While Toyota raised its FY26 operating profit guidance for the second straight quarter based primarily on a revised currency forecast along with lower material costs and expense/cost reduction initiatives, the margin forecast is well below its 10% FY25 result. Toyota’s lower profitability is primarily related to tariff impacts that are expected to be a 290 bp drag on its profit margin this year. While the FY26 operating margin forecast is also below Moody’s 10% downgrade trigger, we expect Moody’s and rating agencies to remain patient owing to the fact tariff mitigation initiatives take years to implement in the capital-intensive automotive industry.

Management maintained its FY26 tariff cost at ¥1.45 tn (the biggest driver of lower FY26 operating income) while currency is expected to represent a headwind; Effective April 1, 2026, CEO Koji Sato will assume the position of Vice Chairman and Chief Industry Officer, while CFO Kenta Kon will become President and CEO. We view these changes favorably as they reflect a recognition of the fast-changing competitive landscape of the global automotive industry.

Management boosted its FY26 sales revenue forecast by 2% to ¥50.0 tn and raised the FY26 operating income forecast by 12% to ¥3.8 tn based primarily on its revised currency forecast, along with cost reduction initiatives, lower material costs, and slightly lower costs for labor, R&D, and depreciation; FY26 operating income is still 21% lower than FY25.

Toyota lowered its FY26 vehicle production and consolidated vehicle sales targets by 50k units (0.5%) each to 9.95 million, with lower production volumes anticipated in Japan because of delays in quality inspections, weather-related interruptions, and equipment challenges; targets still represent growth versus FY25 (+3% production, +4% sales).