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Corporate Japan plays it safe in yen forecasts for second half

Toyota, Hitachi Construction, others stand to benefit from soft home currency

Large Japanese enterprises are working off the assumption that the yen will trade at 109 or so to the greenback for the October-March half.

TOKYO -- Major Japanese companies, already poised for record profits in the year ending March 2018, are assuming a yen stronger than current levels for the second half and so could do even better if the currency stays weak.

Big players have pegged the yen at about 109 to the dollar and around 125 to the euro on average for the half. The actual rates now stand at roughly 113 and 131.

Toyota Motor has weakened its full-year assumed rate by 1 yen to 111 against the dollar but is sticking with 110 for the second half. Its annual operating profit gets a 40 billion yen ($352 million) lift each time the Japanese currency softens by 1 yen against the greenback.

Automakers are major beneficiaries of a weak yen. Honda Motor has assumed yen-dollar rates of 110 for the October-December quarter and 105 for the January-March quarter. Mazda Motor sees the home currency at 108 for the second half. Should the yen stay at current levels, aggregate operating profit at seven major Japanese carmakers would enjoy a roughly 150 billion yen boost.

Nidec and Hitachi Construction Machinery have maintained their assumed rates of 105 yen to the dollar. Hitachi Construction Machinery stands to gain 600 million yen in second-half operating profit for each 1 yen depreciation against the dollar and 400 million yen for each 1 yen depreciation against the euro.

"We can add about 13 billion yen in operating profit should the yen remain as weak as in the first half," said Tetsuo Katsurayama, a vice president at Hitachi Construction Machinery.

While some had foreseen only limited effects from depreciation on profits, the yen's continued weakening since summer has created more room for results to exceed expectations. In fiscal 2016, the yen traded at around 105 to the dollar in the first half and about 111 against the greenback in the second half.

Daiwa Securities estimates that second-half pretax profit at major companies will rise 0.25% for each 1 yen softening against the U.S. currency.

Major companies are also assuming on average that the euro will trade 6 yen stronger than current rates. Casio Computer benefits only slightly from a weaker yen against the dollar but gets a 250 million yen lift to annual operating profit from each 1 yen depreciation against the euro.

But a soft yen squeezes profits at domestic-demand-focused enterprises that import raw materials. Japan Airlines, which purchases fuel and aviation hardware in dollars, assumes a second-half rate of 115 yen to the dollar. Hokkaido Electric Power, an importer of such fuels as liquefied natural gas, is using the same figure.

"Companies reliant on domestic demand tend to set their assumed exchange rates rather weaker," said Kazuhiro Takahashi, senior equity strategist at Daiwa Securities.


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