure in December, the dollar rallied on Friday after the Washington announced emergency loans for crippled General Motors and Chrysler.

But while the move averted a crisis for now, traders said uncertainty over the companies’ restructuring plans left many doubting the long-term effect it would have on the economy.

Last week, the Federal Reserve cut benchmark interest rates to near zero, underlining the severity of the economic crisis and undermining support for the dollar.

Investors are also looking for the European Central Bank to cut interest rates, currently at 2.5 percent, in January, though ECB executive board member Lorenzo Bini Smaghi warned about the risks of monetary policy being too lax, according to the Rome newspaper Il Messaggero.

Steven C. Johnson, Reuters 12/22/08

Global shares weakened on Monday and the dollar fell broadly, weighed by signs of a deepening recession in Japan and the euro zone and concerns about the banking sector around the world.

China’s interest rate cut — the fifth move since September — failed to boost stocks as data showed the deepest plunge on record in euro zone industrial new orders and a record annual fall in Japanese exports in November. Ireland’s weekend announcement that it would take stakes in its three main banks for 5.5 billion euros further underlined the global scope of the worst financial crisis in 80 years.

“One thing you can say for sure is that there has been no Christmas rally,” said Philip Isherwood, strategist at Dresdner Kleinwort.

“The macro outlook is savage. And we want earnings season out of the way. We know it’s going to be bad.”

The MSCI world equity index fell 0.15 percent.

The index rallied last week, rising 20 percent since November 21, when it hit the 5-1/2 year low. It is still on track for its first monthly gain in December after six successive months of losses.

“People can’t see where the turnaround is going to come from — the one piece of good news is that most of the bad news has been discounted,” said Justin Urquhart Stewart, investment director at Seven Investment Management.

The FTSEurofirst 300 index of leading European shares fell 1.4 percent, led by falls in banks such as BNP Paribas . Emerging stocks fell 1.6 percent.

U.S. stock futures were pointing to a slightly firmer open on Wall Street.

EURO AND EASING

The euro rose 0.4 percent to $1.4123. It was up over 1 percent against the dollar at one point as investors grew worried about the economic impact of the U.S. car industry’s expected restructuring. The U.S. government moved on Friday to throw its automakers a $17.4 billion lifeline.

The euro’s trade-weighted exchange rate is up more than 7 percent this month.

“Europe will ultimately need some effective easing one way or another. And the tightening we have seen ultimately is likely to add to the downward pressure on European growth and inflation, and the upward pressure on European bonds,” Goldman Sachs said in a note to clients.

Against a basket of major currencies, the greenback ticked lower, on track for its biggest monthly loss since 1985.

Oil prices rose 0.5 percent to $42.59 a barrel after OPEC producers promised to keep to the cartel’s agreement to cut back production.

The March bund futures were up 42 ticks.

Natsuko Waki, Reuters 12/22/08

He was a great fan – he read all my columns and had done well over the years out of taking some of my advice. I glowed with pride. Then came the fall. But, he went on, he had also lost a small fortune as a result of buying into the Japanese market – again on my advice – in 2007.

What did I suggest he did now? I shifted uncomfortably from foot to foot and prayed for the speeches to begin while the editor of a rival publication, irritatingly standing right next to me at the time, tried not to smirk too obviously.

It’s always horrible to feel responsible for other people losing money, but when it comes to Japan I really feel the pain: my own Isa is stuffed with Japan-related investments. So the fact that the Nikkei 225 was one of the world’s worst performing markets last year hasn’t exactly brought forward my retirement date.

So what did I tell him? That I was buying more. Japan is cheap in a way that no other developed markets are. A good 50% of Japanese stocks trade at less than their book value (the accounting value of their assets), for example. Dividend payouts are also rising. They have always been stingy, when they have existed at all, but over the past three years, the dividends offered by the biggest companies have been rising at double-digit rates.

And the economy isn’t doing badly at all. In the fourth quarter of last year, Japan grew at an annualised rate of 3.5% and in the first quarter of this year the numbers are expected to show that it grew at around 2.5%. Given that the best the US can do is 0.6% (and that number is bound to be revised down over the next few months), that looks pretty good.

Japan is currently the world’s fastest growing developed economy and given its links to Asia (twice as many Japanese exports go to Asia than to the US), it is likely to stay so.

Even more interesting is that fact that, after well over a decade of falling prices, Japan appears to have finally banished deflation. Food prices are rising (McDonald’s has eased the price of a Big Mac up from ¥250 to ¥280) as are energy prices.

But these obvious elements aren’t the only things that drove core inflation up to 1.2% year-on-year in March. Strip them out, says Jonathan Allum of broker KBC Financial Products, and inflation is still “mildly positive”. Better still, wages appear to be rising: the average base salary turned positive in November last year.

This is a very big deal. For far too long falling prices have put the Japanese off spending money (why buy something now if it will be cheaper tomorrow?) but if prices are rising – and workers have more money in their pockets – perhaps they will finally start to loosen their grip on their left-over-from-the-1980s Louis Vuitton wallets.

Already, says Christopher Wood of CLSA, Japanese consumers are expecting inflation to be running at 3.1% in 12 months’ time. This should do wonders for corporate pricing power (you can’t put prices up when people are expecting prices to fall but you sure can when they are expecting them to rise anyway) and for profit margins.

The other thing that might work to cheer up the Japanese consumer is the state of the property market.

Those who have placed very heavy bets on the UK property market on the basis that “we are a small island and demand is greater than supply” don’t like anyone to mention Japan. There, the long and totally insane bubble of the 1980s was justified on identical grounds. Then prices fell for 15 agonising years.

The good news – for Japanese homeowners if not for our own buy-to-let investors – is that they aren’t falling any more: residential land prices rose for the first time in 16 years last March.

Still, a lot of this has been true for some time and, as my new banker friend reminded me, it didn’t do us any good last year. Why might it now?

The answer is sentiment. Today most people hate Japan. Jonathan Allum points out that the week leading up to March 14 saw the biggest wave of foreigner selling since October 1987.

This is good news in the sense that the total capitulation of foreign buyers often marks a turning point for Japan. And so it has again. The point is that sentiment is beginning to turn. Right now very few investors have a stake in Japan. Soon they’re all going to want one.

So it’s best to get in before the rush – and the easiest way to do so is via the iShares MSCI Japan ETF (NYSE:EWJ).

Source: Bucking the Trend Could Help You Make It Big in Japan