Rarely a week goes by without one of the Japanese companies causing a storm in Britain's media as they highlight the ill effects of the sterling-euro exchange rate and attack the British government's failure to take a clear position in favor of joining the new currency. All three Japanese companies are looking closely at their options in the United Kingdom; Toyota and Nissan are contemplating shifting some production to the Continent.

Pro-euro lobbies interpret those warnings as threats to leave the U.K. altogether, placing usually reticent Japanese companies at the front line of Britain's fiercely emotional euro debate.

The pound has risen 16% against the euro since the currency was launched in January 1999. That tends to make British-made goods more expensive to consumers on the Continent. The three big Japanese auto makers book the bulk of their parts and costs in pounds. With the majority of their sales going to the Continent, that hurts. At Toyota, about half of what goes into its cars is purchased in the U.K. and half on the Continent. But 80% of sales are to the 11 Continental nations that use the euro.

Determined to improve their European market share, the Japanese are reluctant to pass the exchange-rate costs on to Continental customers.

Toyota, Nissan and Honda together had only 7.6% of the Western European auto market in the first six months of the year, less than France's Peugeot brand alone. While sales of the major Japanese players are mostly holding steady or rising, they are a long way from threatening the market's dominant players.

But trying to remain competitive in the face of climbing costs has killed profits. People in the industry say, for example, that Nissan is suffering losses on its Micra model, even though it is made at what is widely considered the most efficient auto plant in Europe, the Sunderland facility in northeast England. Honda, which incurred losses of about $135 million (151.3 million euros) in Europe last year, probably won't do much better this year.

Nissan and Toyota won't rule out moving production to the Continent. But will they really go? "There is going to be some change, but I don't think we're about to see helicopter taking off from the roofs of these plants with the last Japanese managers on board," said Garel Rhys, a professor of automotive studies at Cardiff University. "These companies take their decisions based on the fundamentals" - which in Britain's favor include the English language and lower labor costs. "The euro is not a fundamental," he says.

Each Japanese company is trying to cut costs to protect profits. Nissan aims at a 30% reduction at its Sunderland factory and is pressing U.K. suppliers to reduce prices. Honda is asking its suppliers to cut costs 10% to 20%.

Buying more components from euro-zone suppliers would help, but it isn't easy. The Japanese have longstanding relationships with local suppliers, who have often worked closely on developing components. And the big chance to switch suppliers comes only once every six or seven years, when an auto maker brings out a new model. Toyota, meanwhile, has asked some U.K. suppliers to price parts in euros, forcing them to accept the foreign-exchange risk. While the Japanese have been complaining, other auto makers have done more than talk. Germany's Bayerische Motoren Werke AG sold Britain's Rover Group for 10 pounds ($14.50 or 16.34 euros) to a group of investors; it blamed the pound for its difficulties, although Rover had much deeper problems. Ford Motor Co. will stop building cars at its Dagenham plant near London and is moving production of its Fiesta model to Germany.

In the short term, the Japanese haven't much flexibility. Unlike their European and American competitors, they have little manufacturing capacity in Europe outside of the U.K.; of the three, only Nissan currently operates a plant on the Continent. But that may be changing. Nissan says it will make a decision by the end of the year whether to build the next-generation Micra at the Sunderland plant in the U.K. or in France with its partner, Renault SA. Toyota will open a new factory in France next year, where it will build its popular Yaris; a company spokesman wouldn't rule out the possibility of shifting production from the U.K. to that factory. Mr. Rhys, the Cardiff professor, says auto makers tend to blame currency fluctuations for problems that have other causes. The Japanese have had a hard time selling in Europe since European manufacturers started to improve quality. "Blaming the exchange rate is a way of justifying difficult decisions that would have to be made anyway," he says.

( The Wall Street Journal)