Japan cars: low yen boost should inspire range anxiety

A decade ago, Japanese automakers were struggling with a deep crisis of excess capacity. Now they cannot make enough cars to meet demand. The three biggest makers, Toyota, Nissan and Honda, have managed to meet profit expectations despite slashing output. It will not last.

Toyota cut its annual production target by a half a million more cars on Wednesday, blaming component shortages. The Japanese auto giant will make 8.5mn cars in the year to March, down from a previous target of 9mn, and 9.3mn at the start of the financial year. Operating profit fell 21 per cent in the quarter to December.

Local peer Nissan recorded a 22 per cent decline in group output in the latest quarter from a year earlier. Honda reported an operating profit drop of 17 per cent.

So far all three companies have absorbed these blows without slashing full-year profit forecasts. Thank the yen. The currency has weakened more than 10 per cent against a surging dollar since the start of last year. This amplifies profits from sales in key markets such as China and the US. The businesses have covered the rest of the shortfall by raising car prices.

Both buffers have limits. Prolonged yen weakness may trigger official intervention to support the currency more. Meanwhile, the Japanese car market is changing. The loyalty of motorists to local brands is weakening. They are more sensitive to price and welcoming towards imports. After Tesla cut the price of its long-range version of the Model 3 by 24 per cent in February last year, Japanese sales more than doubled. New registrations of imported electric cars have nearly tripled. The relative lack of attractive battery electric models from domestic carmakers should soon be reflected in bottom lines.

Yet shares of the trio have outperformed the benchmark Nikkei 225 index in the past year. All three trade at a steep premium to global peers including BMW on a forward earnings basis. Shares of the best performer Toyota are up 42 per cent, trading at 11 times forward earnings, nearly double Volkswagen. That is despite a much weaker position in electric vehicles.

The rising number of coronavirus infections in Japan and south-east Asia means supply-chain disruptions, and output cuts, will continue. The valuation gap with the likes of VW should narrow.