The Yen May Stop The Japanese Where The Big Three Couldn't

Implications: When they write the history of Toyota in the twenty first century, the only thing that seemed to slow down the Japanese auto juggernaut may not  be its competition, but the strength of the Yen.

Analysis: The seemingly unstoppable profit machine that is the Japanese auto industry is about to come to a grinding halt.

The sector, led by Honda, Nissan and Toyota, has managed to grow profits for seven straight years by expanding sales in overseas markets and steadily cutting production costs.

But a slide in profits looks increasingly likely in the next business year from April due to a slowing U.S. market, rising costs for steel and other materials, and the dollars continuing tumble against the yen.

A stronger yen makes cars imported from Japan less competitive abroad while also slicing into profits made in the U.S. when brought back to Japan.

The numbers at stake are not small. Every one-yen gain on the dollar cuts into Toyota's operating profit by about 35 billion yen. So if the dollar settles at about 100 yen, Toyota could see more than $4 billion wiped away by currency fluctuations alone.

And the nightmare for for Japan's car makers does not end there.

Some analysts think the U.S. market could shrink to about 15 million units in 2008 from 16.5 million in 2007, hitting its lowest level in more than a decade as consumers stop buying cars due to tighter credit conditions and higher fuel prices.

Toyota said earlier this month it would trim U.S. production of its full-size Tundra pickup while Nissan is planning to halt operations at a plant in Tennessee from March 28-31.

Honda and Nissan produce about 80 percent of their cars for the North American market locally. Toyota imports a higher percentage of vehicles, but has also mitigated its currency risk by by boosting local production to 55 percent.

Even with the high level of local assembly, some analysts are warning that Japanese makers could be forced into raising prices in order to avoid charges of dumping as they did in 1995 when the dollar fell to an all-time low of 80 yen.