Honda Motor Co. raised its full-year profit forecast on Wednesday, citing a weaker yen that has made its overseas earnings more valuable when converted back into Japanese currency. The move comes even as the automaker reported a decline in global vehicle sales during the April-to-June quarter.
Japan's second-largest automaker said it now expects operating profit of 650 billion yen ($4.2 billion) for the fiscal year ending March 2025, up 30% from its previous forecast of 500 billion yen. The revised outlook reflects a more favorable exchange-rate assumption: Honda now assumes an average of 155 yen per U.S. dollar for the year, compared with 145 yen previously.
Why the yen matters so much
Honda generates a significant portion of its revenue outside Japan, with the United States accounting for roughly half of its quarterly vehicle sales, according to Reuters. When the yen weakens against the dollar, profits earned in dollars translate into more yen, inflating the company's reported earnings.
This dynamic is common among Japanese exporters. A weaker yen makes their products more competitive in overseas markets and boosts the value of repatriated profits. However, it also raises the cost of imported raw materials and energy, which can squeeze margins at home.
The company's operating profit more than doubled in the April-to-June quarter compared with the same period last year, marking its first year-on-year quarterly profit increase in six quarters. That improvement came despite a dip in global vehicle sales, underscoring how much of the gain was driven by currency effects rather than underlying demand.
What it means for investors
For everyday investors, Honda's forecast revision is a reminder of how currency movements can sway the earnings of multinational companies. When a company earns in a strong currency and reports in a weak one, profits can look better than the underlying business performance might suggest.
Investors should also note that Honda's outlook still depends on the yen staying weak. If the currency strengthens, the company could face headwinds later in the year. Analysts often watch exchange-rate assumptions closely because they can mask or amplify real operational trends.
Honda's situation is not unique. Other Japanese companies have also benefited from the yen's decline, and some have raised their forecasts as a result. For example, NYK Line raised its profit forecast earlier this week, though its shares still fell 4% on the news, highlighting that market reactions can be unpredictable.
Similarly, Next lifted its profit forecast after strong summer sales, showing that forecast upgrades are not limited to exporters. But for Japanese automakers, the currency factor is often the biggest swing factor.
Broader context
The yen has been under pressure as the Bank of Japan keeps interest rates ultra-low while other central banks, particularly the U.S. Federal Reserve, have raised rates. That divergence makes the dollar more attractive, pushing the yen lower. A weaker yen is a double-edged sword: it helps exporters like Honda but hurts consumers and smaller businesses that rely on imports.
Honda's forecast revision also comes amid a challenging period for the global auto industry, with rising competition from electric vehicle makers and supply chain disruptions. The company has been investing heavily in EVs and software, but its near-term profitability still leans heavily on traditional gasoline-powered vehicles sold in North America.
For investors, the key takeaway is that Honda's improved outlook is largely a currency story. While it's positive news, it doesn't change the fundamental challenges the company faces in a rapidly evolving market. As always, it's wise to look beyond headline profit numbers and consider what's driving them.
Honda's shares have been volatile in recent months, and the market's reaction to the forecast will be closely watched. The company's ability to maintain its profit momentum will depend on both currency trends and its success in managing sales volumes and costs.
In the meantime, investors in other Japanese exporters may see similar benefits from the weak yen, but they should also be prepared for the possibility of a reversal if global currency markets shift.
