Stronger yen is the least of Toyota’s problems
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Katrina Hamlin
HONG KONG, Aug 2 (Reuters Breakingviews) -Toyota Motor 7203.T will pay a price for the yen's JPY= turn in fortunes. The world’s largest automaker and Japan's biggest listed company has shed nearly $30 billion, or 11%, of market value in less than two trading sessions, leading a broader decline the country's benchmark Topix index .TOPX. However, the strengthening of the currency from spectacular lows against the U.S. dollar may be the least of Chair Akio Toyoda’s worries.
A change in global interest rates will certainly be painful. The Bank of Japan 8301.T surprised by raising borrowing costs on Wednesday and dangled the prospect of more hikes, prompting a yen rally. Hours later, the U.S. Federal Reserve signalled it may trim as soon as September. The narrowing of the spread between the two countries’ 10-year bond yields will fuel yen appreciation that will crush corporate earnings and equity prices: Japan Inc generates 20% of its revenue overseas, per Goldman Sachs.
At Toyota, yen weakness has masked some problems of its own making. Earnings on Thursday for the quarter ending in June showed operating profit climbed 17% year-on-year to 1.3 trillion yen ($8.7 billion); the benefit of the foreign exchange rates accounted for most of the increase.
A testing scandal is one self-inflicted headache. Sales volumes in Japan shrank by more than a quarter following revelations in June of certification irregularities dating back to 2014. That temporarily held up some production lines in its home market, which made up nearly a tenth of deliveries last year. The pain may intensify: the government has found more cases where models were not properly certified, and demanded what Toyota calls “drastic reforms”.
Meanwhile the company's late embrace of electric vehicles remains a strategic headache. Sales of pure battery-powered cars remain tiny, less than 2% of the total. And while it sells much larger numbers of hybrids, including models like the Prius, that business is still not bigenough to power a turnaround.
Investors will have less patience for missteps if the company's share price is also being dragged down by currency moves. They have already expressed displeasure re-electing Toyoda to his post with just 72% of the vote at the annual general meeting in June; he acknowledges he won't be able to continue in his role if support continues to rapidly diminish. A stronger yen is a problem shared for Japan Inc and for companies like Toyota, it leaveslittle room to hide.
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Raised - https://www.breakingviews.com/considered-view/bank-of-japan-boldly-doubles-down-on-a-new-normal/
Expressed displeasure - https://www.breakingviews.com/considered-view/toyotas-chair-is-driving-with-l-plates-back-on/
CONTEXT NEWS
Toyota Motor’s operating profit rose 17% from a year earlier to 1.3 trillion yen ($8.7 billion) in the six months to June, while revenue rose 12.2% to 11.8 trillion yen over the same period, the company said on Aug. 1. The company noted that foreign exchange rates and cost reduction efforts had helped to achieve the increase in earnings despite falling production and sales volumes in Japan.
A day earlier, the Japanese government ordered Toyota to make "drastic reforms" after discovering new violations in the automaker's vehicle certification procedures. The transport ministry said on-site inspections had uncovered widespread, intentional misconduct and irregularities in seven additional models that had not been previously disclosed. In June, Toyota announced it had found six cases of testing irregularities.
Toyota’s shares fell over 3% in early trading on Aug. 2. In total the stock has fallen 11.5% since the close on July 31.
Graphic: The yen is strengthening after a long slide https://reut.rs/3Sw0zTa
Editing by Una Galani and Streisand Neto
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