The high yen "endaka" drives higher profitability for medical device companies in Japan

November 2011

Although the Japanese medical device and equipment market is experiencing relatively slow growth on a yen basis, the recent appreciation of the yen vs. the dollar has resulted in significant increases in sales and profitability for companies seeking dollar denominated earnings.

According to OANDA, since mid-January 2007, the JPY / USD exchange rate has dropped from 121 JPY per USD in January 2007 to 77 JPY today - an increase in the yen vs. the dollar of 57%. As a result, all things held equal, on a USD-basis foreign manufacturers of medical devices and equipment have seen a dramatic increase in the sales and profitability of their Japanese businesses.

JPY / USD Exchange Rate History
(Jan. 2007 - Nov. 2011)

Source: OANDA 11/11/11

What are the implications of the "endaka" to foreign manufacturers?

In dollar terms, the cost of entering Japan has certainly increased. The USD cost of business is higher than it was 5 years ago; however, companies are able to deliver substantially higher returns on high margin products, including innovative medical devices and equipment. Although there is risk that the JPY will weaken, the IMF has stated that it believes that the yen is "broadly in line with medium-term fundamentals." (Source: Dow Jones 11/03/11) and a weakening of the yen is not expected. As a result, manufacturers should continue to anticipate exceptional profitability in Japan. Furthermore, manufacturers who are worried about a weakening yen may off load some of the risk by entering into USD-based transfer pricing agreements with their Japanese partners.

As the largest and highest priced market in the region, Japan remains an attractive opportunity for medical device and equipment companies. On a local currency basis, Japan may seem less attractive than China; however, manufacturers who care about USD profits continue to find the biggest bang for the buck within Asia in Japan.

How can manufacturers overcome the higher cost of entry?

Companies with sufficient access to capital and cash flow tend to develop a direct presence in Japan. Direct entry enables these companies to capture the full value of their portfolios without having to share profits with a local partner. In contrast, small to medium sized companies with limited resources often choose to partner with local companies. In exchange for a share of profits, local partners are usually willing to cover most of the costs of entry. As a result, the foreign company is able to benefit from the Japanese market opportunity without having to fund the full cost of bringing their products to market.

JETRO North America Medical Device Advisor
Harold Smith