Published October 30, 2008

EYE ON THE ECONOMY
Singapore firms are zen over the yen

Limited exposure in Japanese market; but car importers face higher costs

By JAMIE LEE AND TEH SHI NING
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(SINGAPORE) Volatility in the forex market has hit several Singapore firms recently, with bellwethers such as SingTel and CapitaLand likely to be hurt by the slide in the Australian dollar.

Recalculating: Dealers expect Japanese car demand to fall 10-20% with the higher yen, but some say the surge does not signal any long-term currency movement trend

The latest currency to bring mayhem to the markets is the Japanese yen, which scored a 13-year high of 90.87 yen to the US dollar last week amid the unwinding of yen 'carry trades'.

In a carry trade, traders exploit Japan's cheap credit by borrowing the low- yielding yen to pay for higher-yield investments in other currencies.

But the latest surge in the yen is likely to have a smaller impact on Singapore businesses, given the limited exposure that companies here have in the Japanese market.

The big victims are the Japanese car importers, who say they are reeling from higher import costs.

'The effect is snowballing and those importing from Japan have definitely been affected,' said Vincent Ng, product manager at Kah Motors, which imports Honda vehicles.

As imports are taxed on their value in yen, every 100 yen spent now costs around 65 cents more post-tax, he said. 'In the short term, all importers of Japanese goods will definitely be forced to reckon (with) higher costs.'

Champion Motors, which imports Suzuki vehicles, also reported a significant impact but said it is reviewing a price hike.

'It depends on how drastic currency fluctuations continue to be,' said general manager Victor Tan. 'It's only in recent weeks that we've seen this jump in the yen, so we'll have to watch the next few weeks.'

Demand for Japanese cars could fall between 10 and 20 per cent, said Speedo Motoring's company director Richard Lim, adding that the company has been 'affected tremendously' and has adjusted prices on new orders.

Cushioning the imminent spike in Japanese car prices will be the downward trend in COE prices, added Kah Motors' Mr Ng, but he expects Japanese cars to be priced higher, while Continental cars trading in euros will look more attractive.

It's not all bad news, though; Ascott Residence Trust (Ascott Reit) said it expects to benefit from the rise in yen as it collects rental income from its residential units in Japan in yen.

The firm has 143 serviced residence units in Somerset Roppongi and Somerset Azabu East, as well as 509 rental housing apartment units in Tokyo.

'The rising yen will be positive for Ascott Reit's operations, especially since the rental housing portfolio in Japan enjoys very high gross profit margins,' said Chong Kee Hiong, chief executive officer of Ascott Residence Trust Management.

Japan's contribution to the group's total revenue was 8.6 per cent for the first nine months of 2008, he added.

Conglomerate Fraser and Neave said the yen movement will not have a significant impact on the group because its purchases from Japan are negligible. It started operating its first service apartment building in Tokyo this year.

Although the rise in the yen has little macro impact, CIMB-GK economist Song Seng Wun said the current slowdown in consumption will make it tough for companies to pass off costs to customers.

'Demand has fallen off the cliff, so it's up to the companies to smooth out the volatility of currencies and the impact on their bottom line - whether they can take the hit or pass it on to consumers,' said Mr Song. 'It's difficult for them, though, given the pullback in global consumption.'

The surge in the yen does not indicate any long-term currency movement trend, said David Cohen, director of Asian Economic Forecasting at Action Economics.

'My feeling is not to make too much of it, because we've seen so many short-term swings in recent months. Attempts to see the long-term trends - especially with many changes and announcements expected this week - would be premature,' Mr Cohen said.