Japan's Toyota, Hit Hard Now But Equipped to Steer Clear

Falling Demand, Soaring Yen Drive Down Profits

TOKYO, Oct. 29 -- In Japan, the global financial crisis seems to have singled out some of the world's best-known and best-managed companies for an especially bloody thrashing.

Consider Toyota Motor Corp., whose stock has lost almost two-thirds of its value since February of last year. Like many Japanese exporters, Toyota has been doubly clobbered this fall, first by collapsing consumer demand in the United States and Europe, and then by the exploding value of the yen against the dollar and the euro.

Still, the automaker is exceptionally rich and well positioned for the future. It has about $47 billion in liquid assets, the lowest manufacturing costs in its industry and global leadership in fuel-sipping hybrid cars such as the Prius. It announced this week that it will build a seventh factory with its joint-venture partners in China, where sales, although slowing, have jumped 24 percent so far this year.

So, is the company really worth just a third of what it was worth 20 months ago?

The short-term answer for Toyota and other blue-chip Japanese companies is a qualified maybe, according to economists and investment analysts in Tokyo. The medium- and long-term answer, they say, is likely no. "These stock prices reflect new fundamentals," said Takatoshi Ito, a professor of economics at the University of Tokyo. "Exports earnings are being cut severely because of yen appreciation. Even if Toyota sells the same amount of cars, its earnings decline."

The annual operating profit of Toyota tumbles by about $400 million every time the dollar's value falls by one yen, the company says. Toyota and many major Japanese exporters had expected a dollar exchange rate of around 105 yen throughout 2008, but it has dipped as low as 90 this month.

Although the yen lost value Tuesday in trading against the dollar, many analysts here are predicting the currency's value will continue to increase and squeeze profits out of Japanese companies for at least several more months. The declining popularity of complex transnational bets known as "carry trades" is partly responsible for the pressure on the yen -- in the current turbulence, investors are unraveling these trades and bringing money back to Japan for conversion into yen.

With global recession a near-certainty, Toyota and other Japanese exporters have also had to revise sales and production plans downward. The company recently recorded its first quarterly global sales decline since the downturn that followed the 2001 terrorist attacks. In the United States, Toyota's largest market, sales plunged by 32 percent in September compared with that month last year.

The home market has big problems, too. Japan's real gross domestic product shrank by 2.4 percent in the quarter that ended Oct. 1. Unemployment is at a two-year high of 4.2 percent, and last week the government issued a report warning that the economy "has weakened further."

Fundamentals, though, do not tell the whole story of why stocks in the world's second-largest economy have lost, on average, about a quarter of their value in the past month. Japanese stocks gained back some of their losses on Tuesday, after the Nikkei average reached a 26-year low the day before, but remain at disheartening lows.

"Overseas investors and investment funds are selling Japanese stocks like mad, said Edwin Merner, president of Atlantis Investment Research in Tokyo. "There is panic, and there is blood on the floor."

Merner and several other analysts said foreign investors, including managers of mutual and pension funds, are being forced to sell because they need cash to meet other obligations, particularly for redemption requests from nervous smaller investors.