Sony Shouldn’t Play Soros’s Currency Games

(Originally published here.)

Lots of people are excited about Sony’s new PlayStation 4 game console. Unfortunately for Sony, as Bloomberg News reports, the declining value of the yen threatens the profitability of what should otherwise be a smash hit. Although it might not seem that way to investors or analysts, this is actually a sign that Sony is managing its operations responsibly.

To see why, it helps to remember a quiz I was given when I was a young pup in the investment-management business. One question concerned a hypothetical Canadian brewing company that wanted to open a plant in Japan. Should it finance this investment by borrowing in Canadian dollars or yen? The answer is that the brewer should probably borrow in yen.

Presumably, the plant in Japan is making beer that will be sold in Japan and therefore generating revenue in yen. If the company borrows in any currency other than yen, it exposes itself to exchange-rate volatility. There is no reason for the brewer to bear that risk.

Sony came to the same conclusion when it decided to invest in its latest game console. The yen appreciated by 62 percent against the U.S. dollar between the summer of 2007 and the summer of 2011. Sony responded by moving its console production offshore and negotiating contracts denominated in dollars. This was completely sensible. Sony earns dollars (and euros) from selling PlayStations abroad, not yen. Had it done nothing, its margins would have been obliterated.

Over the past year, however, the yen has become about 20 percent cheaper relative to the dollar. With the benefit of hindsight, some analysts are upset that this prudent hedging strategy is “costing” shareholders money. Strictly speaking, Sony would have made more money if it had kept its costs denominated in yen while earning increasingly valuable dollars and euros from overseas sales.

But these critics are missing the point. Unless you are on a par with George Soros as a currency trader, it’s never a good idea to gamble on exchange rates by bringing in revenue in different currencies from your costs. And if you are a Soros-level currency trader, why the heck would you be wasting your time making consumer electronics?

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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