Tough road ahead for Toyota

Toyota faces tough conditions caused by an excessive appreciation of the yen and an unexpectedly steep downturn in the US, the chief executive of Japan’s largest carmaker said.

“The yen has strengthened too much and will have a big impact on us,” said Katsuaki Watanabe, as the currency jumped from about Y105 to the dollar just days ago to a more than three-year high of almost Y102.

Many analysts expect the yen to strengthen above Y100 to the dollar, a level which, if breached, could lead to a further rapid appreciation.

A rapid rise of the yen to more than Y100 to the dollar could tip the Japanese economy into recession, some analysts say. “If it went to Y95 [to the US dollar] and stayed there, that would probably shave another two-tenths to four-tenths off of real growth,” said John Richards, managing director at RBS Securities in Tokyo.

Mr Watanabe said that it would be difficult to offset the effect of the yen’s rapid rise in spite of Toyota’s legendary ability to cut costs and buoyant demand from emerging markets.

Every rise of Y1 to the US dollar cut Toyota’s annual operating profits by Y35bn ($341bn), said the company.

Mr Watanabe’s grim assessment of the challenges facing the carmaker raises concerns that Toyota could revise down its forecasts if the US economy deteriorates further.

The Toyota chief indicated that North American vehicle demand this year could be weaker than the group had expected last year, although he suggested the second half of the year should see an improvement.

Mr Watanabe’s assessment of the outlook for the year contrasts with Toyota’s confidence just weeks ago that it could weather the global downturn.

Toyota, which is competing with General Motors for the title of world’s largest carmaker, had until recently indicated strongly that it did not expect a significant drop in North American sales.

Toyota also indicated it would be able to offset the US slump with increased sales in emerging markets.

Just last month, the group posted record third-quarter profits as strong sales in emerging markets offset a US slowdown.

Unit sales in China increased 62 per cent in the third quarter.

Even in North America, where sales in the third quarter were down, Toyota achieved record sales in the calendar year for the 12th consecutive year.

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