Strengthening yen bodes badly for Japanese automakers

Japanese automakers may have run out of the fuel that’s driven profits higher for four years: the weaker yen.

Toyota Motor and Japan’s six other automakers may combine to earn 4.55 trillion yen ($40 billion) in the fiscal year through March 2017, according to analysts estimates compiled by Bloomberg. That’s a 5.5 percent increase from what analysts are projecting for the period ending next month, and would be the slowest pace of growth in five years.

These estimates may still be too optimistic. Changes in foreign exchange rates reduced operating income at Nissan Motor, Honda Motor and Mazda Motor in the three months through December and provided the smallest boost to Toyota’s quarterly profit in more than three years. With the yen soaring last week to the strongest level since October 2014, earnings may fall next fiscal year, according to analysts at TIW and Mitsubishi UFJ Morgan Stanley Securities.

“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, said by phone. “Profit will decline against previous years,” dropping by more than 10 percent for some companies, he estimates.

Driving down the value of the yen has been the cornerstone of policy under Prime Minister Shinzo Abe and his hand-picked Bank of Japan Gov. Haruhiko Kuroda.

The government and central bank have sought to boost profits for exporters like Toyota, betting the companies would then be able to raise prices, boost wages and stoke inflation.

Even after the Bank of Japan adopted a negative interest rate policy last month, investors sought refuge from a global stock-market rout in haven currencies including the yen, exacerbating gains that Kuroda had been trying to discourage.

Concern is growing that the stronger yen will erode the competitiveness of Japanese exports and cut the value of profits brought home from overseas operations.

Automakers joined Japan stock indexes in surging Monday after a report showed Japan’s economy shrank more than expected last quarter, boosting the outlook for central bank stimulus. Toyota surged 9.6 percent, its biggest jump since December 2008, while Honda climbed 8 percent and Nissan rose 6.7 percent at the close in Tokyo.

After rising 7 percent over the previous two weeks, the yen traded down 0.7 percent to 114.05 per dollar Monday. Bloomberg