It's been a good year so far for automakers. And it's been an even better year for Toyota. The company reported its second-quarter earnings Friday, which included this whopping number: Sales were up 14 percent over a year earlier. The company hiked its estimate for 2013 earnings by 8 percent. And operating profit rose 88 percent.
The results were enough to spark a 6 percent rise in Toyota's U.S.-listed shares, and surely to strike fear in the hearts of Toyota's competitors. As Bloomberg news points out, while Toyota was edged out by General Motors in number of cars and trucks sold, it recorded more than three times the profit.
The strong earnings are partly a result of surging U.S. auto demand, though that has lifted the boats of almost all the automakers that do business here. But more than that, Toyota's success is an early marker that "Abenomics," the aggressive strategy of Keynesian economic policy embraced by Japanese Prime Minister Shinzo Abe, is starting to have some effects.
Now, some of those effects are easier to measure than others. The most direct way that Abenomics has helped Toyota is by lowering the value of the yen on foreign exchange markets. In the most recent quarter, the yen hovered about 25 percent lower against the dollar than it had in the same period of 2012, the result of the Bank of Japan's promises to keep printing yen and buying bonds until the nation's cycle of deflation is broken.
Of the 272 billion yen in higher earnings that Toyota reported Friday, 260 billion are attributable to foreign exchange swings, according to Toyota's own estimates. Toyota has taken advantage of costs that are now 25 percent lower on the global marketplace (at least for those cars and parts built in Japan, rather than in satellite plants elsewhere).
And rather than try to build market share by lowering prices, the automaker is mostly using its lower cost structure to achieve higher profit margins. In fact, the number of cars it sold in the quarter was actually slightly below the level of the same quarter last year, 2.23 million, down from 2.27 million. But Toyota was making more money off of each car, reaping higher profits. That's particularly welcome for U.S. and European automakers, who can live with the fact that Toyota is making record profits but would be hard-pressed to match price cuts. (It may also be politically savvy of Toyota because if it were to slash prices and grow market share, it could push other governments to raise the political pressure on Japan to curtail its easy money policies.)
But while currency rates matter a lot for a global automaker like Toyota, the real measure of Abenomics will be in how much it can do to change the economic psychology of Japan domestically. The nation has been locked in a pattern of stagnant growth and falling prices for two decades. Part of the premise of the Abe government's strategy is to shock the nation out of its torpor and instill confidence that a better day is coming -- and that prices will rise, so you'd better buy now.
You can see hints of this effect already in the new Toyota numbers. While operating income rose moderately in North America, Europe and parts of Asia other than Japan, it absolutely soared in Japan itself, rising from 107 billion yen to 456 billion yen. Trends were not as decisively positive on the number of vehicles sold in Japan; that volume number was actually down.
But the fact that one of Japan's biggest and most important companies is again finding ways to make money on the homefront is a good sign that the nation's economic torpor may not last too much longer. It wouldn't make much sense to judge Abenomics based on one company's financial results for one quarter. The ultimate success or failure of the strategy will be determined by what happens to Japanese incomes over many years ahead. But the early returns are good, and Toyota's success on the world stage is evidence.