Honda's doubled profit is a currency trick. Its real problems are still running

Honda's operating profit for the three months to June 2026 was ¥530.7 billion ($3.28 billion), more than double the ¥244.2 billion reported a year earlier. Net profit rose to ¥450.9 billion, well above the ¥208 billion that analysts polled by LSEG had expected. Revenue was ¥6.06 trillion, up 13.5%. The company lifted its full-year operating profit forecast by 30% to ¥650 billion and its net profit outlook to ¥400 billion from ¥260 billion. The headline is a turnaround story. The arithmetic is more complicated.

The chief driver of the gain is not operational excellence. It is the yen, which spent much of the quarter near 158 to the dollar. Honda earns most of its profits overseas; translating them back into yen at a weaker rate automatically inflates the headline. A single point of exchange-rate movement can shift reported profits by billions. The company itself attributed the improvement to "a boost from a weaker yen". The motorcycle business — which sold strongly in India and Brazil — helped, too. But the car business, which accounts for the bulk of Honda's earnings, remains under structural pressure.

Two problems that have haunted Honda throughout 2025 and 2026 — its electric-vehicle (EV) disaster and the collapse of its Chinese operations — show no sign of resolution. The profit rebound masks them rather than solves them.

Honda's EV ambitions collapsed spectacularly. In March 2026 the company cancelled three planned EVs for the North American market — the Honda 0 SUV, the Honda 0 Saloon and the Acura RSX — and terminated the Afeela models developed with Sony. An $11 billion EV investment in Canada was put on indefinite hold. The fiscal year ending March 2026, which had been guided for an operating profit of ¥550 billion, ended with an operating loss of ¥414 billion: Honda's first annual loss in nearly 70 years. The bill came to roughly $9 billion in EV-related writedowns and restructuring charges, according to Reuters. And even now the bleeding is not finished. Honda faces approximately $3.21 billion in compensation payments to EV suppliers whose contracts have been abandoned, Automotive News reported on August 5th.

The company's response has been to pivot back to hybrid vehicles. It plans to invest ¥4.4 trillion ($27.8 billion) in new gasoline and hybrid models over the next three years and to launch 15 new hybrid models by 2030, primarily in North America. The Prologue, Honda's only battery-electric vehicle currently sold in the United States, will be discontinued after the 2026 model year. All North American assembly plants will be made capable of producing hybrids. The logic is not hard to follow. Demand for full EVs has cooled, subsidies have been pulled back, and hybrids are profitable. Mr Toshihiro Mibe, Honda's chief executive, has said the revised plans are "by no means an indication that Honda is withdrawing from the EV business". But the gap between that assertion and the scale of the retreat is telling.

To be sure, the hybrid pivot has tactical merit. American buyers are not buying EVs at the pace that car companies assumed two years ago. The federal tax credit has expired. The Iran conflict has raised oil prices and disrupted supply chains, making cheaper-to-run hybrids relatively more attractive. Toyota, Honda's larger rival, has long hedged with hybrids and has been rewarded for its patience. There is a difference between pragmatism and capitulation; Honda's hybrid investment sits closer to the former.

Yet the hybrid strategy does not address the China problem, which is of a different order. Honda's sales in China fell from 1.62 million units in 2020 to 640,000 in the 2025 calendar year — a 60% decline in five years. The company is shutting two internal-combustion engine plants in China, reducing annual production capacity there to 720,000 vehicles. In April this year, monthly sales in China were 22,595 units, down nearly 50% from a year earlier. The domestic competition is relentless: BYD, NIO, Xpeng and others have combined short development cycles with software-defined features at price points Honda cannot match. As Mr Mibe reportedly concluded after visiting a supplier factory in Shanghai: "We have no chance against this."

Honda's attempt to buy time — extending its GAC joint venture in China by 10 years, through 2038, in July — does not fix the underlying dynamic. The GAC-Honda venture, Honda's first Chinese manufacturing operation, was founded in 1998 and has built more than 11 million cars. No new GAC-Honda models are planned for China in 2026. GAC itself lost approximately $1,225 per vehicle sold under its own Aion brand in 2025, according to Nikkei, as it battles a price war of its own making. The extension is a holding pattern, not a recovery plan. Honda is staking a claim on a market it can no longer meaningfully compete in.

The result is a company whose current profits depend on factors it cannot control — the yen's trajectory — while the two segments that should determine its medium-term outlook, EVs and China, are deteriorating. The ¥650 billion operating profit forecast for the full year is not a return to the ¥1.2 trillion level of 2024. It is a floor, bought with currency tailwinds and motorcycle strength, while the car business limps through restructuring.

For investors, the relevant risk is not that Honda will go broke. It is that the stock's valuation may be pricing a recovery that management has not yet demonstrated it can engineer. The consensus EPS estimate for the third quarter of 2026 is $1.25, and actual results have been above consensus in the first two quarters of the current fiscal year. But consensus is a backward-looking exercise built on the last thing the company reported, which happened to be the quarter that doubled thanks to the yen. If the yen strengthens — as it did briefly after US-Japan joint intervention in July — the profit picture reverses quickly. The $3.21 billion in pending EV supplier payments will show up on future income statements. And China, for all the joint-venture paperwork, will not come back.

AInvest's aggregate signal labels Honda a Hold, which captures the market's ambivalence better than the bullish headline about doubled profits does. The stock is not cheap on a fundamental basis: the company has lost more ground on EV capability and China market share than a single currency swing in either direction can repair.

The broader lesson is one that every Japanese automaker knows but only a few can afford to ignore. The yen is a useful temporary prop, but it is not a business model. Honda needs a strategy for electrification that is more credible than "we'll figure it out later" and a plan for China that acknowledges the scale of the problem rather than extending a declining partnership by a decade of hope. Better to start now.