By James Simms
It's not a typo: Japan's exporters ought to start thinking about the yuan.
Beijing is expected to let its currency appreciate. It will take several years, but Japan Inc., China's top source for imports, stands to gain.
China imported some $131 billion worth of Japanese goods in 2009—everything from steel used by auto makers to cosmetics and food. Some of this is re-exported to Asia and the West, but nearly 60% of sales of the China-based subsidiaries of Japanese companies remain within China, according to Japanese trade ministry data.
The makers of that 60% will profit as a stronger yuan makes foreign goods more affordable. Already, another factor is boosting this hunger. In China's cities, per-capita gross domestic product is approaching levels at which consumers tend to spend more on imported products, fashionable clothes, and foreign car brands, says Daiwa Capital Markets.
That threshold—the $10,000 mark to be specific—has been crossed in Shanghai. Market-research firm Euromonitor International says the whole country will reach the same point in a decade.
Those likely to benefit? Cosmetic maker Shiseido already holds 5% of China's beauty and personal-care market by revenue. Watchmaker Casio Computer /zigman2/quotes/202492162/delayed JP:6952 +1.08% , meanwhile, holds 20% of its market. Both brands benefit from a perception that they're selling higher quality products than Chinese competitors.
On a different level, factory-equipment maker Fanuc /zigman2/quotes/202054799/delayed JP:6954 +2.81% and steel-producer JFE Holdings /zigman2/quotes/204336633/delayed JP:5411 +3.05% could profit as Chinese companies also find foreign-made machinery and intermediate goods cheaper.
Meanwhile, a rising yuan could make Japanese exporters more competitive with regional counterparts. The central banks of Asia's exporters have stepped into currency markets lately to keep the likes of the South Korean won and New Taiwan dollar from rising sharply while the yuan remains pegged.
A rising Chinese currency, then, gives these economies room to ease off the intervention. But the yen may not follow suit. Tokyo hasn't intervened, and Japan's interest rates will remain low even as those elsewhere in Asia rise, keeping the yen from gaining much ground relative to neighboring currencies.
This won't benefit all. Fast Retailing /zigman2/quotes/200663563/delayed JP:9983 +4.39% 's Uniqlo brand, which relies on low-cost Chinese labor to produce its chic but cheap clothing, and Nintendo, which outsources all production to China, could see margins squeezed.
Admittedly, much remains unknown about when and how quickly China is going to start pushing its currency higher. But for once, a rising currency could be good news in Japan.
Write to James Simms at email@example.com