TOKYO • Japan Inc is already counting the cost of Brexit. The yen's extended surge after Britain's decision to exit the European Union has turned the outlook for a gain in annual profit to the first decline in four years.
Take Toyota Motor. Since the June 23 Brexit vote, the mean forecast for net income at the world's biggest carmaker has slid to US$16.5 billion (S$22.2 billion), with four analysts cutting their predictions by an average US$2.3 billion for the fiscal year starting April 1.
The referendum outcome triggered the yen's biggest one-day advance in almost 18 years, taking its gains against the US dollar this year to 17 per cent, the best among developed nations.
Profit estimates for Nissan Motor and Canon were also cut by analysts after the Brexit vote pushed up the yen, paring the value of income from overseas. Growth concerns in Europe after the referendum and the currency's gains are casting a shadow on exports and threatening to derail Prime Minister Shinzo Abe's efforts to free Asia's second-biggest economy from deflation.
"Abenomics is finished," said Mr Takuji Okubo, chief economist at Japan Macro Advisors. "The yen appreciation will be the largest impact from Brexit to Japan. Japanese corporate profits will decline and how much they will decline depends on how much the yen appreciates. There is significant risk the yen could increase very sharply to 90 yen against the US dollar."
Earnings at 200 of Japan's largest companies would drop about 3.6 per cent in the fiscal year, Daiwa Securities Group estimates, based on the yen averaging 100 against the US dollar and 115 against the euro during the year. The currency traded at about 103 yen against the US dollar as of Monday.
"The yen is strengthening against several currencies and this is weighing heavily on earnings at Japanese carmakers," analysts at Goldman Sachs Group wrote in a report. The company lowered its Toyota operating profit forecast by 21 per cent for this fiscal year.
If analysts are right with their predictions, it would be Toyota's first drop in profit in five years.
The prospect of lower profit is also adding to pressure on Bank of Japan governor Haruhiko Kuroda to expand monetary stimulus at the central bank's policy meeting later this month. Failing to take that step may make the yen rise even further, said chief economist Hiroaki Muto at Tokai Tokyo Research Centre.
More conservative profit forecasts would signal bleaker prospects for growth in key export markets including Europe, China and the US. Japan's exports fell 11 per cent in May, an eighth monthly decline as shipments to all three trading partners slumped.