June 4 (Bloomberg) -- Canon Inc., the world's biggest maker of copiers, may beat its second-quarter pretax profit forecast as demand rises for its color copiers and digital cameras and a weaker-than-expected yen increases the value of overseas sales, Senior Managing Director Toshizo Tanaka said.

Canon this quarter is poised to pass the record 135.9 billion yen ($1.22 billion) pretax profit it posted in the three months to March 31 , Tanaka said. In April, Canon forecast pretax profit of 113.1 billion yen for the quarter ending June 30, compared with 98.3 billion yen in the same period a year earlier. Canon didn't provide an estimate for net income or sales.

``There are no signs the momentum from the first quarter is abating, and the current direction of the exchange rate is also a plus,'' Tanaka said in an interview.

Canon President Fujio Mitarai has pooled resources into higher-margin digital camera and copier models, allowing the Tokyo-based company to benefit more than rivals such as Nikon Corp. and Xerox Corp. as those markets have expanded.

Shares of Canon rose 1.3 percent to 5,530 yen as of 13:45 p.m. in Tokyo. Canon shares have risen 11 percent so far this year, compared with a 7.2 percent gain by the benchmark index.

Overseas Sales

``Demand for Canon products is good, both in and out of Japan,'' said Edwin Merner, who oversees $600 million in assets as president of Atlantis Investment Research Corp. in Tokyo. ``The yen is weaker than expected, a plus for profits on overseas sales,''.

Xerox said in April that sales of lower-priced products hurt margins in the quarter ended March 31. The margin, profit after costs are deducted from sales, fell to 39.8 percent from 41.9 percent a year earlier. Nikon said in May it had a current loss of 4.3 billion yen for the full year ended March 31 as the average price of its compact digital camera fell on increased competition.

Tanaka said sales will probably rise 5 percent to 7 percent in the fiscal year ending Dec. 31, 2005, because of continued strong sales of its mainstream products such as color copiers and digital cameras.

Weaker Yen

A weaker-than-expected yen is also helping sales outside Japan. The yen has fallen 6.4 percent against the dollar since rising to a four-year high of 103.68 on April 1. Against the euro, the yen has dropped 4.6 percent in the same period. Canon, whose overseas sales make up 75 percent of its total revenue, expects an average yen exchange rate of 105 to the dollar and 125 to the euro for the nine months ending Dec 31.

Still, currency fluctuations may pose a risk to Canon's earnings this year, Tanaka said. A one-yen move in the exchange rate against the dollar will affect the Canon's operating profit by about 5 billion yen in the nine months ending Dec. 31, the company said. A one-yen move against the euro would translate into a 3.5 billion yen difference to the company's operating profit in the same period, Canon said.

Accelerating competition in digital cameras and printers is also a concern, he said.

Demand for Canon machines used to etch computer-chip circuits on to silicon wafers, or integrated circuit steppers, is also contributing to rising sales, owing to the improved conditions in the semiconductor-device market. The company may surpass its target to ship 146 IC steppers for the year ending Dec. 31, Tanaka said.

Strong Growth

Continued strong growth in the United States and China is helping to propel increases in global chip sales, the Semiconductor Industry Association said this month. Worldwide sales of semiconductors in April rose 4.1 percent from March and 36.6 percent from a year earlier, the association said.

Pretax profit for Canon of about 550 billion yen in 2005, up 10 percent from this year's forecast of 500 billion yen, is realistic because ``the strategic pawns such as production-reform efforts to improve efficiency that we have been putting in place since around 1998 have blossomed,'' Tanaka said.

Imaging processors used in digital cameras and other ``in- house development of key components of our business are helping strengthen our competitiveness and contributing to cost cuts,'' he said.

``The company continues to cut costs and new products are doing well, with lots in the pipeline,'' Atlantis Investment's Merner said. ``The company is well run, focused and is benefiting from cost cutting, good yields from research and development.''

To contact the reporter on this story: Junko Hayashi in Tokyo at juhayashi@bloomberg.net

Last Updated: June 4, 2004 00:53 EDT