Market Overview

Japanese Car Makers Rally on Weak Yen; Hyundai and Kia Misstep

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The beleaguered Japanese auto shares are rallying today on the weaker Japanese yen and overstated mileage claims by South Korean rivals Hyundai and Kia.

The rapid decline of the yen against the U.S. dollar this week following Japanese prime minister Noda's decision to call a Lower House election for December 16 is the best news any Japanese car company has had in months. The yen is trading at an 81 handle for the first time since April, which could add a lot to the bottom lines of Toyota (NYSE: TM), Honda (NYSE: HMC) and Nissan (OTC: NSANY).

Japanese car makers had been suffering from a relentlessly strong yen which takes a bite out of reported earnings on cars sold in the United States whether they are made here or imported from Japan. Although the U.S. remains the most important market for the Big Three Japanese car companies, all three have made big commitments to China, where growth had been accelerating until September.

Early in September, a territorial dispute between Japan and China erupted over a group of uninhabited islands in the South China Sea. This resulted in widespread protests against Japanese interests in China and calls for a boycott of Japanese goods. As a result, sales of Japanese brand cars in China plummeted and have yet to recover.

With their main growth market gone, the current round of yen weakness could not have come at a better time for the auto makers. Japanese cars continue to sell well in the U.S. but have been facing tougher competition from South Korean brands Hyundai and Kia.

However, the South Korean companies have been caught inflating their EPA mileage figures and, whether it was done by accident as the companies claim or by design, they have been forced to revise their figures downward and are compensating drivers who purchased their vehicles under false pretenses.

Bloomberg writes, “Just as Honda ramps up sales of a new Accord sedan and prepares a modified Civic small car, Hyundai and its affiliate Kia Motors Corp.are regrouping after admitting to the most extensive overstatement of fuel-economy ratings ever found by the U.S. Environmental Protection Agency.”

“The bill could easily top $100 million,” the The Detroit News reported. “EPA's investigation is ongoing; the agency could seek to impose civil penalties over the misstated claims.”

Hyundai had been taking market share away from the Japanese by offering cars with comparable or better fuel efficiency at lower prices. The company had also poked fun at its Japanese rivals for claiming that their cars got 40 mpg through its “Save the Asterisks” advertising campaign. But, as a result of the EPA audit, the three Hyundai models that did claim to have 40 mpg have been reduced to less than that.

In the meantime, Toyota, Honda and Nissan are rallying off of a long base and, for as long as the yen remains weak against the U.S. dollar, could continue to move higher. Now might be a good time for investors to consider a position in one or a basket of these shares as a way to play both a weaker yen and the missteps of the South Koreans.

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