How Japan Companies Use the Weak Yen to Beat Profit Targets

Visitors walk past the Mitsubishi Motor booth at the 16th Shanghai International Automobile Industry Exhibition (Auto Shanghai 2015) in Shanghai, China, on Monday, April 20, 2015. (Bloomberg Photo/Tomohiro Ohsumi)
If you’re searching for Japanese companies likely to beat earnings forecasts this quarter, one good place to start is the currency assumptions.
Take Mitsubishi Electric Corp., the industrial giant that makes everything from rice cookers to satellites. In February, the company gave a profit forecast that was based on the yen at 100 to the dollar, even though the currency was bouncing around 120. That means Mitsubishi’s overseas sales will bring in more revenue than assumed just two months ago — one reason the company will probably beat forecasts when it reports April 28.
Mitsubishi isn’t alone. As Japan’s biggest companies prepare to report full-year results in the coming weeks, the weakening yen is giving them unusual flexibility to beat forecasts and surprise investors. Others that have kept their yen assumptions strong — and therefore given themselves the most potential upside from currency effects — include Daikin Industries, Ricoh and Toshiba Corp.
“Cautious foreign exchange estimates also give them a cushion should their actual operations turn out not so well,” said Peter Tasker, a founding partner of Arcus Investment in Tokyo.
“I would also say that the kind of yen moves we’ve seen in the last 2.5 years are almost unprecedented for a major currency with no crisis going on.”
Mitsubishi Electric is predicting operating profit will climb 45 percent to a record 290 billion yen in the fiscal year that ended March 31. While the company has bumped up its guidance each quarter this fiscal year, the latest projection is still almost 10 billion yen ($84 million) below the average analyst estimate compiled by Bloomberg.
‘Geopolitical risks’
The company left the forecast assumption rate at 100 yen to the dollar because geopolitical risks could have caused the currency to strengthen, Mitsubishi Electric said in an e-mail.
The yen fell 14 percent against the dollar in the 12 months ended March, more than any major Asian currency tracked by Bloomberg, giving a tailwind for Japan’s export-oriented manufacturers. While the value of the yen ranged from 100.82 against the greenback to 122.03 during the period, it averaged at 109.90.
Many companies have adjusted their currency assumptions to reflect market rates — for example, Casio Computer changed it to 110 in late January — though laggards remain. Air conditioner-maker Daikin kept its yen projection at 106, copier maker Ricoh is using 105.13, and electronics maker Toshiba left it at 100, according to the companies.
Record profits
The weakening yen has driven corporate profits to all-time highs. Earnings last fiscal year probably jumped to a record 21 trillion yen, based on aggregated analyst estimates for 214 of the largest companies in the Nikkei 225 Stock Average. Net income will probably rise to a new record of 24 trillion yen this fiscal year, the estimates show.
To see how big of a difference the currency can have on a business’s bottom line, look no further than Toyota Motor Corp., Japan’s biggest company. In Toyota’s latest annual report, swings in the yen boosted the carmaker’s operating profit by 39 percent, or 900 billion yen — more than what General Motors earns each year.
Toyota’s latest currency projections are closer to market rates than some past prognostications. The carmaker calculated its forecasts for the fiscal year just ended based on the yen at 109 against the dollar. The company, which reports results on May 8, has called for earnings to have risen 18 percent to 2.7 trillion yen last fiscal year, in line with analysts’ estimates.
Conservative forecasts
While the yen is projected by analysts to weaken beyond 125 by the end of March 2016, companies are unlikely to use such rates in their forecasts.
According to SMBC Nikko Securities, companies are likely to make conservative forecasts this earnings season based on the Bank of Japan’s most recent Tankan survey, which showed large companies expect profit growth to slow this fiscal year.
“Forex assumptions alone could result in company projections falling short of analyst forecasts,” the brokerage wrote in a recent note to clients. “Japanese companies typically unveil conservative projections for the new fiscal year when announcing full-year results, and we expect this tendency to be particularly strong this year.”
Bloomberg
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