Weaker Yen Puts Japanese Profits on a New Track

Japan's hard-hit manufacturers are expected to declare this week a turning point in their long struggle to maintain profitability. A sharply weaker yen will allow at least some of the country's automotive and electronics titans to report stronger earnings for the just-ended fiscal year, rosier forecasts for the current one, and big increases in spending on new equipment, R&D, and marketing.Analysts say Toyota Motor Corp. 7203.TO -0.17% will announce on Wednesday its highest profit for the year ended March 31 since a record haul five years ago, while Sony Corp. 6758.TO +2.37% on Thursday will notch its first profit of any kind after four years of losses.The currency windfall won't be enough to solve all problems at Japan's once-world-beating factories. The country's No. 2 auto maker,tyres and wheels service & repair equipment Nissan Motor Co., 7201.TO +0.88% is still likely to report on Friday a drop in profit due to a sharp decline in sales in China, its biggest market, where the political fallout from a territorial dispute has offset some potential currency gains. Panasonic Corp., 6752.TO +0.55% the No. 1 electronics company, is expected to report the same day a second straight year of red ink worth billions of dollars. But the yen's drop will definitely soften the blow for each."The impact is huge,Cast iron clawfoot tubs" says Koichi Sugimoto, senior auto analyst at BNP Paribas BNP.FR +2.40% in Tokyo, referring to the gain for the car companies from the recent forex moves. "It's almost revolutionary in that it looks like a completely different world now for them," he adds.A weaker yen is a boon to the country's export-reliant manufacturers because it makes Japan-made goods less expensive abroad and helps increase overseas earnings when they are repatriated into yen.Japan's top six auto makers collectively lost ￥3.6 trillion ($36.4 billion) in operating profits during the four-year period through March 2012,Used construction machinery a time when the yen hovered near record highs against the dollar, according to a Nomura Securities auto-sector report last month. It got so bad that auto makers like Nissan and Honda Motor Co. 7267.TO +0.25% aggressively shifted more production and parts sourcing away from Japan to shield themselves against the volatile currency. The dollar hit a post-World War II low of ￥75.31 in October 2011. 

It is now hovering right under ￥100.BNP Paribas's Mr. Sugimoto estimates that every one-yen depreciation against the dollar gives each car maker's operating profit a 2% to 3% pick-me-up. That means that at the relatively conservative forecast of ￥95 per dollar for the current fiscal year, car companies would enjoy a roughly 30% bump in operating profits, since most auto makers had assumed the yen would be in the low 80s to the dollar for the just-ended fiscal year.For Toyota, the weaker yen raised operating profit last year by about 10%, estimates Issei Takahashi, an analyst at Credit Suisse CSGN.VX +2.37% in Tokyo. He says currency gains will make up about a third of Toyota's profit for the current year.The weaker yen is also helping Japan's embattled tech sector, but not as much. The country's electronics conglomerates are still paying the price for ill-timed bets on flat-panel televisions and failing to seize the smartphone boom that has lined the pockets of rivals Samsung Electronics Co. 005930.SE -0.67% and Apple Inc.carbon fabric AAPL -0.45% Sony also says it has hedged itself against dollar-yen moves, so the yen's weakening against the U.S. currency doesn't make any difference. But a one-yen decline against the euro can add ￥6 billion to the company's annual profit. Sony recently doubled its profit estimate for last year, due in part to the yen.Just as significant as the earnings figures, this week's announcements will be important for what the companies say about what they plan to do with the new money. That will tell a lot about whether the weaker yen will have the impact desired by Prime Minister Shinzo Abe, who has been looking for a broader economic lift.Analysts expect the companies to plow the money back into research and development, capital spending to ramp up production, and marketing budgets, which had stalled during the strong yen years. Mr. Sugimoto, of BNP Paribas,Antique faucets says it will also give them more flexibility on strengthening customer loyalty through incentive spending or packing newer models with more bells and whistles without raising the price.One harbinger could be No. 3 auto maker Honda, which reported its earnings ahead of the pack, in late April. Honda pledged to put ￥700 billion toward capital spending in the current fiscal year, an 18% jump from the previous year and another ￥630 billion in R&D, up 12.5%.