This one event captures it all. In July, Honda Motor (HMC) will open its first new car plant in Japan since 1964.
For decades, Japanese carmakers have been moving production out of Japan as the strong yen raised domestic costs and killed profits. And for years the stock market has punished those companies that only grudgingly joined the exodus.
But now that a weak yen is official government policy, it's the turn of those laggards to be stock market darlings. For example, in the last year the Tokyo traded shares of Honda Motor (7267.JP in Tokyo) were up 15.4% as of March 4. Shares of Mazda Motor (7261.JP in Tokyo), on the other hand, were up 118.9%. The difference? Honda makes 75% of its vehicles outside of Japan. Mazda makes 71% of its vehicles in Japan. Sure, Honda will get the benefit of a weak yen when it translates revenue from stronger Thai baht or Mexican pesos or U.S. dollars into weaker yen. But Mazda will reap a far bigger cost advantage from a weak yen on all those cars it makes in Japan.
The pecking order in Japanese auto stocks was turned upside down with the Dec. 16 election of Shinzo Abe as Japan's new prime minister. Abe ran on an explicit promise to revive the Japanese economy by weakening the yen in order to expand Japanese exports of TVs, machine tools, computer chips and cars. The yen is down 15% against the U.S. dollar since November. With the pick of Haruhiko Kuroda to take over as the new governor of the Bank of Japan in March, the financial markets are getting a true believer in the power of a weak yen and one convinced that Japan has to take drastic action to fend off long-term decline to second-tier economic status. (Japan is now in the midst of its fifth recession in 15 years.)
The winners in the weak yen rally are by no means the cream of the Japanese auto industry. Mazda has been disorganized and slow off the block to introduce new models. Fuji Heavy Industry, the maker of Subaru, hasn't exactly pushed the envelope on new models or new auto technology. Yet the stocks of those companies have soared in the weak yen rally as their vices have turned into virtues. Fuji Heavy Industries (7260.JP in Tokyo) was up 128.6% for the last 12 months as of March 4. That's even better than Mazda's 118.9% gain, but then Fuji Heavy still has 75% of its vehicle production in Japan to Mazda's 71%.
If you can trade in Tokyo, my pick for the new auto pecking order is Mazda. On Feb. 6 the company announced that it expected earnings to double for the 2013 fiscal year that ends on March 31. In forecasting earnings, the company gave full credit to a weaker yen, but Mazda still performed its calculations at an exchange rate of 81 yen to the U.S. dollar. That's a weaker yen than the 79 yen to the dollar that the company used in its last forecast, but there's still plenty of room to the upside for fiscal 2014. The Japanese yen closed at a much weaker 93.28 to the dollar on March 4.
If you can't trade in Tokyo, my pick would be the New York traded ADRs of Toyota Motor (TM) While expanding global production, Toyota has stubbornly refused to close plants very quickly in Japan. As of the end of 2011, 40% of Toyota's global production capacity was still in Japan. Many of these Japanese plants have been running well below capacity. Now the weak yen makes them a potentially profitable resource rather than a drag on earnings. Toyota hasn't soared as high as Mazda or Fuji Heavy in the weak yen rally, but it has easily outgained more globally-focused Honda. Shares of Toyota were up 45.7% for the last 12 months as of March 4.