Strong Yen Could Further Damp Japan Corporate Earnings Outlook



Toyota Motors President Akio Toyoda speaks to journalists in Tokyo in May. ENLARGE
Toyota Motors President Akio Toyoda speaks to journalists in Tokyo in May. Photo: Toshifumi Kitamura/Agence France-Presse/Getty Images

TOKYO—Under pressure from a stronger yen, many Japanese companies face further downgrades to their earnings projections for the year, after a surge in the currency this past quarter eroded profits.

Major Japanese businesses from Sony Corp. SNE -1.39 % to Nintendo Co. NTDOY -10.90 % will this week release results for the quarter ended in June, in which the yen strengthened more than 8% against the U.S. dollar. The increase hit exporters that had earlier enjoyed the benefits of a currency weakened by Prime Minister Shinzo Abe’s aggressive policies to revitalize Japan’s economy.

The yen has been rising since late last year, posing a major challenge to the so-called Abenomics program and the Bank of Japan 8301 -0.42 % ’s efforts to cheapen the yen, which supports corporate profits earned abroad. The dollar fell briefly below ¥100 last month on the vote by the U.K. to leave the European Union.

“Because many companies made their full-year earnings guidance based on a yen rate that is weaker than the current market rate, we cannot expect boosts from foreign-exchange rates like we saw in the past few years,” said Kazuhito Yasumura, a senior quantitative analyst at Mitsubishi UFJ Morgan Stanley Securities Co.

A stronger yen makes the products Japanese firms sell overseas more expensive while eroding those profits when they are repatriated.

The yen weakened in the past few weeks on hopes that the government and the BOJ will introduce further fiscal and monetary stimulus, although the movement won’t be reflected in the April-June results.

The negative impact of the yen’s strength has been apparent in results released this month.

Fast Retailing Co. FRCOY 1.68 % Ltd. lowered its profit forecast for its fiscal year ending Aug. 31. The owner of the Uniqlo brand has cut its profit expectations by more than 60% since the start of the year.

For Toyota Motor Corp. TM -0.04 % , a weakening yen had been the single-biggest contributor to profit growth for nearly three years. Now the currency has changed course, “the tide has greatly shifted,” President Akio Toyoda said in May. The company said it loses ¥40 billion ($377 million) in operating profit every time Japan’s currency strengthens by one yen against the dollar.

Toyota earlier this year said it expected profit to decline by more than a third in the current financial year, which ends March 2017, based on an average rate for the period of ¥105 to the dollar. On Monday, the yen was at about 106 to the dollar.

Daiwa Securities DSEEY 1.11 % chief economist Kazuhiro Takahashi said the auto sector likely was hit hard in the April-June quarter, and estimates pretax profits of Japan’s six major auto makers declined by about 30% for the period.


In reports released earlier this year, nearly half of the 200 companies Daiwa Securities monitors made their projections based on a rate of ¥110 to the dollar, according to the brokerage. It was around ¥120 in early January.

If the dollar averages ¥105 or ¥100 for the financial year that began April 1, ordinary profits by major Japanese manufacturers are estimated to decline by up to about 20% or 26%, respectively, according to a calculation made by SMBC Nikko Securities chief market economist Yoshimasa Maruyama.

“The estimate is large enough to cause an extremely negative impact, even after taking into account any expected cost-cutting measures by the companies,” Mr. Maruyama said.

A stronger yen deals a blow to an electronics sector already struggling with tepid demand, according to Nomura Securities’ analysts. Many Japanese electronics companies have operations in the U.K. and Brexit concerns could lead to currency fluctuations, Nomura said.

The British pound fell sharply last month after the result of the U.K. referendum increased uncertainties over the course of the country’s economy. The currency fell 15% against the yen between April and June.

Hitachi Ltd. HTHIY -0.67 % has a manufacturing site in the U.K. for a high-speed railway contract it won in 2012. As the British plant imports key components from Japan, the yen’s appreciation against sterling would be a concern, Nomura said.

Hitachi said it was fully hedged against foreign-exchange moves on materials it ships to the U.K. from Japan, but sales earned in the country could be affected by a higher yen when converted back into the home currency.

Profits at Nintendo may be hit by the yen’s appreciation as the company holds ample cash in dollar and euro terms. Any impact from the smash-hit smartphone game “Pokémon Go” launched earlier this month won’t be reflected in the results expected to be announced on Wednesday.

For Sony, the yen’s appreciation against the dollar and euro is expected to have a muted effect. Sony said for every one yen of strengthening against the dollar, it gains ¥5 billion in operating profit, while every one yen of strengthening against the euro takes away ¥5.5 billion.

A stronger yen isn’t bad news for all companies. Japanese furniture maker Nitori Holdings Co. 9843 -0.88 % Ltd. reported a record 43% increase in profit for its March-May quarter. Nitori produces 90% of its furniture overseas and imports it to sell in Japan.

Megumi Fujikawa at


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