While expected profit margin compression is material and Toyota management has disclosed few details of its tariff risk mitigation strategy to improve or restore profitability, the company’s competitive position remains strong with volume growth expected in each of its major markets this year. Unlike many of its peers, its EV investments have been modest to date as it has focused on hybrids and flexible plant manufacturing, which we believe should help it avoid material near-term EV investment write-offs in the US. While we expect the company’s profit margin to fall below the rating downgrade triggers in FY26, we do not expect negative rating actions in the near term as further tariff relief is likely with the renegotiation of the US-Mexico-Canada Agreement in 2026.

Toyota has reaffirmed its FY2026 outlook, holding its consolidated vehicle sales target at 9.8 mn units and total revenue at ¥49.0 tn, representing YoY increases of 5% and 2%, respectively. The forecast for operating income was revised up from ¥3.2 tn last quarter to ¥3.4 tn. The revised operating income guidance represents a 29% YoY decline, reflecting the full-year impact of US tariffs totaling ¥1.45 tn, a ¥555 bn negative effect from yen appreciation, and an additional ¥470 bn in higher material costs.

Management stated these headwinds are expected to be partially offset by improvement initiatives totaling ¥910 bn, which include higher sales volume, enhanced product mix, cost reductions, and expanded value chain profit. The operating margin is projected to contract to 6.9% for FY2026, down from 10.0% in FY2025, with tariffs accounting for the largest share of the decline.

Management clarified that the tariff assumptions for FY2026 include a 25% rate on Japanese exports to the US from April through September 15, 2025, dropping to 15% for the remainder of the fiscal year, and a 25% rate on exports from Canada and Mexico for the full year.