Toyota Outlook Shows Yen Revives Confidence in Japan Inc.
Japan Inc. is coming back at the expense of Korea Inc.
Twelve analysts covering Toyota Motor Corp. (7203), Japan’s largest manufacturer, have raised their earnings estimates for next fiscal year as the yen dropped against all major currencies in the past month. By contrast, shares of Hyundai Motor Co. (005380) and Samsung Electronics Co. (005930) fell after the South Korean exporters voiced concerns about the rising won.
As Japanese companies prepare to announce earnings -- Toyota and Sony Corp. (6758) are among hundreds reporting by the end of next week -- investor confidence in the world’s third-largest economy is back. The benchmark Nikkei 225 Stock Average (NKY) is near its highest since April 2010 as the yen’s slide helps Japanese makers of cars and ships compete against their Korean rivals in markets such as the U.S. and Europe.
“Automakers are the ones that can fully benefit from a weaker yen, and the results this time may spur expectations for a better period next fiscal year,” said Makoto Kikuchi, chief executive officer at Myojo Asset Management Japan Co., a Tokyo- based hedge fund advisory firm. “A weaker yen will be a tailwind.”
The benefits of the weaker yen will begin showing during the current quarter, and Japanese companies will probably forecast a recovery in the second half of next fiscal year, Kikuchi said.
Among corporate chieftains regaining optimism is Toyota President Akio Toyoda, who said this month that domestic carmakers are “beginning to see the light” with the yen. About 15 months ago, the 56-year-old executive, who’s also chairman of the Japan Automobile Manufacturers Association, was so pessimistic that he warned Japanese carmakers may collapse under the weight of a local currency that had surged to a postwar high of 75.35.
Exporters are now getting some help. The Bank of Japan (8301) last week announced a shift to Federal Reserve-style open-ended easing, and Prime Minister Shinzo Abe, who took office last month, has called for “bold monetary policy” to beat deflation and drive the yen lower.
The yen has weakened more than 5 percent in the past month, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The Japanese currency reached as low as 91.26 today, the weakest since June 2010.
“If current yen depreciation were to continue, this could have a marked effect,” Bank of America Merrill Lynch said in a report on carmakers last week. “We can look for an improvement in competitive strength and high earnings growth.”
At Toyota, which outsold all other carmakers last year, net income for the year ending March 31 may triple to a five-year high of 890.6 billion yen ($9.8 billion) and climb to 1.17 trillion yen a year later, according to the average of 24 analyst estimates compiled by Bloomberg. Toyota’s annual operating profit gains by 35 billion yen for every 1-yen drop in the value of the Japanese currency against the dollar, according to the carmaker.
The ratio of Toyota’s share price to sales has gained 49 percent since Oct. 11 and is near the highest level since March, according to data compiled by Bloomberg. The Japanese carmaker’s price-to-sales ratio is double that of General Motors Co. (GM), the biggest premium versus the Detroit-based rival since September, and 1.6 times that of Ford Motor Co., the data show.
“Toyota and other Japanese carmakers have been forced to fight with disadvantages including a strong yen,” said Ichiro Takamatsu, a fund manager at Tokyo-based Bayview Asset Management, which oversees 150 billion yen. “Their businesses have been hindered by the currency, the March 11 earthquake and floods in Thailand. The business environment has improved because one of those factors is starting to disappear.”
Toyota fell 0.6 percent to 4,315 yen at the close of trade in Tokyo, trimming its gain this year to 7.7 percent. Sony jumped 9.1 percent today, while Samsung Electronics and Hyundai Motor fell in Seoul.
While profit at Nissan Motor Co. (7201), Japan’s second-largest automaker, is expected to drop 1.5 percent to 336.2 billion yen this fiscal year, 10 analysts have raised their estimates for the next fiscal year in the past four weeks, according to estimates compiled by Bloomberg. Fourteen analysts have raised next fiscal year’s forecasts for Tokyo-based Honda Motor Co. (7267) in the past month.
“We’re expecting very strong performance in earnings” for the automotive industry, said Takaki Nakanishi, a Tokyo-based auto analyst at Bank of America Merrill Lynch.
Nakanishi estimates the operating profit margin for the sector will jump to a record 8.4 percent should the yen weaken to 90 to the dollar.
In South Korea, where companies had enjoyed a four-year period of favorable exchange rates, the mood is souring after the won appreciated against all major currencies last quarter.
Take Samsung Electronics, the nation’s largest company. It expects the won to keep appreciating for the “time being,” Robert Yi, head of investor relations, told analysts during an earnings call Jan. 25. Samsung estimates the won’s appreciation, which cut about 360 billion won from operating profit in the fourth quarter, will drain more than 3 trillion won from earnings this year.
Samsung is more concerned about the won’s rise against the euro, yuan and Brazilian real than versus the dollar, Yi said.
At Hyundai Motor, the nation’s largest automaker, Chief Financial Officer Lee Won Hee said during a conference call on Jan. 24 that he expects the magnitude of the won’s appreciation to intensify toward the second half of this year and expressed concern about the yen.
“The weak yen will allow Japanese automakers to aggressively market products, especially in places where we are intensely competing against them, such as Australia and Russia,” Lee said. “If this trend continues, it will have an adverse impact on our profitability.”
The won, which traded as high as 1,078.70 against the dollar today, is projected to end 2013 at 1,025, the sharpest gain among Asian counterparts, according to the median estimate in a Bloomberg survey of analysts.
“Clouds have started to gather over the Korean manufacturers’ structural competitive advantage,” Bank of America Merrill Lynch said in a Jan. 22 report.
For Japan’s electronics makers, relief from the yen may be too little, too late. Years of competition from the Korean manufacturers, declining demand and prices for televisions contributed have chipped away at the competitiveness of Sony, Panasonic Corp. (6752) and Sharp Corp. (6753), which posted record losses in the year ended March 31.
For Sony, Japan’s biggest electronics exporter, the yen- dollar rate has no direct impact on earnings, according to George Boyd, a company spokesman. A 1-yen change in the Japanese currency’s value against the euro affects annual operating profit at the Tokyo-based company by 6 billion yen, he said, declining to comment further.
The company’s troubles predate the yen’s surge in recent years. Sony’s main television-making business is headed for a ninth straight year of losses as the company loses market share to Samsung and LG Electronics Inc. (066570) Overall, Sony may post net income of 8.9 billion yen in the year ending March 31, according to the average of 17 estimates compiled by Bloomberg. That’s below the company’s own forecast of 20 billion yen.
Bank of America Merrill Lynch raised its investment rating on Sony to buy on Jan. 25 and almost doubled its price estimate for the shares to 1,850 yen from 980 yen, citing the weaker yen and the outlook for improved smartphone sales.
Panasonic may post a net loss of 779.7 billion yen for the year ending March 31, according to the average of 13 analyst estimates compiled by Bloomberg. Sharp may lose 468.7 billion yen.
“We could see companies taking market share from Samsung, for instance, narrow the gap in margins, and lift growth rates,” Citigroup Inc. analyst Kota Ezawa said in a Jan. 8 report, commenting on the weaker yen’s effect on consumer electronics makers. “However, any talk now of a revival of Sony’s TV business would ring hollow.”