Toyota’s financial guidance for FY26 reflects expectations for higher vehicle production and wholesales but lower consolidated operating profit. Most of the decline in profit is attributable to currency that is projected to go from a tailwind in FY25 to a material headwind in FY26. The other major profit headwind is tariffs, which we estimate could be a 200 bp automotive EBITDA margin headwind based upon management’s estimates. While significant, we believe the tariff headwind – if realized – would not push its profit margin below the rating agency downgrade triggers. Management noted tariff impacts are difficult to estimate based on ongoing negotiations, including government-to-government dialog between Japan and the US.

Toyota unveiled FY26 financial guidance that includes a 5% increase in vehicle wholesales and a 1% increase in automotive revenue but a 21% decrease in consolidated operating income. Consolidated vehicle sales are expected to increase by about 5% YoY based on growth in all regions. FY25 consolidated operating income guidance of ¥3.8 tn is 21% lower on a YoY basis, which would represent the second consecutive double-digit decline from its peak ¥5.4 tn consolidated operating income it reported in FY24.

On tariffs, management stated details of tariffs are still in flux, including ongoing government-to-government negotiations between Japan and the US. It indicated the tariffs that have been imposed to date are reflected in its forecast, but noted it is difficult to forecast the future given the fluidity of global trade negotiations. The company has a long-term plan to increase its local supply percentage ratio in the US as part of its business continuity plan. However, it has no immediate plans to change in its US vehicle production or auto parts sourcing plans in the near term owing to uncertainty in country tariffs and the durability of US vehicle and auto parts tariffs.