BUSINESS Yen Takes Toll on Nintendo but With a Twist By Juro Osawa Updated Nov. 10, 2010 12:01 a.m. ET TOKYO-Like many Japanese companies, Nintendo Co. NTDOY -0.21% recently reported a big hit to its financial results from the strong yen. But unlike its brethren, reduced exports weren't the main cause of Nintendo's first interim net loss in seven years. The bigger problem for the home of Super Mario was the company's unusually large $7.4 billion pile of cash held in foreign currencies at the end of its fiscal first half, representing nearly 70% of Nintendo's total cash holdings.A strong yen affects all Japanese exporters when overseas sales of cars, electronics and other products are translated into the Japanese currency, and Nintendo is no exception. The companies do whatever they can to combat the strength of the yen, which is trading near 15-year highs against the dollar. On top of hedging to lock in xed foreign-exchange rates, which Nintendo does on a limited basis, many are slashing costs to squeeze out prots. Like many other Japanese companies operating globally, Kyoto-based Nintendo also makes as many overseas payments as possible with dollars to offset the currency impact. But Nintendo stands out from the pack by keeping large amounts of revenue in foreign currencies rather than converting it to yen. In recent years, the company has generated an unusually high 80% or more of its revenue outside Japan, largely thanks to the popularity of its Nintendo Wii game console and the DS hand-held game system. With foreign-currencyr reserves among the highest for Japanese exporters, that has exposed Nintendo to bigger paper losses on reserves when the yen appreciates. Nintendo's 2.01 billion yen ($24.8 million) loss for the half through September largely was because of 62.1 billion yen in appraisal losses on its foreign-currency reserves. Of those reserves, $3.4 billion was in dollars and 23? billion ($3.76 billion) was in euros. The company posted an operating prot of 54.23 billion yen, but that was down 48% from a year earlier. Nintendo justies its foreign-currency strategy as a way to take advantage of higher interest rates overseas while saving on the commissions required for exchanging foreign currencies. The policy also reects Nintendo's distinctive long-term thinking: The value of its foreign cash may be down this year because of the yen's strength, but it could rise in coming years, resulting in appraisal gains. Since scal 2000, Nintendo has been alternating every few years between appraisal gains and losses on its foreign currency holdings, though it has consistently posted net prots for its scal years. For the current year, which runs through March, Nintendo has forecast a net prot of 90 billion yen. The company occasionally converts some of its foreign cash into yen "whenever the rates are favorable," said Nintendo spokesman Ken Toyoda. "There are some payments we have to make in yen, such as taxes, so we make sure we always have enough yen to cover those." Because Nintendo holds many currencies other than the dollar and the euro, it can selectively convert the currencies that are relatively strong against the yen. Nintendo also uses either 33% of its group operating prot or 50% of its net prot, whichever is higher, for its total dividend payout. That allows the company to keep its dividend relatively strongand keep investors satised even when foreign-exchange losses weigh on the bottom line. "I think Nintendo's management philosophy is quite different from most other companies," said Tokai Tokyo Research Center analyst Yusuke Tsunoda. Nintendo's currency strategy indicates that, instead of focusing on short-term results, Nintendo measures its performance over a longer period, perhaps taking a few years at a time, he said. "Some retail investors may occasionally complain, but this is just how Nintendo is," he said. Institutional investors generally are aware of and accept the company's currency policy. Sony Corp. Chief Financial Officer Mamoru Kato said his company wouldn't consider adopting Nintendo's currency policy, though he didn't pass judgment on his rival's choice. Sony's cash deposits in foreign currencies are small and any gains or losses on them have little impact on its earnings, the company said. Panasonic Corp. also said its foreign cash deposits have almost no impact on its bottom line. "Nintendo has its own way of thinking, maybe much longer-term thinking," Mr. Kato said. Nintendo nevertheless is considering making adjustments to its singular stance as interest-rate differences between Japan and other major countries have narrowed and foreign-exchange rates have become increasingly volatile. "We may be at a point where we need to reassess the advantages and disadvantages of holding money in foreign currencies," Nintendo President Satoru Iwata said at the company's annual meeting in June. "In the long run, the most effective method is to hold all the key currencies in a well-balanced manner."