Yen Surge Threatens Japanese Exporters' Profits, Dampens Stock Market Outlook

Recent gains have lifted the yen above the exchange rate levels referenced in the performance forecasts of many Japanese companies, increasing the risk of export companies lowering their earnings guidance and further hindering the stock market's upward momentum.
The yen has appreciated 3.5% against the dollar since late July, propelled by stronger signals from the Bank of Japan and the Federal Reserve regarding their respective monetary policies. Analysts now predict the yen could reach 135 per dollar by the end of the year.
This is stronger than the average rate of 144.77 yen per dollar expected by over 9,000 companies surveyed in the latest quarterly Tankan survey by the Bank of Japan, and it also surpasses the exchange rate levels assumed by major exporters like Toyota and Honda.
Forecasters estimate that for every 1 yen the yen appreciates against the dollar, Japanese company profits decrease by 0.4% to 0.6%. Mitsubishi UFJ Morgan Stanley Securities senior investment strategist Kohei Onishi noted that if the yen reaches the lower end of the 140 range, some companies are likely to downgrade their earnings guidance. He added that, historically, the Nikkei 225 index tends to fall when the yen is stronger than corporate estimates.
After a significant global market drop in the first week of August, investor confidence in U.S. stocks rebounded due to economic indicators and Federal Reserve commentary pointing to a soft landing for the economy. Meanwhile, Japanese stocks have lagged, with the Nikkei down 1.9% in August compared to a 1.3% gain for the S&P 500.
"Concerns about the yen breaking the 140 mark are the primary reason for the disparity in performance between U.S. and Japanese stocks recently," said Nobuyuki Kashihara, Executive Officer at Marusan Securities.
The recent yen's rebound has exceeded many Japanese companies' forecasts for exchange rates, increasing the risk of export companies lowering earnings predictions and stalling the stock market recovery.
The yen has risen 3.5% against the dollar since the end of July, reaching 144.78 yen per dollar at the latest reading. Some analysts estimate the yen may rise to 135 yen per dollar by the end of the year. The Bank of Japan's latest quarterly survey of over 9,000 companies showed an average assumption of 144.77 yen per dollar for this year's exchange rate.
Analysts believe that for every 1 yen appreciation against the dollar, Japanese corporate profits will fall by 0.4% to 0.6%. Kohei Onishi, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities, commented that "once the yen falls below 140 per dollar, some companies may cut their financial forecasts." History shows that when the yen is stronger than corporate expectations, the Nikkei 225 index tends to decline.
After a significant global stock market drop in early August, investors have regained confidence in the U.S. stock market, thanks to economic indicators and statements from Federal Reserve officials suggesting the U.S. economy will achieve a soft landing. Meanwhile, Japanese stocks have lagged, falling behind the U.S. market.
"Investor worries about the yen falling below 140 per dollar have been the biggest reason for the recent divergence in performance between U.S. and Japanese stocks," said Nobuyuki Kashihara, Executive Officer at Marusan Securities.
Additionally, Japanese exporters have consistently anticipated stronger yen levels than the current rates, granting them room to exceed expectations when the yen depreciates. However, with the yen strengthening rapidly in August, profits no longer appear conservative.
When the yen strengthens and overseas sales shrink, the automotive sector is one of the industries most exposed to downside risks. For instance, Toyota assumed an exchange rate of 145 yen per dollar for this fiscal year, and Honda assumed 140 yen per dollar.
Looking ahead, Mitsui Sumitomo DS Asset Management Co. chief market strategist Masahiro Ichikawa indicated that whether concerns about the yen will subside depends on a U.S. soft landing and economic indicators, with close attention to the Federal Reserve's actions. He stated, "If the yen strengthens quickly again, it will be an unexpected headwind for Japanese stocks."