The strong expectation of the yen's appreciation has prompted Japanese exporters to "take the lead"

Japanese exporters are increasingly optimistic about the outlook for the yen, which has made their profit expectations more conservative but also easier to surpass.

According to data compiled by Bloomberg, companies in the TOPIX 500 index have recently released their fiscal year performance guidance for the period ending in March 2024. Their guidance is based on an average exchange rate of 140.22 yen to the US dollar, which is 5% higher than the current market rate.

This means that even if the yen actually appreciates by 5% in the future, it will not have an impact on their performance because it has already been factored in. And if the exchange rate does not reach the 5% increase, the difference will be additional profit for them.

As the latest data shows a cooling of US inflation, market investors believe that the Federal Reserve's rate hike process has ended, leading to a decline in long-term interest rates in the US and a narrowing of the interest rate differential between the US and Japan. In addition, there have been media reports that the Bank of Japan will exit its ultra-loose monetary policy at some point next year, which has strengthened expectations for the appreciation of the yen.

For Japanese exporters, when overseas income is repatriated to Japan and converted into yen, a lower-than-expected exchange rate will translate into higher-than-expected profits.

Toyota announced earlier this month that the depreciation of the yen has boosted its first-half operating income, and its stock price has risen by over 6%. Similarly, Nintendo's performance has exceeded expectations with the help of the weak yen, and its stock price has risen by about 10%.

With the yen falling to its lowest level since 1990, exporter profits have soared, and the TOPIX and Nikkei 225 indices in Japan have reached nearly 30-year highs this year.

According to Takatoshi Itoshima, a strategist at Pictet Asset Management in Tokyo, considering the ongoing uncertainty in the global economy, it makes sense to maintain conservative profit expectations based on a yen assumption that is stronger than the spot rate, and then revise them upward later.

Masahiro Ichikawa, Chief Market Strategist at Sumitomo Mitsui DS Asset Management, also agrees with this view. He said, "Due to the increase in revenue and profits, the performance for this fiscal year has already been revised upward, and the performance outlook for this fiscal year is quite good."

Toyota has stated that for every 1 yen depreciation against the US dollar, operating profit will increase by an additional 45 billion yen. According to Bloomberg's calculations, if the yen remains at around 150 yen to the US dollar, the top 10 largest companies in Japan could potentially earn an additional 1.4 trillion yen in profit this fiscal year.