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Unprecedented Costs Surge has Toyota and other Companies Struggling

In: Finance

Halfway through Japan’s reporting season, companies are mostly hitting their marks, but some high-profile cautious outlooks from blue chips like Toyota Motor Corp. risk sapping optimism for the rest of the financial year.

Almost 60% of firms have beaten earnings estimates in the latest quarterly reports, with technology and consumer discretionary firms doing best and health-care and financial companies lagging. But some investors are worried the earnings recovery could soon unravel as companies such as Toyota struggle to deal with high raw material costs and supply disruptions.

The world’s biggest automaker forecast a 20% decline in operating profit for the current fiscal year despite posting robust annual car sales, citing an “unprecedented” rise in costs for logistics and materials. That even Toyota, known for its meticulous cost-cutting, sees higher expenses far outweighing the benefits of a cheaper yen spells trouble for many other Japanese manufacturers.

Toyota’s weak guidance will have quite a big impact on the market as a whole. This suggests Japanese manufacturing as a whole is likely to be in a tough situation when it comes to annual guidance.

Robot manufacturer Fanuc Corp. was another closely-watched Japanese bellwether that disappointed investors with its earnings outlook this season.

Japan’s stocks look vulnerable to a negative shift in sentiment, having outperformed global peers so far this year. The Topix Index has fallen just 8%, compared with a more than 18% slump in the MSCI AC World ex-Japan Index.

On top of increased costs, Japan’s corporates are dealing with a sluggish domestic economy and increasing risks to growth in key markets, the US and China. And while a weak yen could be seen as a positive for exporters, this time it is aggravating the impact of surging commodity prices, hitting some businesses and consumers much harder than before.

The gap between producer and consumer inflation in Japan has hit the highest since 1980, suggesting increased pressure on profit margins for companies that have traditionally balked at pushing through price rises. But analysts have yet to downgrade their earnings forecasts, which are at the highest in at least 17 years, according to data compiled going back to 2005.

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