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A Cheap Yen Means Huge Profits for Toyota

By John Rosevear – Feb 9, 2014 at 4:00PM

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Exchange-rate shifts helped Toyota's profits quintuple -- yes, quintuple -- last quarter.

Sales of the all-new Toyota Corolla have been strong, but that's not why Toyota's profits have surged in recent months. Photo credit: Toyota.

Toyota (TM -0.01%) reported its profits for the last quarter of 2013 this week, and the numbers are eye-popping: 525.5 billion yen, or just over $5.1 billion. 

That didn't just blow away Wall Street estimates. It's roughly five times what Toyota made in the year-ago quarter. What's more, Toyota says that it's on track to make almost $19 billion for the full year through March 31. 

How is this happening?

It's true that, as Fool contributor John Rosevear explains in this video, Toyota has been executing well. The company's new models are solid entries, and it has made good progress on reducing costs around the world.

But the real secret of Toyota's real success is something completely different: the Japanese government's determination to drive down the value of the yen. Watch as John explains.

A transcript of the video follows.

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Hey, Fools, it's John Rosevear. Shares of Toyota had a huge week, jumping 6% after Toyota reported that its profit quintupled in the last quarter of 2013, and after Toyota raised its profit forecast for the full year ending March 31 to 1.9 trillion yen. That's about $18.8 billion -- just an unprecedented profit for an automaker. Unbelievable.

Toyota's fiscal year runs April 1 to March 31, but if we look at calendar year 2013, Toyota's profit was about as big as GM and Volkswagen combined, and in terms of sales, Toyota's the leader, but only by a little bit. Really these three companies are about the same size. So what's driving this? Well, Toyota is executing well. They had the recall scandals a few years back, but they've really put all that behind them. Their latest new models have been good, the new Corolla is selling quite well, they've done good work on controlling costs, but really Toyota has gotten a whole lot of help from the Japanese government here.

Japan's central bank has followed a policy of easing, which has weakened the yen against nearly every major currency around the world. In other words, a dollar or a euro or whatever buys more yen now than it did. Two years ago, a dollar was worth about 76 yen, and now it's worth about 102 yen. That's a huge difference. That means that cars exported from Japan and sold here in the U.S. can be priced lower, they can earn fewer dollars, and those dollars are worth more when they're converted to yen.

Now, Toyota hasn't gone too far down the road of cutting its prices here in the U.S., at least not so far, so it's still earning plenty of dollars on each car sold, except now those dollars are each worth more yen than they were, and that has led to massive profits.

So what is Toyota doing with these massive profits? So far, the company has mostly been putting them in the bank. Toyota's cash hoard is up well over $35 billion at this point. They haven't been spending because they've actually been focused on trying to control costs. While GM and VW are both spending big bucks to build a slew of new factories in places like China, something that Ford is also doing, Toyota has so far focused on getting more out of the factories it has.

But this big pile of cash will turn out to be an advantage for Toyota in time. Don't be surprised if they plow a lot of it into advanced technology, better hybrids, fuel cells, electric vehicles, and so forth. Being a green leader is a huge priority for Toyota, and now they have a cash hoard to help extend their lead, we'll see what they can do with it. Thanks for watching, and Fool on.

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors and owns shares of Ford. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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