Toyota's yen windfalls are drying up

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TOKYO -- For years, Toyota Motor Corp. lost money as the Japanese yen climbed higher against the dollar and other currencies. It responded by off-shoring production and positioning its U.S. operations as an export base immune from the yen's swings.

But now that the yen is on the wane again, Toyota is learning the hard way that yen hedging cuts both ways.

Toyota has predicted flat operating profit and falling income for the current fiscal year that began April 1, in part because of a ¥95 billion ($924.1 million) hit it expects to take from currency losses. The problem: its overseas export bases.

"We produce vehicles abroad, and there are non-yen-denominated transactions, like producing in the United States and exporting to Canada or producing in Europe and exporting to Russia," Managing Officer Takuo Sasaki said. "It generates a negative impact."

The problem comes when Toyota tries to ship from dollar or euro zones to emerging markets or when parts are purchased in advanced countries and shipped to emerging markets for assembly.

In 2013, for example, Toyota exported 130,000 vehicles from the United States to 32 countries. In February, it began exporting U.S.-built Highlander SUVs to Australia, New Zealand, Russia, Ukraine and Kazakhstan, targeting another 29,000 units annually.

As Toyota expands its overseas manufacturing footprint, its foreign currency calculus becomes more complicated. Until recently, the yen was the main make-or-break currency.

When the yen was up, it crimped profits on the Japanese exports that make up a huge chunk of Toyota's global sales. When the yen was down, as it has been the past year, profits surged. A weaker yen boosts the yen value of overseas earnings sent home and makes Japan exports more competitive internationally.

Indeed, in the fiscal year that ended March 31, Toyota booked a foreign exchange gain of $8.75 billion, thanks to the yen's dramatic depreciation. The yen lost about 20 percent of its value against the dollar during the year. That gain helped to drive operating profit up 74 percent to $22.3 billion and net up 89 percent to $17.73 billion.

But those windfalls are drying up as the yen stabilizes.

In the January-March fiscal fourth quarter, for example, Toyota reaped only a $389.1 million gain from foreign exchange rates -- or just 4 percent of the year's total.

That's partly because the yen fell only 12 percent in that quarter from year-earlier levels. In the three prior quarters, the yen fell at about double that rate.

Even those diminishing gains may soon end. Toyota forecasts the dollar to remain unchanged at about 100 yen for the current fiscal year, further taking the home currency out of the earnings equation.

You can reach Hans Greimel at hgreimel@crain.com. -- Follow Hans on Twitter

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