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A weak Japanese yen has been a cause of concern for the Bank of Japan and the Fumio Kishida-led government through 2022, but Japan corporate earnings have become the unlikely winners amid the currency turmoil. The yen’s decline to a three-decade low has helped Japanese corporates reap record profits for the quarter that ended June 2022.
Japan corporate profits rose to 28.32 tn yen ($201 bn) in the first quarter of 2022, jumping 17.6% over the previous year, data from the Ministry of Finance showed. Japan’s economy is highly reliant on trade, with exports making up over 15% of the country’s GDP, per the World Bank.
“Note that the strong results occurred despite quite subdued GDP, further proving the long-held theme of this report that profit margins remain on a structural uptrend despite sluggish domestic GDP growth,” wrote John Vail, Chief Global Strategist at Nikko AM, in September.
Japan corporate earnings and yen
Japan is seeing a widening trade deficit as imports become expensive, but exports have seen substantial gains as well. In October, Japan’s exports were up 25.3% YOY, led by shipments of chips, electronic parts and cars. October was the 20th consecutive month when Japan recorded annual export growth.
The island nation has largely relied on exports for growth over the past few decades, but a global slowdown may put a dent in export growth. Separately, the zero-Covid policy by Beijing has left Japan rethinking its dependence on China. However, the weak yen has helped exporters offset the supply chain difficulties and lower demand, driving the value of earnings from overseas higher.
A weak yen also makes importing raw materials expensive for manufacturers, but big Japan corporates are in fact banking on the weak yen to make their products more competitive in the international markets. This is one of the reasons why the Bank of Japan has retained its negative monetary policy stance despite the yens more than 20% decline against the US dollar.
Data from SMBC Nikko Securities showed that over 200 companies in Japan’s Topix index had raised their full-year profit forecasts as of this week, compared to 109 companies that expect a drop in profits.
Honda is expecting a 2.5% higher profit for the year ending March 2023 compared to the previous fiscal year. The automaker also revised its August forecast, increasing its net profit guidance by 15 bn yen. While the company is expecting record revenues, head of accounting Eiji Fujimura said, “We don’t think we can pride ourselves for setting records, because our unit sales aren’t record highs.”
Nissan, which took a hit after withdrawing from Russia, revised its profit outlook higher by 5 bn yen. “It is indeed a dramatically weak yen and, as a result, our earnings have increased,” said Makoto Uchida, company president and CEO.
Earlier this week, video game company Nintendo, which makes 80% of its revenue overseas, raised its full-year net profit guidance by 60 bn yen or 18% but sees sales drop by 10%.
Toyota has cut its production guidance by 500,000 vehicles but still expects its previous profit guidance. Sony Group, which reported its Q2 results on November 1, raised its operating profit outlook by 1.16 tn yen but cut the forecast for its games segment by 12%.
The higher export-based profits are also reflected in the earnings report of Japanese trading houses, which have posted record first-half net profits. Mitsubishi’s net income for the April-September period nearly doubled, and it expects a record profit for the full year. Mitsui was another trading house which booked record profits.
“Based on research by our analyst team, SuMi TRUST expects (Japan corporate) profit for FY2022 to be up 14.9% year-over-year. Our estimate for operating profit growth rate was 4.7% a month earlier (as of May 24), with internal demand driving the estimates higher while external demand remains solid,” writes Takayuki Toji, Economist at Sumitomo Mitsui Trust Asset Management. “We predict recovery in consumption to drive internal demand and the weak yen to support earnings on the external demand side.”
