Shogo Maeda, Head of Japanese Equities, comments on whether a weaker yen is leading to profits for Japanese companies…
Most Japanese companies have now announced results for the fiscal year 2012. The evidence is now clear that the much-publicised policy of Prime Minister Shinzo Abe, dubbed ‘Abenomics’, has reaped rewards for not only share prices but for bottom lines too.
The stockmarket has been booming, despite a recent short-term correction, with the TOPIX up nearly 40% year-to-date. Meanwhile, a weakening yen has given previous anaemic GDP numbers a much-needed boost. Economic data released last week showed that Japan’s economy grew at an annualised 3.5% in the first quarter, beating analyst expectations of a 2.7% expansion. How were earnings received? And what is the outlook for Japanese companies under Abenomics as the fiscal year 2013 kicks off?
Show me the yen
Japanese earnings results for 2012, on aggregate, slightly exceeded the consensus expectations as pre-tax profits were up 9% while after-tax profits increased 23% year-on-year. As for earnings guidance in the upcoming year, it has broadly been in line with our expectations – pre-tax profit looks set to increase 19%, with after-tax gains of 45% year-on-year. However, the guidance comes with two caveats, both of which offer scope for upward revisions. Firstly, there are the usual conservative estimates by banks on their trading profits. Secondly, exporters have drawn up relatively conservative assumptions on foreign exchange rates.
Appreciation of depreciation
For example, median foreign exchange rates assumed by exporters in their earnings guidance are around 93/94 yen to the US dollar and 120 yen against the euro. This is in contrast to the current exchange rates of 102/103 yen and 131/132 yen, respectively. As a result, there is clearly potential for further revisions upwards – a one-yen depreciation against the US dollar can be expected to increase operating profits by 1-2% for aggregate corporate earnings excluding financials.
A particular mention should be given to management guidance for the possible earnings improvement for large trading companies, from which we have taken encouragement. Many of these companies have been lagging the market, mainly due to their exposure to resources and commodities. They’re currently trading at merely 7x the current year’s earnings, while the TOPIX trades at around 16x.
Looking ahead, we see the biggest risk to current earnings expectations as weak global economic growth, particularly in the US. The weakness in China and Europe has, to a large extent, already been factored in by companies.