Corporate-earnings reports for fiscal 1999, which ended March 31, provide further evidence of a budding recovery in the corporate sector. Most of the companies listed on the Tokyo Stock Exchange posted their first net profit increase in three years. On a consolidated basis, pretax profits surged an estimated 25 percent in all industries except financial services, although sales either remained flat or dropped slightly.
The profit surge is attributed mainly to the brisk expansion of exports, particularly to Asian markets, and to the strong growth of high-tech companies supported by information-technology investment. Cost cuts from restructuring, such as layoffs, also contributed significantly to the profit gains.
Prospects for fiscal 2000, which will end next March, look brighter still. The upward trend in earnings is expected to gain momentum, while the slump in sales is predicted to give way to a gradual expansion. The hope, of course, is that the earnings recovery in the corporate sector will lead to a self-sustaining economic recovery supported by the two main engines of private-sector growth: business investment and consumer spending.
The business reports clearly show that sectoral disparities in profit performance are narrowing markedly, with about three-fourths of the companies that released their figures by the weekend reporting either gains or surpluses. Leading the profit recovery are information and communications companies that are enjoying a boom created by the IT revolution. Sales of cellular phones and personal computers expanded rapidly, as did demand for electronic parts such as semiconductors and liquid crystal displays. It is estimated that electronics firms account for roughly 40 percent of the total profit increase.
The fact remains, however, that unemployment is stuck at high levels — close to 5 percent — as companies continue relentlessly trimming their payrolls. Still, judging from the latest earnings reports, restructuring and other moves to clean up the negative legacies of the 1980s asset bubble seem to have passed their peak. This is clear from the marked growth of after-tax profits.
Companies charge as special losses those one-off expenses that they incurred from their loss-making actions, such as the liquidation of bad assets like real estate and equities, the closing of unprofitable operations and deficit-running subsidiaries, and increased payments of separation allowances as a result of layoffs. Of course, these special losses affect net profits. In fiscal 1998, net income dropped sharply because many companies took very large special losses. The rebound in fiscal 2000 is proof that these charges are over the hump.
What is happening is that backward-looking restructuring — a passive strategy aimed chiefly at trimming fat — is giving way to a forward-looking strategy focused on investment in growth-oriented sectors, including those related to IT, biotechnology and environmental technology.
For one thing, an analysis of financial data from reporting companies reveals an increase in depreciation costs — a sure sign that business spending on new plant and equipment is picking up. By contrast, expenses such as interest payments and labor costs are falling steadily. All this indicates that Japanese corporations are regaining health for the first time in almost a decade. The collapse of the bubble and the long business slump that followed had shattered their confidence. Now, however, they appear ready to take up the new challenges that lie ahead, including investment in growth sectors and expansion into other business lines.
Another notable thing about the earnings reports is the introduction of new accounting rules based on market value, not book value. The new rules, which conform to international standards, require that commercial real estate, for instance, be appraised at prevailing market prices. Companies are also required to report items that so far have escaped scrutiny, such as shortfalls in the retirement and pension reserves.
The consolidated accounting system, which had been introduced earlier, also provides a better picture of the financial status of corporate groups by presenting profits and losses of parent companies and subsidiaries on a consolidated, or group, basis. The shift to market-value accounting also allows investors to know more about the financial conditions of companies holding latent losses on portfolio investments, for example. Beyond that, the new accounting standards are likely to put further pressure on debt-heavy companies to clean up their balance sheets. Sound corporate accounting is proving to be an essential step in the revitalization of corporate Japan.
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