Japanese carmakers brace for profit hit after yen strengthens

Toyota Motor and other Japanese carmakers risk taking a hit to their bottom lines after the yen strengthened to its highest level in more than six months.

The currency traded just above ¥153 against the dollar on Tuesday, its strongest level since February. That’s squeezing many of Japan’s export-focused automakers, which have partly based their earnings forecasts on weaker yen assumptions.

At ¥160 yen to the dollar, Toyota has the most bearish projection. The world’s biggest automaker said in August its annual operating income falls by about ¥50 billion ($326 million) each time the yen appreciates by ¥1.

The swings are a source of uncertainty for Japanese automakers, highlighting the economic cost of a volatile currency. A stronger yen erodes the value of overseas earnings when they’re brought back to Japan, hurting companies that generate much of their sales in the U.S. and Europe.

The yen is currently outperforming the assumptions of all Japanese carmakers except Nissan Motor, which projects it at ¥150 against the dollar for the fiscal year through March 2027. Toyota and Suzuki Motor revised their projections upward in August from May.

Japan’s automakers have long embraced conservative currency assumptions, helping them to meet or exceed forecasts when posting results. Many of them produce cars and even parts closer to final sales markets, creating a natural hedge because production expenses can be paid in the same currency.

Toyota is better equipped to tolerate the risks that come with adopting a weaker-yen assumption. Its earnings are among the most global in the industry and are spread across financial services and other businesses, giving it additional operational flexibility to offset adverse swings.

While the weak yen has threatened to drive up inflation and import prices in Japan, it had offered the island nation’s largest exporters a much-needed respite from U.S. tariffs, soaring oil prices and supply chain snags.

In late June, the yen was trading at its lowest since 1986, prompting the U.S. and Japan to make their first joint intervention in 15 years.