Globally Imbalanced

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Project 70

It’s sounds like its out of a classic war movie, but it’s another battle on the front lines of the currency war. A strengthening JPY has been the bane of Japanese exporters for years and as the pair hit a 15 year low nearing the dreaded 80 mark, exporters have every reason to be nervous.

But one company is fighting back. Toshiba apparently began preparing last year for the extreme case that the USDJPY would hit 70.00, instituting an analysis of their business processes called “Project 70”. Rather than just sitting back and watching their profit margins eroded by factors completely out of their control, they took action and ended up with billions of Yen in profit thanks to the foresight:

Toshiba made 48 per cent of its products in Japan in the period from April to September 2009 and bought 45 per cent of its components from Japan-based suppliers. By the same period this year, the ratios were down to 44 per cent and 42 per cent respectively.

The change added Y4.2bn to Toshiba’s operating profit in the half to September, or Y700m for each one-yen increase in the Japanese currency’s value against the dollar. That compared with an Y800m loss on each increase last year.

Having spent my past life working with corporate treasuries in managing their FX risk, it was amazing to see how this risk was always treated as something peripheral. You have companies like Nintendo having all their successes in the product realm being wiped out by lack of planning in the currency realm. FX hedging decisions were often just handed off to junior people.

People want to ignore currency risk because it’s not part of the core business, yet in the coming years, as competitive devaluations and inflating our way out of the deep, dark hole of the financial crisis take hold, it’ll be more important than ever for companies to proactively plan their production strategies around currency risk (yes, I know I’m talking my book here as a former currency market maker).

Every multinational company needs their own Project 70.

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Filed under: Corporate FX, Currency War

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About Me

Former emerging markets currency trader in NYC for seven years, turned MBA student at INSEAD living in Singapore.