TOKYO -- Japan's top three automakers are likely to post modest gains in operating profit for the second quarter as healthy sales and cost cuts offset big losses from a fall in the dollar against the yen.
A surge in steel prices has put a brake on profit growth, but the impact on forecasts for the year should be limited since, despite the yen's renewed strength, the dollar is still higher than the level built into forecasts by the big car firms.
"The rise in steel prices may have a slightly bigger impact than previously expected, but it should be absorbed by a more favorable yen exchange rate than car makers' assumptions," Deutsche Securities analyst Tatsuo Yoshida said.
The dollar hit a six-month low of 106.55 yen on Monday, while the euro was fetching around 136.5 yen.
However, Toyota Motor Corp. and Nissan Motor Co., Japan's two biggest carmakers, have assumed an average dollar rate of 105 yen and a euro rate of 125 yen for the year to March 31, while Honda Motor Co. is using those rates for the second half.
In the July to September quarter, the dollar was 8 to 10 yen weaker than a year earlier, car analysts said, while the euro weakened by around 2 yen, shaving billions of yen from Japanese car makers' earnings.
But analysts said continued cost reductions and sales growth, mainly in overseas markets, would cushion the blow.
Even though most of Japan's top automakers are expecting a slowdown in profit growth from the first quarter, their performance is much better than that of Detroit's General Motors and Ford Motor Co., which lost money in their core automotive business in the July-September quarter.
Hit by higher sales incentives, health-care costs and slowing sales, GM said this month its automotive arm spilled red ink for the first time in about a decade except for the third quarter of 1998, when the world's biggest car maker suffered major strikes.
The U.S. Big Three have upped the ante in a fierce price war to lure customers away from Japanese brands, which have been chipping away at the light trucks segment with sport utility vehicles and pickups traditionally dominated by the locals.
Japan's auto executives have cautioned that rising sales costs in the crucial North American market remained a major risk.
TOYOTA STRONG, NISSAN MAY DISAPPOINT
Toyota, the world's second-biggest auto maker and its most profitable, is likely to put in the best performance thanks to solid vehicle sales everywhere, including the lacklustre U.S., European and Japanese markets.
"There aren't too many negatives for Toyota," said Koji Endo, an auto analyst at Credit Suisse First Boston Securities. "Domestic sales are going as planned, as are sales in the U.S., even though incentives haven't risen that much."
The average of eight brokerage estimates had Toyota's operating profit rising 4.8 percent to 447.6 billion yen ($4.17 billion) -- about 10 times what GM booked for the same quarter.
At the other end of the spectrum is Mitsubishi Motors Corp., whose sales in the key North American and Japanese markets have slumped since financial troubles and a recall scandal resurfaced earlier this year.
Its second-quarter loss is expected to grow by around 40 percent from the year before to 45 billion yen.
The consensus estimate has Nissan's quarterly profit rising 2.7 percent to 231 billion yen, although several analysts expect a fall due to a slump in domestic sales and the higher-than-anticipated cost of materials and incentives.
"The market will probably be disappointed," said Macquarie Securities analyst Kurt Sanger, who is expecting a 5 percent fall in second-quarter operating profit.
HONDA SEEN RAISING FORECASTS
Honda, which kicks off the earnings season on Wednesday, is expected to report modest growth in operating profit due mainly to an accounting change that removes costs related to some financial derivatives from the operating line.
Analysts expect on average a rise of 3.2 percent to 156.5 billion yen thanks to an improvement in domestic sales, which helped make up for a slowdown in North America.
Many analysts said they expected Honda to raise its conservative full-year forecasts to reflect, among other factors, a weaker-than-expected yen during the three months.
Its quarterly net profit, however, is expected to fall by double digits from last year when it was artificially boosted by valuation gains on derivatives.
Mazda Motor Corp. is seen posting a jump of more than 30 percent in operating profit to 37.4 billion yen for the six months to Sept. 30 helped by strong European sales, although analysts said an improvement in North America was crucial for future earnings growth. No quarterly comparisons are available.
Mazda, owned one-third by Ford, will outline a medium-term business plan with its earnings announcement on Nov. 9.
Nissan will report on Friday, Toyota on Nov. 1 and Mitsubishi is undecided.