TOKYO (BLOOMBERG) - Japan Inc is already counting the cost of Brexit. The yen's extended surge after UK's decision to exit the EU 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 automaker has slid to US$16.5 billion, with four analysts cutting their predictions by an average US$2.3 billion for the fiscal year that started April 1. The referendum outcome triggered the yen's biggest one-day advance in almost 18 years, taking its gain against the dollar in 2016 to 17 per cent, the most among developed nations.
Profit estimates for Nissan Motor and Canon were also cut by analysts after the referendum vote pushed up the yen, paring the value of income from overseas. Concern growth would slow in Europe is also casting a shadow on Japan's exports and undermining Prime Minister Shinzo Abe's effort to end deflation and spur expansion.
"Abenomics is finished," said Takuji Okubo, Tokyo-based 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 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 102 yen as of July 5. Should the dollar average 105 yen, current profit would drop 0.5 per cent, Daiwa estimates.
"The yen is strengthening against several currencies and this is weighing heavily on earnings at Japanese automakers," analysts led by Kota Yuzawa at Goldman Sachs, wrote in a report. "We revise Goldman Sachs estimates following the UK's referendum vote to leave the EU."
The company lowered its Toyota operating profit forecast by 21 per cent to 1.78 trillion yen for this fiscal year.
Toyota shares have slumped about 32 per cent this year, almost double the 18 per cent drop in the Nikkei 225 Stock Average. The stock was little changed on Tuesday.
Toyota said its approach to maintaining production of 3 million vehicles in Japan hasn't changed, and that its system isn't dictated by "short-term factors such as exchange rates, regardless of how much the business environment fluctuates." If analysts are right with their predictions, it would be Toyota's first drop in profit in five years.
Canon declined to comment. Nissan said it desires exchange- rate stability and it is "always working to create a business structure that minimizes exchange-rate volatility." Suzuki Motor said the Indian rupee and the euro have the biggest impact on its earnings.
"We are going to cope with a stronger yen through further cost-cut efforts and local production," Takashi Iwatsuki, a corporate director in charge of overseas sales at Suzuki, told shareholders at a meeting last week.
Wacoal Holdings, a Japanese bra maker that got about a third of profit overseas last year, said it will consider moving its UK warehouse should Brexit cause tariffs to rise.
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 Hiroaki Muto, chief economist at Tokai Tokyo Research Center.
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.
"You're in trouble if you're exporting," said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo. "If the currency changes slowly over a period of a couple of years you can adjust, but if it moves very quickly like it has, you cannot adjust so quickly - it's pretty serious."
The Brexit vote may cost automakers worldwide about 2.8 million light-vehicle sales through 2018, researcher IHS Automotive said in its latest projections for the industry. Global stock markets that were whipsawed after the referendum may suffermore, according to Olav Chen, who oversees US$9.6 billion at Storebrand Asset Management, a tactical asset allocation unit of Norway's biggest listed life insurer.
Since Mr Abe assumed office, corporate profits have been up for three years, while the Topix index has climbed 50 per cent.
Some Japan Inc stalwarts are benefiting. The shift in fortunes for manufacturers has boosted the relative market value of companies less affected by foreign exchange fluctuations. Three of Japan's four biggest companies are now telecommunications carriers and analysts have increased earnings estimates for each of them following Brexit.