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Japanese companies have just posted record quarterly profits, but the\u00a0yen\u2019s rebound<\/a>\u00a0is fueling worries about just how sustainable their earnings growth will be amid weak demand in China and the risk of a slowing U.S. economy.\u00a0<\/p>\n The murky outlook is likely to dog Japanese stocks after they suffered one of the worst crashes in history earlier this month as concerns about the Bank of Japan\u2019s hawkish posture and fears of U.S. recession gripped the market. Companies in the Topix 500 Index of large-cap shares earn 45% of their revenue outside Japan, Bloomberg-compiled data show, and analysts estimate that each 1 yen appreciation in the Japanese currency against the dollar will reduce profits for the country\u2019s firms by 0.4-0.6%.<\/p>\n \u201cJapanese stock prices have had a boost from a weaker yen in recent years. If that boost is gone, the earnings picture will look less grand,\u201d said Tadao Kimura, chief fund manager at Sumitomo Mitsui DS Asset Management Co.<\/p>\n Concerns about the sustainability of earnings raise a challenge for Japanese stocks which have lost their mantle of the world\u2019s best performer after a stellar start to the year. Debate is raging about whether a\u00a0$1.1 trillion meltdown<\/a>\u00a0means the best days for the market are over. Several brokerages including JPMorgan, UBS Group AG and Goldman Sachs Group Inc. have lowered their price target even as they maintained a positive tone overall on the market.<\/p>\n Net profits at Japan\u2019s 500 biggest listed companies reached an all-time high of \u00a515 trillion ($104 billion) in the quarter that ended on June 30, an increase of 9% from a year earlier, according to data compiled by Bloomberg.<\/p>\n A significant part of the growth came from a weaker yen lifting the value of overseas earnings. The yen traded at an average of \u00a5156 against the dollar in the April-June period, some 12% less than a year earlier, and reached a 34-year low in early July. It has since jumped back to around \u00a5145 per dollar.<\/p>\n The sudden strengthening of the currency is particularly problematic for companies that have factored a weak yen into their profit estimates. Endoscope maker Olympus Corp. puts the dollar at \u00a5151 in the current financial year, and Mitsubishi Chemical Group Corp. assumes \u00a5150.\u00a0<\/p>\n Rie Nishihara, chief Japan strategist at JPMorgan Securities, said a fifth of firms are assuming that the yen will weaken beyond \u00a5150 per dollar, raising the hurdle for them to meet guidance this financial year after the yen rebounded. That\u2019s especially the case for companies that rely on foreign demand, according to a report this month.<\/p>\n Earnings also showed many Japanese companies struggled in China.<\/p>\n \u201cAlthough the earnings results were pretty good because a weak yen supported exporters, they showed the tough conditions for business in China,\u201d said Hiroyuki Ueno, chief strategist at Sumitomo Mitsui Trust Asset Management Co. \u201cIt\u2019s clear that recovery there will take time.\u201d<\/p>\n Recent economic data showed China\u2019s economic malaise is continuing, with fixed asset investment showing\u00a0surprising weakness<\/a>. That is hurting many Japanese companies that had benefited from a capital spending boom in the world\u2019s second-biggest economy\u2014such as robot manufacturer Yaskawa Electric Corp. and precision tools maker Shimadzu Corp.\u00a0<\/p>\n Among consumer names, cosmetics firm Shiseido Co. missed forecasts by 70% in the previous quarter, sparking the\u00a0steepest plunge<\/a>\u00a0in its shares since 1987.<\/p>\n For many Japanese firms, the weakness in China has been manageable so far thanks to a robust U.S. economy. But rising worries about a\u00a0U.S. slowdown<\/a>\u00a0are seen tipping the balance against them.<\/p>\n \u201cThere isn\u2019t confidence in the outlook\u201d for earnings, said Yasuo Sakuma, president of Libra Investments. \u201cWhen you look at the next six months or so, the U.S. economy won\u2019t strengthen. It will be either relatively steady or slip into recession,\u201d he said.\u00a0<\/p>\n Many sell-side analysts remained hopeful, though, that the U.S. economy will manage a soft landing, and that Japan will manage to stabilize the yen and keep earnings growth on track. After initial volatility sparked by the\u00a0rate hike<\/a>\u00a0late last month, the currency has been trading mostly between 145 and 149 in the past two weeks.\u00a0<\/p>\n \u201cI don\u2019t think there\u2019s any risk to corporate earnings at the moment,\u201d said Bruce Kirk, chief Japan equity strategist at Goldman Sachs. \u201cPositive surprises were significantly outweighing negative surprises,\u201d adding to a strong fundamental story for Japan, he said.<\/p>\n In the April-June period, 64% of Topix companies beat expectations while 33% missed, a better ratio than the previous quarter, Bloomberg-compiled data show. This points to likely upward revisions of earnings, Fumio Matsumoto, chief strategist at Okasan Securities Co. wrote in a report last week.<\/p>\n Still, the yen\u2019s rapid 12% appreciation from its low in July is keeping concerns about erosion of corporate profits at the forefront.\u00a0<\/p>\n \u201cIt\u2019s true that earnings were pretty good but the foreign economic environment is uncertain. I don\u2019t see any reason to buy stocks in a hurry now,\u201d said Shingo Ide, chief equity strategist at NLI Research Institute.<\/p>\n<\/div>\n\nChina Malaise<\/h2>\n
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