Toyota Battling Against Yen's Strength

Japan's rebound is a double-edged sword for Toyota Motor Corp.

This should be the year for the auto maker to shake off natural-disaster-related supply constraints from 2011 and its 2010 recall woes, reclaiming lost U.S. market share. Already, industry figures out Wednesday are expected to show Toyota improving its share in December by perhaps the most of any auto maker, even as industry sales are flat or weaker from November's annualized level. Still, with a current market share of roughly 14 percent, Toyota has a ways to go before it gets back to its peak 17 percent levels, reported The Wall Street Journal.

There is some doubt as to whether those levels can be recaptured in the wake of the company's massive recalls. What is certain is that the steely Japanese yen isn't helping Toyota's prospects. For reasons ranging from a Japanese recovery to dimming growth prospects elsewhere, the yen has recently become one of the world's strongest currencies—much to the chagrin of Japan's exporters, which are critical to the island nation's economy.

The yen has risen by some 17 percent against the dollar over the past two years, even as Japan has repeatedly intervened to stem the rise. Toyota isn't the only Japanese auto maker struggling with the surging yen when it comes to exported vehicles; Honda and Nissan also are feeling the impact. But of the three, Toyota retains the largest Japanese production base, meaning its costs are most sensitive to yen appreciation, notes Credit Suisse analyst Christopher Ceraso.

As Morningstar points out, each one-yen rise against the dollar is about a 32 billion yen ($417 million) hit to Toyota's operating income—more the double the impact on Honda. Moreover, at current levels of roughly 76 or 77 yen per dollar, Japan's output of vehicles like compact cars for the U.S. market is rendered unprofitable. For Toyota, the hope is such yen strength will prove temporary; indeed, the auto maker is planning to boost production 24 percent globally next year as its sales gather pace.

The yen may prove stubbornly buoyant, however, unless global growth prospects suddenly revive. And this may keep Toyota's earnings—and shares—from reaping the full benefit of that rebound. In 2011, Toyota proved a better bet than General Motors or Ford Motor Corp. This year, the opposite may be true.