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By Bloomberg

Toyota Motor Corp., already forecasting a record profit based on the yen at 104 per dollar, received a twin festive-season gift as the government decided to delay raising the sales tax and the currency fell toward 120.

The yield on Toyota bonds due in June 2019 dropped to an all-time low of 0.125 percent yesterday, compared with an average of 1.9 percent on U.S. notes with similar maturities and credit ratings, Bank of America Merrill Lynch data show. Default risk fell to a two-month low as Fitch Ratings Ltd. said the company will get the biggest boost from yen weakness because it produces more cars domestically for export than Japanese competitors Nissan Motor Co. and Honda Motor Co.

The world’s largest automaker, which reported a 900 billion yen gain ($7.5 billion) from currency swings last year, said Dec. 2 that U.S. sales of light trucks and sport utility vehicles reached a record for November. Prime Minister Shinzo Abe’s plan to postpone raising the sales tax to 10 percent, after April’s increase to 8 percent led to a recession, may also support domestic car sales.

“The weakening yen puts Japan’s carmakers in a stronger position in the U.S. because we expect the U.S. market to become increasingly competitive,” said Isabelle Katsumata, a credit analyst with Fitch. “We think the delay in the increase in the consumption tax will lead to a modest rebound in sales in Japan.”

Profit Forecast

Toyota increased its net income forecast for the 12 months ending in March by 12 percent to 2 trillion yen, predicting a second year of record profits as a weaker yen boosts the value of high-profit Lexus luxury models and SUVs sold abroad. The carmaker also raised its projections for full-year operating profit and revenue, according to a statement from the Toyota City, Japan-based company on Nov. 5.

The yen has declined by 29 percent against the dollar since December 2012, when Abe came to power pledging to end deflation. South Korea’s won dropped 3.8 percent during the period. Japan’s currency traded at 119.92 per greenback as of 2:08 p.m. in Tokyo, after dropping earlier to a seven-year low of 119.95.

“The Japanese yen is the elephant in the room for U.S. autos,” Morgan Stanley wrote in a report last month, when the yen was still at 114 to the greenback. “If we had to name just one macroeconomic factor that has the greatest number of auto CEOs losing the greatest amount of sleep at night, it is without question the weakening Japanese yen.”

Competitive Advantage

While Japanese carmakers are unlikely to start price wars, the weakening currency allows them to boost the product specifications in vehicles, making them more competitive against U.S. producers, according to the report.

The yen’s rapid decline compared with that of the won has left Korean automakers such as Hyundai Motor Co. at a competitive disadvantage, according to Fitch’s Katsumata.

The cost to protect Toyota’s bonds against non-payment was at 26 basis points yesterday, after falling to 25 on Nov. 28, the lowest since Sept. 29, according to CMA prices. Hyundai’s credit-default swaps were at 66 basis points, the data show. A basis point is 0.01 percentage point.

Toyota increased last month its estimate for vehicle sales to individuals in North America, its single biggest market, by 30,000 to 2.74 million this fiscal year, even as it cut its forecast for Japan by 20,000 vehicles to 2.19 million.

In the first 10 months of the year, Toyota produced 41 percent of total vehicles in Japan, compared with Nissan’s 20 percent and Honda’s 22 percent, according to information in the companies’ websites.

Lexus Sales

U.S. deliveries of Toyota’s Lexus climbed 14 percent this year through November, outpacing Bayerische Motoren Werke AG’s BMW and Daimler AG’s Mercedes-Benz.

In Japan, Toyota widened recalls after an air bag made by Takata Corp. ruptured in one of its cars at a scrapyard last month. The automaker will recall 185,000 vehicles including Corollas, said Nobuhito Kiuchi, a transport ministry official.

BOJ Governor Haruhiko Kuroda’s board bolstered bond buying on Oct. 31 as inflation slowed before reaching the central bank’s 2 percent target, when the sales tax’s effect is ignored. The 10-year yield has fallen 30 1/2 basis points this year to 0.43 percent, the world’s lowest after Switzerland’s.

Abe decided to delay a planned sales tax increase set for Oct. 2015 by 18 months after the economy shrank for two quarters, following a boost in the levy to 8 percent in April. He called last month a general election to be held on Dec. 14, with the focus on his economic policies.

Fiscal Goals

Moody’s Investors Service cut its sovereign rating on Japan to A1 from Aa3 on Dec. 1, saying there’s “heightened uncertainty” over the nation achieving its fiscal deficit reduction goals.

The rating company yesterday affirmed Toyota’s credit score at Aa3, one level higher than the government’s grade, even as it reduced to A1 the evaluations of companies including Takeda Pharmaceutical Co., Fujifilm Holdings Corp. and Seven & I Holdings Co. Toyota’s Aa3 level is the fourth highest.

“Automakers’ business is spread all over the world so there’s little concern” about their bonds after the sovereign downgrade, said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Corp. “The Japanese market isn’t very good for local automakers now, so they are dependent on overseas business.”