Stronger yen hurts Toyota’s outlook, Honda’s quarterly results

TOKYO — Toyota Motor Corp lowered its annual profit forecast while Honda turned in a double-digit decline in quarterly earnings as a resurgent yen hurt two of Japan’s biggest automakers.

The quarterly earnings unveiled on Friday by Japan’s biggest and third-biggest automakers highlight how “safe-haven” demand for the currency — buoyed by global uncertainties and falling U.S. interest rates — could eat into profits at Japanese exporters in the months to come.

A strengthening yen hurts Japanese automakers as cars exported from Japan become more expensive, while it also decreases the value of earnings made overseas.

Toyota cut its operating profit forecast for the year ending March 2020 by nearly 6% to 2.4 trillion yen ($22.4 billion), from a previous forecast of 2.55 trillion yen. The 2.7% drop on the year means it will snap a three-year run of rising profit.

“We have factored in cost reduction efforts for the year, but there are still some uncertainties. We cannot be complacent,” Toyota Operating Officer Kenta Kon told reporters at a results briefing.

It expects the yen to trade around 106 to the U.S. dollar and 121 to the euro in the current financial year, from a previous assumption of 110 yen and 125 yen, respectively.

For the quarter just ended, however, Toyota posted an 8.7% rise in operating profit to 741.9 billion yen ($6.93 billion), its highest since the September 2015 quarter, helped by a slight increase in global vehicle sales. (Toyota earnings interactive graphic.)

But the stronger domestic currency took a toll on Honda’s profits. Japan’s No. 3 automaker posted an operating income of 252.4 billion yen for the April-June period, down 16% from 299.3 billion yen a year ago and lagging analyst forecasts.

Still, Honda reiterated its forecast for a 6% increase in operating profit to 770 billion yen for this fiscal year, and said it expected the yen to average around 110 to the U.S. dollar, unchanged from its previous forecast. (Honda earnings interactive graphic.)

 

‘Conditions in the U.S. market continue to be severe’

Easing demand for cars has also dented earnings at Honda and other automakers including Nissan and Ford, prompting the latter two to announce job cuts and plant closures.

An escalating trade war between China and the United States, the world’s top two auto markets, and slowing economic growth have prompted a broad-based sales downturn in the global auto sector.

“Conditions in the U.S. market continue to be severe, including the effects of the trade friction between the U.S. and China,” Honda Executive Vice President Seiji Kuraishi told reporters, adding that tensions could also have a negative impact in China, where demand for cars is already slowing.

“How the Chinese market reacts to the U.S.-China trade friction will be key to setting our business strategy.”

A downturn in the global auto sector could weigh on profits just as automakers invest heavily in new technologies including electric cars, autonomous driving technologies and ride-sharing services to survive a industry shift away from car ownership.

Toyota has been pouring money in ride-sharing services including Uber, Grab and Didi Chuxing while deepening alliances with SoftBank Group Corp to develop on-demand transportation services in Japan, to position itself as a provider of mobility services.

Investors have backed this strategy, pushing Toyota shares roughly 10% higher this year, outperforming its domestic rivals.

Honda too has been scrambling to reinvent itself to compete with tech firms such as Google parent Alphabet and Uber, by expanding partnerships and investing in General Motors‘ Cruise self-driving vehicle unit.