Japan’s manufacturers are facing threats on two fronts, and prospects for improvement on either are dim. The first front, which is affecting every one of the country’s exports, is the strengthening yen. The second is price erosion on some of the country’s signature products.

Sony Corp. (NYSE: SNE), Panasonic Corp. (NYSE: PC), and Sharp Corp. (OTC: SHCAY) are among the world’s largest manufacturers of TV sets, and TV sets are not exactly flying out retailers’ doors. In mid-August, Sony dropped its forecast for TV sales in 2011 from 27 million to 22 million. Korean rival LG Electronics cut its sales forecast from 50 million sets to 40 million.

In the US, glass maker Corning Inc. (NYSE: GLW) warned early in September that demand from its LCD-making customers was falling and the company lowered its forecast for third quarter sales from an increase in the high single-digits to flat. The company also noted that volume at its joint venture with Samsung Electronics (OTC: SSNLF) was off -30%.

The worse news for the Japanese TV makers is that the cuts in production are accompanied by disappearing margins as the strong yen forces makers either to accept lower margins or to cut back on exports. The yen has traded at or below 80 vs. the dollar since early July, and the currency’s status as a global safe haven has increased since the Swiss put in a peg against the euro.

The steady rise in the dollar vs. the euro has contributed to the yen’s new strength as well. What continues to strengthen the yen is the real yield on both 5- and 7-year US Treasuries, both of which are negative. Japan’s 5-year yield rate is about 0.7%, not great, but better than Uncle Sam’s. As investors seek returns from the safe havens of US dollars and Japanese yen, capital flows into Japan boosting the value of the country’s currency.

Predictions of only a so-so holiday season in the US can’t be doing much to boost Japanese hopes for a recovery in TV sales. Sales prices for flat-panel TVs declined in August, partly as a result of the global economic outlook and partly due to high inventory levels that pushed prices down. There’s little reason to believe that prices will turn higher any time soon.

Paul Ausick

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