Posted by: Kenji Hall on October 23, 2008
The surging yen is taking a toll on Japan Inc. On Oct. 23, Sony issued a profit warning, saying that it expects the yen’s recent gains against a slew of currencies to seriously undercut the company’s earnings this fiscal year. The Tokyo-based electronics and entertainment company now expects operating profits of 200 billion yen ($2.04 billion) on sales of 9 trillion yen ($92 billion) in the year through March 2009.
For sales, that’s only a 2% drop from the earlier forecast and it’s 1% higher than in the previous fiscal year. But operating profits will be a hefty 57% lower than the prediction Sony made in July and will have dropped 58% from last year’s results.
The announcement, which is to be followed by a press conference this evening, wasn’t completely unexpected. Sony had based its forecasts on the assumption that exchange rates would be 105 yen per dollar and 160-165 yen for every euro. Those numbers now look dated: The dollar has fallen to around 98 yen and the euro to 125 yen.
When the yen rises, Japanese exporters’ earnings take a hit because they convert profits earned overseas back into yen. That’s a big deal for a company like Sony which made nearly three-quarters of its revenues outside of Japan last year. Though Sony’s bean counters likely have hedged against shifting currencies, the yen’s unpredictably wrenching move may have exceeded expectations and put the company in a world of hurt.
The yen isn’t wholly to blame for Sony’s earnings revision. As the economy sours, consumers are less likely to splurge on flat-screen TVs and digital cameras. The dilemma for Sony CEO Howard Stringer, who has spent the past three years rebuilding the company, isn’t one merely of smaller profits. In late June, Stringer had predicted that the loss-making TV and video game businesses would be profitable this year for the first time in a while.
Prior to the announcement, Sony's shares finished the day 6% lower in Tokyo trading. The industry bellwether electrical machinery index fell 4% on the day.
Sony probably won’t be the only Japanese blue-chip to lower its annual earnings forecasts. Next week, a number of Japan’s largest exporters, including Panasonic, Nintendo, Nissan and Honda, will release their fiscal first-half results. They could offer a similarly bleak outlook.
It’s hard to say how big an impact collapsing stock prices and a recession will have on electronics sales globally. Sony is vulnerable because its electronics business accounts for 70% of overall sales.
There is a chance, though, that video games won’t do as badly. Traditionally the gaming sector has held up during hard times. That’s because consumers have viewed video games as an affordable way to keep themselves occupied for hours at home. Sony will likely cling to the hope that its video game unit will stay on track for a recovery as the company adds to the new video-download and other online services for the PlayStation 3 console in the coming months.