Toyota Motors Could Get A Boost With New BoJ Governor

by Trefis Team
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Quick Take

  • Japan’s PM nominates Haruhiko Kuroda to be the new head of Bank of Japan.
  • Mr. Kuroda supports the PM’s policy of monetary easing in order to revive the economy.
  • Since Mr. Abe took over the office in December, the yen has fallen more than 20% against the dollar. A weak yen benefits Japanese export companies.
  • Toyota’s margins should widen significantly due to a greater dependency on exports.
  • Honda’s gains will be limited since it exports only a fraction of vehicles it produces domestically.

In a move that bodes well for the profitability of export dependent Japanese companies such as Toyota Motors (NYSE:TM), Prime Minister Shinzo Abe nominated Haruhiko Kuroda, currently the president of the Asian Development Bank, as the new head of Japan’s central bank. Mr. Kuroda supports the new PM’s policy of aggressive monetary easing in order to fight deflation and revive the economy by making the Japanese companies more competitive. Mr. Kuroda still needs to be approved by the Japanese Parliament before he can head the Bank of Japan. [1]

Since Mr. Abe took over the office in December, the yen has fallen more than 20% against the greenback, but the PM is determined to weaken the Yen even further. Until now, the current central bank head Mr. Masaaki Shirakawa and Mr. Abe were not exactly on the same page regarding monetary policies. Although the government has an influence on the monetary policy, it relies on the central bank actions such as asset purchase programs if it wants to weaken the currency.

See our complete analysis for Toyota Motors here

In the last few years, a highly unstable global economy had made the Japanese yen a safe haven and therefore strengthened the currency. Just to emphasize the point, one U.S. dollar yielded 110 yen in July 2008 but the same dollar could only purchase 78 yen four years later. Mr. Abe has been vocal in his criticism for a strong yen and insists that the currency must be weakened in order to resuscitate the economy.

What’s In Store For Auto Companies?

So, what does it mean for automotive companies like Toyota and Honda ? Will a weak Yen have any meaningful impact on their fortunes ?

While the costs associated with manufacturing the cars domestically will remain pretty much the same since production is relatively independent of the currency fluctuations, the profits earned from overseas markets will translate into more yen. At the same time, it gives the companies a greater freedom to price their vehicles in a manner which they believe would maximize the profits (i.e. the ability to cut prices in order to boost volumes).

Toyota’s gross margins stood at 22.8% in 2012, but we estimate they could rise to 24.0% if the current exchange rates were to be maintained throughout the year. If the Japanese central bank under Mr. Kuroda gets more aggressive in its bid to weaken the yen through monetary easing, there could be a further upside to our estimates. A hundred basis point gain in the margins could push the stock price up by 10%. You can drag the trend line to arrive at your customized price. Toyota still produces almost half of its vehicles in Japan about two-thirds of which are exported to international markets. [2]

Honda is another company that is likely to benefit although the impact might be less than that for Toyota since the automaker only produces about 25% of its vehicles domestically. [3] Moreover, only a fifth of these vehicles are exported abroad so the margin expansion should be more limited in this case. Note that in our calculation of gross margins, we do not include R&D and depreciation costs in the expenses.

We currently have a $105 price estimate for Toyota’s stock, which is slightly ahead of the current market price.

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Notes:
  1. Japan Nominates New Central Bank Chief, February 27, 2013, nytimes.com []
  2. Toyota Investor Relations []
  3. Honda Motors Investor Relations []
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