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Stocks

Currency woes hit Japan equities exposed to emerging markets

TOKYO -- Japanese companies with heavy presences in emerging markets continued to be sold Tuesday in the Tokyo stock market out of concerns that weaker local currencies could shrink those companies' yen-denominated earnings down the road.

Suzuki Motor, which is strong in India, closed down 3% on that day, marking the third straight losing session. Auto components supplier Toyota Boshoku finished down 1% despite healthy sales in Asian countries. Kansai Paint turned in a record net profit for the April-September half, yet the share price dipped 2% due to its automotive coatings business' exposure in India.

These shares are bucking the trend of the Nikkei Stock Average, which briefly topped the 17,700-point mark to reach highs not seen in roughly nine months.

The divergence became evident after it became clear that Donald Trump had won the race to the White House. Instant noodle maker Toyo Suisan Kaisha commands a strong presence in Mexico. Its share price has dropped nearly 6% since Nov. 8, the date of the U.S. election. Unicharm, whose diapers have been selling well in Asia, has seen its share price fall 2% over the same period.

Emerging currencies have depreciated since the election of Trump, who has pledged an "America First" stance under his presidency. Many believe that he will move toward an economic stimulus package that includes massive infrastructure investments. That has led to long-term Treasury yields rising to roughly 2.3%, a level not seen in 11 months. Consequently, funds are being redirected from emerging nations to the dollar.

If the softening currencies end up decelerating local economies, "earnings at Japanese companies may diminish in the future," said Makoto Kikuchi, representative director of Myojo Asset Management.

Many enterprises are already being impacted. Canned coffee maker DyDo Drinco bought out a Turkish beverage company this past February. The company's assumed exchange rate for the Turkish lira in the current fiscal year is 37 yen, but the actual current rate is around 33 yen, roughly 4 yen weaker than DyDo anticipated. Indonesia accounts for about 20% of sales at cosmetics manufacturer Mandom. The rupiah has weakened against the yen more than the company estimated. DyDo and Mandom will both see their yen-converted earnings diminish if those local currencies remain weak.

Fears that developing economies will stagnate could threaten to weigh down on the Japanese stock market as a whole. Persistent expectations that the U.S. will raise interest rates in December are fueling those concerns.

"If emerging financial markets become choppy after a U.S. rate hike, it will put the brakes on the upward trend of Japanese equities," said Takashi Oba, head of the Japanese equities strategy group at Okasan Securities.

If Trump engages in defensive trade actions like stepped-up tariffs, "emerging nations will not be able to benefit from a U.S. economic recovery," warned Toru Nishihama, chief economist at the Dai-ichi Life Research Institute.

(Nikkei)

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