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Strong Yen Helps to Fuel Germany’s Export Boom

Jack Ewing |The New York Times
Friday, 3 Sep 2010 | 4:33 AM ET

There was a touch of gloating in the most recent earnings report issued by Kuka, a company based in the Bavarian city of Augsburg whose orange industrial robots are a common site on auto assembly lines around the world.

Kuka said last month that its sales had more than bounced back to levels predating the financial crisis.

By contrast, sales at its Japanese rivals were still a third below where they had stood in early 2008, before the global downturn slammed the machinery industry.

A surge in orders from European carmakers has helped Kuka’s rebound.

But it also does not hurt that the euro has plunged compared with the yen, which has given Kuka a price advantage against Japanese competitors that it did not have a year ago.

“Price is not the sole criteria, but it’s an important criteria,” Kuka’s chief executive, Till Reuter, said in an interview. “The weaker euro is to our advantage.”

European companies tend to focus on the dollar exchange rate , because the United States currency is the most important for world trade.

But the yen’s recent strengthening is playing a role in Germany’s export boom as well. The euro has fallen 19 percent against the yen in the last year, nearly double the decline against the dollar.

Over all, the euro is down more than 36 percent against the yen since August 2008.

A stronger yen is good news for German machinery and auto companies whose main competitors often are based in Japan. And it is, of course, bad news in Japan, where the strong currency has become a political issue.

The rivalry between the two countries is particularly intense in China. It is the fastest-growing market for many German companies, but proximity gives Japanese exporters an edge.

China was the destination for 5 percent of German auto exports last year, up from 0.6 percent in 2000. And 9.1 percent of German machinery exports went to China, up from 2.7 percent a decade ago, according to the Ifo Institute, a research organization in Munich.

“Japanese manufacturers are all over the place, and they are usually the toughest competitors,” said Oliver Wack, a China specialist at the German Engineering Federation, an industry group.

In fact, German companies gained ground in China last year, increasing their share of imports to 22.9 percent from 20.6 percent, while Japan’s share of Chinese imports slipped to 24.1 percent from 27 percent, according to the engineering federation.

Because the Chinese currency moves in lockstep with the dollar, the yen is rising against the renminbi, even as the euro has grown cheaper.

But economists and company executives caution that there are many other reasons for Germany’s gains.

For example, Germany benefited from China’s heavy investment in infrastructure like power plants, which favored companies like Siemens.

And the initial cost, in euros or yen, is often a secondary consideration in markets for specialized factory machines or heavy equipment, where both Japanese and German companies are strong.

Customers scrutinize factors like energy efficiency, which may be a more important cost factor over the long term. But few German companies are complaining about the strong yen.

“If Japan has a stronger currency, there is no question that helps the German companies,” said Steffen Elstner, who specializes in exports at the Ifo Institute.

The benefit is small but significant, said Rolf Schneider, head of macroeconomic research at the German insurer Allianz. He calculates that the dollar’s rise against the euro has added three or four percentage points to German exports, while the yen’s rise has added no more than one percentage point.

But “one percent is still relatively high,” Mr. Schneider said. “For companies that compete directly with Japanese companies, it plays a decisive role.”

The weak yen of a few years ago was a product of Japan’s extremely low interest rates, which made Japanese bonds and other assets less attractive for international investors.

But when the financial crisis hit, the European Central Bank also cut its benchmark interest rate, to a record low of 1 percent, which meant that the interest rate that investors could earn on euros was not much better than the return for yen.

That and shaky growth in much of the euro area meant there was less incentive for investors to put their money into Europe as opposed to Japan.

“Now that interest rates are low worldwide, this advantage is gone,” said Ralph Wiechers, chief economist of the German Engineering Federation.

German industry representatives tend to play down the importance of exchange rates, preferring to emphasize other reasons their strategies and products are superior to those of competitors.

A spokesman for the carmaker Volkswagen, who said he could not be quoted by name because of company policy, said the company had been taking market share from Toyota because of the quality of Volkswagens, not because of a shift in the yen.

ABB, a company based in Zurich whose products include industrial robots made in Germany and other locations, said it was not noticing any yen effect.

“At this point we don’t see an overall change in the competitive landscape because of the strong yen,” Michel Demaré, the chief financial officer at ABB, said in an e-mail.

Many multinational companies now produce their products all over the world, in part to protect themselves from currency swings. Kuka produces machinery in Shanghai as well as in Germany and in Hungary, and it buys parts from Japan.

Liebherr, a German company that makes construction equipment, competes directly with Tadano of Japan in the mobile crane business. But, since Tadano manufactures mobile cranes at a subsidiary in Germany, the strong yen does not give Liebherr any advantage.

Still, in Japan the yen has become a sensitive issue as the currency fluctuates around a 15-year high. In a government survey of 102 exporters, released last week, more than 60 percent said that they would see profits fall because of the strong yen.

Ichiro Ozawa, who is challenging Prime Minister Naoto Kan to be head of the Democratic Party of Japan, said Thursday that action was needed to weaken the yen, Reuters reported.

It is difficult for countries to do much about currency levels, though. Central banks can sell large amounts of their own currency, but the effect is usually temporary.

And the Bank of Japan could probably not count on coordinated action from the European Central Bank and the United States Federal Reserve, which have no interest in strengthening their own currencies.

At best, interventions slow down currency movements and give companies more time to adjust. While acknowledging the difficulties, Mr. Ozawa said that “the yen’s rise has come to a level where we will need to act.”

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