Japan’s automakers are forecasting record-high profits for the fiscal year ending March 31, 2014. The weakening yen is a big contributor to this phenomenon, but it isn’t the only factor.

By February 10, 2014, Japan’s big seven automakers – Toyota, Nissan, Honda, Suzuki, Mazda, Fuji Heavy (Subaru’s parent), and Mitsubishi – all reported their forecasts. Except for Nissan, the forecasts are pretty good.  The combined forecasts of the seven automakers for net profit amount to 3.37 trillion yen ($33.0 billion).  If achieved, it would break their record high of 3.25 trillion yen ($31.9 billion), which they marked in March 2008 just before the financial crisis. Similarly, the combined forecasts for operating profit amount to 4.46 trillion yen ($43.7 billion), which comes very close to their record high of 4.48 trillion yen ($43.9 billion) in March 2008. Five out of the big seven expect to break their own record on both operating profit and net profit.

Why is this happening? There are several factors that lead to this phenomenon.  Obviously, the main factor is the weakening yen. A total of 1.74 trillion yen ($17.1 billion) is expected to be generated from the depreciation of the yen. This is equal to approximately 40% of their total operating profit.

But what about the remaining 60%?  There are several factors. One big factor is their growing sales worldwide, particularly in North America. For example, Fuji Heavy’s Subaru is selling very well in the US and is expected to sell close to 830,000 vehicles worldwide during this fiscal year. This would be Fuji Heavy’s new record high in sales volume. Another factor is their recent cost-reduction efforts.  For example, Japan’s automakers have been expanding their list of parts suppliers and shifting production to overseas plants. As a result, their operating margins (operating profit on sales) increased dramatically. Fuji Heavy’s operating margin is 13.0%; Toyota’s is 9.4%; and Honda’s, Suzuki’s, and Mazda’s are above 6.0%.

How long will this phenomenon continue? No one knows. The yen could strengthen again. The sales in North America and Asia could drop. Their American, European, and Korean counterparts could become more competitive. The true challenge for Japan’s automakers still lies ahead in the coming years.