Last week, Toyota, Japans largest automaker and the worlds second-largest automaker, handed in its best quarterly results in nearly four years. Data show that in the first fiscal quarter of fiscal year 2020 (April 1, 2019 to March 31, 2020), Toyotas global sales reached 2.71 million vehicles, up 3.6% from 2.62 million in the same period last year. Operating profit increased by 8.7% from 682.6 billion yen in the same period last year to 741.9 billion yen.
Honda, Japans third-largest car company, is less fortunate. The appreciation of the yen directly impacted Hondas performance from April to June this year. According to the data, Toyotas operating income fell from 299.3 billion yen in April to June this year to 252.4 billion yen in the same period last year, a 16% decline. Honda believes that the strong yen and worsening global trade situation are the two main reasons for the decline in corporate revenue. Although Honda reiterated its market target of 6% growth in operating profit in fiscal 2020, it has lowered its global sales target to 5.11 million vehicles from 5.16 million previously.
In addition to the above two Japanese auto companies, Suzuki and Mazda have cut their profit expectations for this year. For Japanese exporters, such as Toyota and Honda, the stronger yen means that Japanese products, such as electronic parts, semiconductor equipment and automobiles, which sell well abroad, become more expensive.
Was the Bank of Japan running out of ammunition?
Usually, for Japans export-oriented enterprises, the US dollar-yen exchange rate around 105 is the lifeline considering the need to adjust profits due to exchange rate factors.
Toyota expects the US dollar to yen exchange rate to remain around 106 in the current fiscal year and the Euro to yen exchange rate to be around 121, both lower than the previous projections of 110 and 123. Sony expects the dollar to stabilize around 108 against the yen in the current fiscal year, which is also lower than the previous estimate of 110.
Speaking of the yens appreciation, Masayoshi Hirata, Toshibas chief financial officer, said reluctantly: If this trend continues, we can only improve it by cutting costs and improving efficiency.
Shigeto Nagai, a former official of the Bank of Japan and an economist at the Oxford Institute of Economics in Japan, warned early this year about the risk of yen appreciation. At that time, he said the yen could rise to $1 to 95 in 2019. International trade frictions, Britains exit from Europe and so on may prompt global investors to turn to the safe-haven asset yen. But in his view, after nearly six years of massive stimulus, the Bank of Japan has few tools to deal effectively with the strengthening of the yen.
Of course, the governor of the Bank of Japan, Toshihiko Kuroda, will have to try to deal with it, because the depreciation of the yen strengthens the confidence of Japanese enterprises and helps them formulate long-term business plans. But standing by while the yen strengthens is tantamount to confirming to business leaders that the central bank cant do anything about it, Yoshii said.
Kazuo Momma, a former governor of the Bank of Japan, agrees: Current exchange rates are tolerable, but the Bank of Japan, which has run out of ammunition, has little to do with further strengthening of the yen or a serious economic downturn. No matter how bad Japans economy is, the central bank cant increase its stimulus.
At present, the Bank of Japan only said that it was ready to deal with the impact of the continued appreciation of the yen on the Japanese economy. When asked whether it would intervene in the exchange rate of the yen, the Bank of Japan did not give a direct response. Mitsubishi UFG believes that the Bank of Japan is still in a passive state. Once the dollar breaks the 100-level barrier against the yen, it will force the Bank of Japan to introduce policies to calm the pressure of appreciation.