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Announcement:

Moody's changes Toyota Motor's outlook to negative

 The document has been translated in other languages

22 Dec 2011

Tokyo, December 22, 2011 -- Moody's Japan K.K. has affirmed the Aa3 long-term senior unsecured and issuer ratings of Toyota Motor Corporation(Toyota) and its subsidiaries, but changed the rating outlook to negative from stable.

The ratings on the following entities are affected:

Toyota Motor Corporation

Toyota Financial Services Corporation

Toyota Finance Corporation

Toyota Credit Canada Inc.

Toyota Finance Australia Ltd.

Toyota Finance New Zealand Ltd.

Toyota Financial Services (South Africa) (Proprietary) Limited

Toyota Motor Finance (Netherlands) B.V.

RATINGS RATIONALE

The change in outlook reflects the likelihood that the recovery in Toyota's profitability will be more protracted than anticipated due to the company's significant exposure to the strong Yen.

This foreign-exchange pressure is compounded by eroding macro-economic conditions in certain core markets, and Toyota's weaker competitive position following product quality issues.

The company earlier this month materially lowered its earnings expectations, reducing its consolidated operating profit forecast for FYE 3/2012 to JPY 200 billion from JPY 450 billion. It attributed the reduction to the disruptions in production caused by the floods in Thailand and the increasing adverse effects on its business of the strong Yen.

Toyota is particularly vulnerable to the strengthening Yen because of its greater dependence on domestic production to support sales in markets such as the US and Europe.

In FYE3/2011, Toyota domestically produced about half of its global vehicles, while its peers such as Nissan and Honda only produced about one fourth of their total global units in Japan. Moreover, Toyota exports about half of its domestic production, and uses some components exported from Japan for the assembly of vehicles in the local markets.

The strong Yen undercuts margins on exported products, and adversely affects Toyota's price competitiveness in relation to foreign automakers.

Toyota is trying to lower its currency exposure by increasing its overseas production, using more locally sourced components for transplant facilities, and raising the usage of imported components for domestic production.

Success with this initiative will be critical to its ability to restore its profitability and financial metrics to levels that support the current Aa3 rating.

However, the transition to a greater level of local-market production will require time as well as incremental investment. Moreover, as some production shifts from Japan, Toyota could see the efficiency of its domestic plants deteriorate unless it is able to implement offsetting actions.

Toyota has not issued public guidance for FYE 3/2013, but the absence of disruptions caused by unexpected events -- such as the March 11 earthquake and the Thai floods -- should contribute to some improved performance relative to FYE 3/2012.

Moody's considers a significant improvement in unit sales volumes across many of its markets could be difficult to achieve, given the weak macro-economic environment in certain core markets and the continuing challenges stemming from past product quality problems.

Moody's believes that the significant headwinds caused by the strong Yen compound the challenges that Toyota faces in rebuilding its market position and restoring adequate profitability.

And while the company continues to have significant balance sheet strength -- which provides some degree of rating support as it works to improve its operations -- the negative outlook considers the potential for some portion of this strength to be eroded unless it significantly improves its operating performance during the coming year.

Toyota's Aa3 rating continues to reflect its important position in the Japanese economy, and its stable and strong relationships with its banks. As a result, its rating incorporates an uplift of one notch.

Given the current operating challenges, Toyota's rating is unlikely to be upgraded in the short term. A stabilization of the rating outlook could occur if profitability improves to levels that are at least comparable with those of its peers and the company can sustain its historic balance sheet strength. For instance, if it can improve its EBITA margin to 4% or more in the short term, while retaining its existing balance sheet strength and strong liquidity, the rating outlook could change to stable.

The rating could be downgraded if it is unable to implement initiatives that restore profitability, while preserving balance sheet strength. In particular, if it appears unlikely that EBITA margin will improve to 4% by FYE 3/2013 -- or there is a significant reduction in its net cash position -- then its rating would come under pressure.

A downgrade in Japan's sovereign rating without a corresponding strengthening of Toyota's standalone credit profile would also weigh on its rating.

Please see ratings tab on the issuer/entity page on the Moody's website for the last rating action and the rating history.

The principal methodology used in this rating was "Global Automobile Manufacturer Industry" published on 25 August 2011 and available on www.moodys.co.jp.

Toyota Motor Corporation, headquartered in Toyota City, is Japan's biggest automaker.

Tadashi Usui
Vice President - Senior Analyst
Corporate Finance Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100

Moody's changes Toyota Motor's outlook to negative
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