• Exchange-rate swings lead Toyota to cut profit forecast
  • Auto trade group JAMA asks Abe’s new cabinet to take action

Japan’s auto industry is going back to tried-and-tested plays to ease the pain of yen strength as Toyota Motor Corp.’s prediction for a 37 percent plunge in earnings threatens to end the era of record profits.

A resurgent yen wiped almost half a trillion yen ($5 billion) off the operating income of Japan’s seven automakers in the first quarter, with Toyota alone taking a 235 billion yen hit. The industry, which accounts for about one in 10 jobs in Japan, is responding by cutting costs, dialing back expenses and turning to Prime Minister Shinzo Abe for help.

Japan’s automaker association asked Abe’s reshuffled cabinet this week to take action in response to seesawing foreign exchange markets, Britain’s decision to leave the European Union and slowdowns in emerging markets. Without the tailwinds of a weak yen boosting export profits, cost-cutting measures by Toyota such as shutting down elevators, bathroom hand driers and air conditioning may prove futile.

“Carmakers including Toyota, Nissan and Honda are the driving force for Japan’s GDP,” Koji Endo, a Tokyo-based analyst with SBI Securities Co., said by phone. “The Japanese economy depends on the car industry a lot, so they have strong bargaining power with the Abe administration.”

On Thursday, Toyota lowered its fiscal-year profit forecast to 1.45 trillion yen for the 12 months ending in March, down from the 1.5 trillion yen projection made in May. The strong yen is cutting earnings from vehicles sold outside Japan, and U.S. consumers are buying fewer Camry, Corolla and Prius cars, as cheap gasoline fuels greater demand for trucks.

With its four-year reign as the world’s top-selling automaker at risk of being ended by scandal-tarred Volkswagen AG, Toyota is now forecasting 375 billion yen in cost-cutting efforts this fiscal year. It also pared back projections for capital expenditure and research and development spending, by 10 billion yen each.

“We had an emergency profit improvement activity launched internally in Toyota and the results are being felt steadily,” Managing Officer Tetsuya Otake said of the company’s reaction to the Brexit referendum. “Things are moving so rapidly every day. The yen got so strong.”

For Gadfly’s take on why Toyota should loosen its purse strings, click here.

Toyota’s souring outlook for profit this year is almost entirely due to changes in foreign-exchange rates, which the company now estimates will slash operating income by 1.12 trillion yen. That’s more than what Honda Motor Co. and Subaru-owner Fuji Heavy Industries Ltd. earned in the last fiscal year combined.

‘Rapid Fluctuations’

The headwinds Toyota and its peers are feeling from the stronger yen help explain the message delivered to Abe’s new cabinet by the Japan Automobile Manufacturers Association on Wednesday. Chairman Hiroto Saikawa highlighted global economic uncertainty spurred by Brexit and “rapid fluctuations in the foreign exchange market.”

“JAMA requests not only that the new Cabinet take the initiatives necessary to prevent those risks from negatively impacting Japan’s economy, but also that it implement the economic measures” that “will facilitate investments in Japan’s future,” wrote Saikawa, who’s also Nissan Motor Co.’s vice chairman and chief competitive officer.

Like Toyota, Honda hasn’t stood pat waiting for Abe to act. Japan’s third-largest automaker said cost reductions contributed 45.7 billion yen to operating profit in the first quarter. The manufacturer plans to cut capital expenditure by 14 percent and research-and-development spending by more than 4 percent this fiscal year.

“Since no one can predict which direction currency rates will move, automakers will have to be much more conservative than before,” Ken Miyao, an analyst with Tokyo-based market researcher Carnorama, said by phone.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE