Japanese automakers are increasingly feeling the combined pressure from the spillover effects of the Iran conflict and a rebound in the yen. In the most recent quarterly reports, companies like Toyota Motor Corporation (NYSE: TM), Honda Motor Co Ltd (NYSE: HMC), and Nissan Motor Co Ltd (OTC: NSANY) posted strong earnings, largely thanks to the yen's historic weakness. The first two firms raised their full-year profit forecasts, while Nissan recorded its first profit in roughly two years.
However, the external environment may no longer be so accommodating. In early August, after the yen weakened past the 163 mark against the US dollar, hitting its lowest level in 40 years, the US Treasury and Japan's Ministry of Finance jointly intervened in the foreign exchange market by buying yen. This unprecedented move serves as a clear warning signal.
Since Japanese automakers have traditionally relied on a weaker yen to lower the price of exported vehicles and boost their global competitiveness, this intervention is a significant alert. Vincent Sun, a senior equity analyst at Morningstar, stated, "If government intervention pushes the yen stronger, it will be a headwind for Japanese automakers." He noted that a stronger yen forces these companies into a difficult choice: either raise prices in overseas markets, potentially losing market share, or accept that foreign currency revenue will shrink when converted back to yen, squeezing operating profits.
Masahiro Akita, a senior analyst at Bernstein, commented, "A 1% change in the yen exchange rate typically impacts the operating profit of Japanese automakers by about 2%, although the sensitivity varies by company, with some seeing an impact of around 4%."
Analysts also believe that the ongoing Middle East conflict poses a significant risk. Vincent Sun pointed out that this will lead to more supply chain disruptions and rising costs. The Strait of Hormuz and the Red Sea are critical shipping lanes for Japanese automakers, who rely heavily on aluminum and petrochemical materials like naphtha in their production processes.
Masahiro Akita added, "The biggest headwind for automakers' profits is the sharp rise in raw material costs, a trend further exacerbated by the persistent Middle East conflict." He also noted that "prices for key inputs, including naphtha and resin linked to oil prices, memory chips, and industrial metals like aluminum, copper, and steel, are all rising, which is having a broad negative impact on the industry's overall profitability."
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