While we expect its automotive profit margin to fall below the Moody’s EBIT margin downgrade trigger of below 10%, we believe Moody’s is unlikely to make a negative outlook revision in the near term considering it revised its outlook on Toyota from positive to stable in early June after the tariffs had been implemented. Outside the tariff impacts, Toyota’s global sales and market share remain strong, and it maintains a leadership position–if not THE leadership position–in hybrid vehicle sales, which is currently the fastest growing light vehicle segment globally. And while management maintains the long-term strategy of localizing vehicle production in the US, it also announced a new manufacturing facility in Japan that is expected to open by the early 2030s to support its home market.

Toyota revised its FY26 financial guidance that maintains projections for vehicle wholesales (+5%) and revenue (+1%). The guidance reflects a full-year tariff impact of ¥1.4 tn, a ¥725 bn headwind from yen appreciation, and a ¥300 bn drag from higher material costs. These pressures are projected to be partially offset by planned improvement efforts totaling ¥900 bn, comprised of volume/mix gains, cost reductions, value chain profit expansion, and other positive drivers. The company’s consolidated operating margin is now expected to decline from 10.0% in FY25 to 6.6% in FY26, representing 340 bp of contraction, 290 bp of which is from tariffs.

The tariff impact assumptions include a 25% tariff on Japanese exports to the U.S. from April through July, shifting to 12.5% for the remainder of the fiscal year, and a 25% tariff on exports from Canada and Mexico for the entire period. Management highlighted that a portion of these costs are expected to be absorbed by suppliers or mitigated by exemptions for USMCA-compliant parts and U.S.-produced vehicles, but acknowledged “the impact of U.S. tariffs and other factors drove the profit guidance cut.”