A stronger yen could trim Japanese automakers’ profit image

As the yen becomes stronger and stronger, the Japanese automakers might lose an important tool of making a strong profit.

A weaker Japanese yen has always been favorable for local automakers, as it was the main profit driver in recent years. It was also the government’s indispensable tool of helping major exporters such as Toyota to increase their gains, to keep the wages high and to control inflation. However, the projections show that earnings will be much lower next year. All seven Japanese carmakers are estimated to earn 4.55 trillion yen (40 billion dollars) in the fiscal year through March 2017, according to Bloomberg analysts. If so, it would only be a 5 percent increase over the fiscal year that will end next month, the slowest growth rate since 2012.

“Japanese automakers won’t be able to achieve their growth targets if we take the current spot rate of the yen,” Koichi Sugimoto, a Tokyo-based analyst at Mitsubishi UFJ Morgan Stanley, told to Bloomberg. “Profit will decline against previous years,” dropping by more than 10 percent for some companies, he estimates. “It’s difficult to expect profits to rise given the tailwind of (foreign exchange) has turned into a headwind,” Satoru Takada, another analyst, said. “It’s possible that all carmakers will report profit decreases in the next fiscal year, depending on how strong the yen will go.”

And with lower profits and higher costs from building safer and cleaner cars, the Japanese automotive industry might close ranks sooner than expected, as it would be healthier for the industry to fit only two or three major auto groups, and not seven independent makers as they are now.

Via Bloomberg