Business / Corporate

Profits at Japanese firms approach all-time high, but not everyone is smiling

by Dave Mccombs and Yusuke Miyazawa

Bloomberg

Japanese companies are headed toward their highest profits ever, as the falling yen boosts exporters from Toyota Motor Corp. to Uniqlo-operator Fast Retailing Co.

Aggregate net income at 195 of the largest listed companies will expand 10 percent to a record ¥17.5 trillion this fiscal year, based on some analyst estimates. Executives are catching up to such lofty expectations, with Toyota this week raising its profit forecast to an unprecedented ¥2 trillion.

As the earnings season winds down in Japan — almost all companies will have reported results by next week — exporters are emerging as one of the biggest beneficiaries of Prime Minister Shinzo Abe’s economic policies. For investors, the weaker currency is outweighing slumps in wages and local consumption, prompting them to push up the Nikkei 225 average to levels last seen seven years ago.

“Profits were pushed up somewhat surprisingly by the exchange rate recently,” said Tomohiro Okawa, a Japan equities strategist at UBS AG in Tokyo. “Still, there’s not much more that monetary policies can do, and structurally, nothing has changed for these companies.”

Depreciation has been a central theme of Abe’s two-year tenure. The yen renewed its plunge last week when the Bank of Japan unexpectedly expanded monetary stimulus.

As recently as 2012, the currency traded at ¥76 versus the greenback. The dollar traded at more than ¥115 in Tokyo on Friday.

After gains last fiscal year, aggregate earnings growth at Japan’s biggest companies decelerated to the slowest pace since Abe took office, as the currency traded in a narrower range of between 100 and 105 to the dollar.

Toyota had been predicting a decline in annual profit this fiscal year prior to raising its forecast, citing weak demand in Japan, where sales taxes rose April 1 and higher energy costs have damped consumer sentiment. This week, the carmaker announced second-quarter earnings that beat analysts’ estimates and said a weaker yen would propel net income to rise about 10 percent this fiscal year.

While the yen helps, some executives are voicing caution.

“There’s a gradual recovery, but has it bottomed out?” Toyota Executive Vice President Nobuyori Kodaira said in Tokyo on Wednesday. “I’m not necessarily certain.”

Certain or not, Toyota is projecting record earnings. So are Fuji Heavy Industries Ltd., the maker of Subaru cars, and Mazda Motor Corp. Analysts project Fast Retailing, operator of the Uniqlo clothing stores, will see annual profit climb 46 percent to ¥108.5 billion.

Nintendo Co., Honda Motor Co. and Nissan Motor Co. also cited the weak yen for improved quarterly results, though they left their full-year forecasts unchanged.

“Companies are giving the bare minimum forecasts so they are sure they’ll make their target,” said Edwin Merner, president of Atlantis Investment Research in Tokyo.

Nintendo, the Kyoto-based maker of the DS handheld games console, last week said a weaker yen added ¥15.5 billion to first-half profit, or equivalent to 78 percent of the annual net income it is forecasting.

It is not just the yen, as companies that have expanded overseas and pruned money-losing businesses are also reporting improved profit.

Panasonic Corp., which has shifted from relying on television production to solar panels and batteries, raised its profit projection to ¥175 billion this fiscal year, from a previous forecast for ¥140 billion. It is getting some help from the weaker currency too.

“Of the four units that comprise our company, the cheaper yen benefits two and is a minus for the other two,” Panasonic President Kazuhiro Tsuga at a briefing on Oct. 31. “Overall, yen depreciation leads to a slight plus for operating profit.”

Some Japanese carmakers have worked to reduce their vulnerability to yen fluctuations and so are getting less benefit from the currency’s decline.

Honda cut its annual profit forecast last week, citing weaker deliveries in Japan and China. The Tokyo-based automaker projects net income of ¥565 billion this fiscal year, about 6 percent less than its previous outlook.

“We’re working to eliminate any influence on our operations” from the yen’s fluctuations, said Honda spokesman Tsutomu Nakamura. “Our company basically isn’t influenced much by exchange rates.”

Abe is credited with weakening the yen after campaigning for prime minister while saying he would do “whatever it takes” to depreciate the currency, including persuading the Bank of Japan to help him.

A weaker yen boosts profit by increasing the value of overseas earnings. A depreciating currency can also allow an exporter to compete with global rivals by cutting prices in dollar or euro terms without sacrificing profit margin.

Much of the gain in profits has flowed into companies’ cash stockpiles, a sign that executives remain skeptical that earnings growth is sustainable.

Cash and near cash climbed to a record ¥145.6 trillion as of the most recent quarter, based on data compiled by Bloomberg for 203 of the largest listed companies. That is an increase of about ¥8 trillion from the previous quarter and almost triple the ¥52.4 trillion figure from five years ago, the data show.

Still, Japanese companies that mainly rely on local demand are unlikely to benefit from the yen’s decline.

For example, NTT DoCoMo Inc., the country’s mobile-phone operator, cut its net income forecast to ¥420 billion from a previous projection of ¥480 billion.

McDonald’s Corp.’s Japan business, which relies on imported ingredients to make its burgers, said yesterday that the weaker Japanese currency will hurt its business. The burger make said profit is reduced by about ¥100 million every time the exchange rate drops by ¥1 against the dollar.

Abe has called on companies to raise wages to help counter the effects of inflation and a weaker yen, which raises import prices. Toyota and some others have increased pay. In aggregate, the raises have not kept pace with consumer prices, damping economic growth and confidence, just as Abe seeks support to go ahead with a second planned sales tax increase Oct. 1, 2015.

The planned increase in nationwide consumption taxes to 10 percent from 8 percent is needed to help the government pay down the developed world’s largest debt load.

Still, the looming tax jump is sapping the confidence of companies that could be plowing profit from a weaker yen back into capital spending and higher salaries. An April 1 increase, the first since 1997, caused the sharpest quarterly economic decline in five years.