Blaming the strength of the yen and recession-hit European sales, the company warned that profits would be slashed in the year to the end of March. This will be the first time the group's profits have fallen in 12 years.
But industry analysts said there was little evidence of any sharp downturn in global demand for video games. The problems faced by Sega and its bigger rival, Nintendo, lay in rising competition and a strong Japanese currency, which have eaten into margins, one observer said.
Nevertheless, there may be other difficulties ahead. The Monopolies and Mergers Commission is preparing a report on the video game industry, prompted by complaints of overpricing and market dominance by Sega and Nintendo.
A negative finding could hurt both, although some analysts believe that moves by the MMC to lower the price of games would expand sales.
Sega Enterprises, whose interests include arcades and theme parks as well as video games, said 1993/4 group profits, which include the full effect of currency movements, would be cut to about Y20bn ( pounds 132m), almost a third of last year's Y57bn.
The news came as a shock. Despite warnings by Nintendo that the strength of the yen and the weakness of the recession-hit European market would mean lower profits, Sega was saying as recently as last November that it expected profit growth to continue.
Sega, like Nintendo, has managed to keep sales up - they are likely to be around Y350bn compared with Y347bn a year before. But the yen, which has risen by more than 13 per cent against the dollar in the past year, has slashed profit margins.
The company says profits should recover this year - it is building three theme parks in Japan and one in the US, and plans several new products.
In particular, it is pinning its hopes on a new video game machine using 32-bit microprocessing units, twice as powerful as current 16-bit technology. This will be launched in Japan in November under the name 'Saturn' and in the US by the end of 1994.Reuse content