TOKYO • Japan Inc is caught in the crossfire of the trade war between the United States and China, as a resurgent yen threatens to sap profits and complicate the economic outlook.
Worsening trade friction between the world's two largest economies has reduced investor appetite for risk and boosted assets perceived to be safer bets, such as gold and the yen.
Japan's currency is now near its firmest level in eight months against the US dollar, and exporters in the world's third-largest economy are preparing for pain.
Toyota Motor recently reported its best quarter in four years, but cut its full-year outlook on the currency.
"We're going to be affected by a stronger yen this year, so, to offset this as much as possible, we have been taking extra measures to reduce fixed costs and cut down on expenses," said Mr Kenta Kon, a Toyota manager.
Japanese exporters regularly hedge against currency fluctuations, but a strengthening yen still hurts them because it makes their electronic appliances, semiconductors and cars more expensive overseas. It also decreases the value of overseas earnings when they are brought home.
The escalating US-China trade war and the yen's rise are negative factors for Japan's economy... There's a pretty good chance the timing of a pick-up in exports could be delayed.
MR YOSHIKI SHINKE, chief economist at Dai-ichi Life Research Institute.
The economy expanded at an annualised 1.8 per cent in the second quarter, data showed on Friday, beating expectations of a 0.4 per cent increase. Robust household consumption and business investment offset the adverse effects on exports, which fell 0.1 per cent.
But the outlook for exports could be further complicated as firms are saddled with a strengthening yen.
"The escalating US-China trade war and the yen's rise are negative factors for Japan's economy," said Mr Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"There's a pretty good chance the timing of a pick-up in exports could be delayed," he added.
Toyota expects the stronger yen to knock 350 billion yen (S$4.6 billion) from its operating profit in the current financial year, roughly double its previous forecast and a big increase from last year's 50 billion yen impact.
The carmaker, Japan's largest company by revenue and market value, expects the yen to average around 106 to the US dollar in the current financial year, against a previous assumption of 110 yen.
'NO MAGIC SOLUTION'
Other exporters have signalled the possibility of currency pain. Sony now expects the yen to average 108 this year, from its previous forecast of 110.
"There's no magic solution," Toshiba chief financial officer Masayoshi Hirata told reporters last week, referring to the Japanese currency.
"If the yen continues to appreciate, we'll have to further improve our cost efficiencies," he said.
Honda Motor, Suzuki Motor and Mazda Motor have also flagged the possibility of a cut to profit forecasts if the yen's climb continues.
Honda, which relies on the US for about a quarter of its vehicle sales, recently posted a 16 per cent drop in its first-quarter profit, partially hit by the yen.
The currency is an additional problem for carmakers already facing easing demand in many markets, said Mr Chris Richter, a senior research analyst at brokerage CLSA. "Many Japanese automakers are going to have to adjust their profit forecasts simply because things are bad for them in vehicle markets, and the forex issue is the icing on the cake,"he added.
The yen appreciating beyond 105 to the dollar is often seen by carmakers as determining whether the Japanese currency will mean a significant hit to profit.
The currency was at 105.93 to the dollar on Friday.
Mr Masahiko Nagao, managing officer at Suzuki, told a briefing last week: "Given the current uncertainty about what will happen between the United States and China, along with other issues, it's difficult to revise our forecasts at the moment."
"But we may have to revisit them later in the year, once we have a better idea," he added.
TRADE WAR WORRIES
Some investors and economists worry that the US-China trade war has entered a new phase that will do even more damage to the global economy. US President Donald Trump has said that he will impose more tariffs on Chinese imports from next month.
China last week let the yuan slide to an 11-year low, prompting the US Treasury Department to label Beijing a currency manipulator.
Japan is involved in a trade dispute of its own with South Korea that is threatening to spiral out of control, and both governments want the White House on their side.
So far, economists say there are no signs that the uncertainty over the US-China trade war has prompted Japanese companies to rein in investment spending.
Still, with global demand cooling, a resurgent yen is hardly what Japan's exporters - or the economy - need.
"The outlook for Japan's economy is highly uncertain. My main scenario is that Japan can avert a full-blown economic downturn," said Dai-ichi Life's Mr Shinke.
"But the risk is clearly tilted to the downside," he said.