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The latest midterm earnings reports from Japanese companies listed on the Tokyo Stock Exchange offer a qualified but positive message: Corporate Japan appears to be finally recovering from its protracted slump. Pretax current profits for the six months to September held level with profits from the same period last year in all sectors, excluding financial services. However, sales continued to decline.

This encourages forecasts that profits for all of fiscal 1999, which ends next March, will post their first increase in three years. To keep the momentum, Japanese corporations must take proactive steps, such as investing in new business lines, rather than concentrate on purely reactive restructurings that involve the closing of existing offices and plants.

Two reasons are cited for the reversal in declines in the semiannual period. One is that restructuring measures such as job cuts and other cost reductions, as well as withdrawals from money-losing operations, are beginning to show their effect. The other reason is that a combination of reflationary fiscal and monetary measures — increased government spending, particularly increased public-works outlays and near-zero interest rates — helped improve the profit position. Growing exports to Asian nations, now recovering from their economic crisis, also helped.

The yen’s surge had raised fears that export firms would be hit, dragging down overall profits. That did not happen, however, indicating that the combined positive effect of cost-cutting measures and stimulatory policy measures, as well as rising exports to Asia, more than offset the negative impact of the yen’s rise.

One salient feature of the interim earnings reports is that after-tax net profits increased markedly. This reflects the fact that negative legacies from the 1980s asset-price bubble — bad debts and other distressed assets, losses from failed financial investments, deficit-ridden subsidiaries and unprofitable operations — were liquidated for the most part in the previous fiscal year that ended in March 1999.

In fiscal 1998, companies took large special losses to write down those negatives, resulting in a sharp drop in net profits. This Draconian step was taken in line with the scheduled introduction of new accounting standards that call for more accurate disclosure. These rules, including reporting profits and losses for parent and subsidiary firms on a consolidated basis, should make it extremely difficult to cover up losses.

Earnings in the financial sector also improved, although the picture is clouded by the still-large volume of bad debts carried by banks. In the April-September period, 17 top banks wrote off nearly 1.6 trillion yen in nonperforming loans, but their books still carry more than 19 trillion yen worth of bad loans. Prospects for bad-debt disposal remain grim, with falling land prices cutting into the market value of the real estate that banks hold as loan collateral. Also, with many of their corporate clients in trouble, more loans might go sour.

Adding to the banks’ burden is the 7.5 trillion yen in public funds that they received from the government to bolster their capital. How soon they will be able to repay those huge debts will be a measure of the success of their efforts to regain health and vigor, steps that include mergers and tieups now in the works.

When the Japanese economy was following an upward growth trajectory, Japanese companies were able to put in a good performance across the board. With the business climate becoming increasingly competitive, however, the quality of corporate leadership is now a critical determinant of success.

In the consumer-electronics sector, for example, a big-name corporation that had previously reported a large deficit from massive restructuring recorded a pretax surplus in the latest half-year period. But another corporation, which had been rather slow to restructure, ended up with a larger deficit than before. It is also worth noting that while traditional heavy industries, such as steel, shipbuilding and machinery, made a poor showing, profits in sectors related to information technology, such as cellular phones and Internet services, showed strong growth.

Notable, too, is the growth of medium-size companies strong in technology; some of them generated profits greater than major companies that represent corporate Japan. New products and services that appeal to consumers enjoyed robust demand even amid the recession. The lesson is clear enough: Companies that succeed are those that constantly broach new fields and open up their future for themselves.

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