Toyota shrugs off effects of rising yen

July 5, 2002

Tokyo BLOOMBERG News reported that Toyota Motor Corp., the world's largest automaker by market value, expects to shrug off the effects of a rising yen and report another record profit as luxury cars and new models lure buyers.

Toyota remains on course to beat the 616 billion yen ($5.1 billion) net income earned in the year to March 31, 2002, "even just by a little," based on the performance so far this business year, said Executive Vice President Ryuji Araki, in an interview.

"We will probably have a good balance in earnings again this year, which is Toyota's strength," said Araki, who heads finance. "We are likely to see good performances in regions such as North America, Japan, Europe and Asia, and the auto and financial businesses are likely to do well this year again."

Toyota expanded its share of the U.S. auto market, the company's most profitable region, by 0.5 points to 10.4 percent in the first half of 2002 from a year earlier, attracting consumers with its new Lexus ES 300 sedan and Highlander sport-utility vehicle. Toyota's currency hedging activities will also help blunt the effect of a stronger yen, investors said.

"There is a chance for Toyota to post record earnings again this year," said Marc Desmidt, who helps manage 1 trillion yen at Merrill Lynch Investment Managers Co., including auto stocks. "What we are seeing in the U.S. is still the strong performance of the Lexus, which improved its product mix and provides higher profitability."

Toyota will release its first set of quarterly results, covering the April-June quarter, in late July or early August. It doesn't disclose profit targets and company officials say the target of a record result for this year excludes an expected gain from pension changes.

Toyota shares have fallen 17 percent since April 1 until yesterday's close, compared with a 1.9 percent drop in the Topix Index and 10 percent decline in the Topix Transportation Index.

The Japanese yen has gained about 9.5 percent in the past three months, squeezing the value in yen-terms of profit and sales generated outside Japan for Toyota and other exporters.

Toyota's Araki said the company, which based this year's profit goals on an average exchange rate of 125 yen per dollar, hedges half of the foreign currency it gains by selling cars.

"Our hedging policy is like a shock absorber," said Araki. "We will only hedge based on what we have earned and we don't speculate." Toyota has completed its hedging activities for the first half ending Sept. 30, he said.

"For companies to take a strong view either way on the currency is the wrong thing to do," said Merrill's Desmidt. "They can forecast sales that they are likely to make, and they can hedge those, and to be reasonably accurate, they should do it in a short period of time, which is probably about six months."

Among rival automakers, Nissan Motor Co., which also bases its earnings outlook for the year ending March 2003 on a rate of 125 yen to the dollar, doesn't hedge currency, President Carlos Ghosn said last month. Honda Motor Co. reviews its hedging policy every quarter, Senior Managing Director Satoshi Aoki has said.

Mazda Motor Corp., a third owned by Ford Motor Co., has hedged about two-thirds of currency trades at rates of at least 125 per dollar for the next six months, said Chief Financial Officer Bob Shanks in May.