Strengthening Yen and Rising Raw Materials Threaten Japan's Automakers

Japan's automakers are facing a significant challenge as a result of two major factors: a stronger yen and the ongoing conflict in the Middle East. For years, a weak yen has been beneficial for Japanese car companies, making their cars cheaper in foreign markets while boosting the value of overseas profits when converted back into yen.

The intervention in early August changed the math, with both the U.S. Treasury and Japan's Ministry of Finance jointly buying yen to slow its decline. This move signals a desire for a stronger currency, which will force automakers to make a painful choice: raise prices abroad and risk losing customers or accept thinner profits on every car sold overseas.

Bernstein's Masahiro Akita noted that 'A 1% change in the yen generally affects Japanese automakers' operating profit by roughly 2%.' Morningstar's Vincent Sun added, 'If government intervention is to strengthen yen, this would be negative for Japanese automakers.'

The conflict in the Middle East is also having a significant impact on carmakers. The dependence on sea routes through the Strait of Hormuz and the Red Sea is causing logistics to get messy and costs to climb. Akita said, 'The most significant headwind to automakers' earnings is the surge in raw material costs.'

The rising cost of raw materials is driving up prices across almost everything that goes into a car, including naphtha and oil-linked resins, memory chips, and industrial metals like aluminum, copper, and steel. This is having a broad-based negative impact on industry profitability.