Japanese corporations have just reported record quarterly profits, however the Yen recovery is fueling concerns about how sustainable its earnings growth can be given weak demand in China and the danger of a US economic slowdown.
The gloomy outlook can also be more likely to haunt Japanese stocks after they suffered one in all the worst crashes in history earlier this month as worries concerning the Bank of Japan’s hawkish stance and fears of a U.S. recession dominated the market. Companies within the Topix 500 index of large-cap stocks generate 45 percent of their revenue outside Japan, data compiled by Bloomberg show, and analysts estimate that each yen appreciation of the Japanese currency against the dollar will shave 0.4 to 0.6 percent off the profits of the country’s firms.
“Japanese stock prices have been boosted by the weaker yen in recent years. If that boost disappears, the earnings picture will look less rosy,” said Tadao Kimura, chief fund manager at Sumitomo Mitsui DS Asset Management Co.
Concerns concerning the sustainability of earnings pose a challenge for Japanese equities, which have lost their title because the world’s best performers after an excellent begin to the 12 months. There is heated debate about whether a $1.1 trillion nuclear meltdown signifies that the very best days for the market are over. Several brokerages, including JPMorgan, UBS Group AG and Goldman Sachs Group Inc., have lowered their price goal, although they proceed to keep up an overall positive sentiment available in the market.
Net profit at Japan’s 500 largest listed corporations hit a historic high of 15 trillion yen ($104 billion) within the quarter ended June 30, up 9 percent from a 12 months earlier, in accordance with data compiled by Bloomberg.
A big a part of the expansion was as a consequence of the weaker yen, which boosted the worth of overseas earnings. The yen traded at a median of 156 yen against the dollar within the April-June period, about 12 percent lower than a 12 months earlier, and hit a 34-year low in early July. It has since recovered to around 145 yen to the dollar.
The sudden strengthening of the currency is especially problematic for corporations which have factored a weak yen into their earnings estimates. Endoscope manufacturer Olympus Corp. estimates the dollar exchange rate for the present fiscal 12 months at 151 yen, and Mitsubishi Chemical Group Corp. expects it to be 150 yen.
Rie Nishihara, chief Japan strategist at JPMorgan Securities, said a fifth of firms expect the yen to fall below 150 yen per dollar, making it harder for them to satisfy their forecasts this fiscal 12 months after the yen recovers. This is very true for corporations that depend on foreign demand, in accordance with a report this month.
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The earnings figures also showed that many Japanese corporations were having problems in China.
“Although the results were quite good because a weak yen supported exporters, they showed the difficult conditions for business in China,” said Hiroyuki Ueno, chief strategist at Sumitomo Mitsui Trust Asset Management Co. “It is clear that the recovery there will take time.”
Recent economic data showed that China’s economic malaise continues. Investment in fixed assets showed surprising weaknessThis is hurting many Japanese corporations that had benefited from an investment boom on the earth’s second-largest economy, equivalent to robot maker Yaskawa Electric Corp. and precision tool maker Shimadzu Corp.
Among consumer names, cosmetics group Shiseido Co. missed forecasts by 70% within the last quarter, which led to the steepest fall in its shares since 1987.
For many Japanese corporations, the weakness in China has been bearable due to the robust US economy. But growing concerns a couple of Economic downturn within the USA appear to shift the balance to their drawback.
“There is no confidence in the outlook” for earnings, said Yasuo Sakuma, president of Libra Investments. “If you look at the next six months or so, the U.S. economy is not going to recover. It will either remain relatively stable or slide into recession,” he said.
However, many sell-side analysts remained confident that the US economy would manage a soft landing and that Japan would manage to stabilize the yen and keep earnings growth on course. After initial volatility triggered by the Interest rate increase At the top of last month, the currency was mostly trading between 145 and 149 for the last two weeks.
“I don’t think there is any risk to corporate earnings at this time,” said Bruce Kirk, chief Japanese equity strategist at Goldman Sachs. “The positive surprises clearly outweighed the negative ones,” which underscores the strong fundamental situation for Japan, he said.
In the April-June period, 64 percent of Topix corporations beat expectations while 33 percent missed, a greater ratio than within the previous quarter, in accordance with data compiled by Bloomberg. That suggests likely upward earnings revisions, Fumio Matsumoto, chief strategist at Okasan Securities Co., wrote in a report last week.
Nevertheless, the yen’s rapid 12% appreciation since its July low continues to boost concerns about dwindling corporate profits.
“It’s true that earnings have been pretty good, but the overseas economic environment is uncertain. I see no reason to rush into buying stocks now,” said Shingo Ide, chief equity strategist at NLI Research Institute.
