February 20, 2014 7:00 pm JST

History suggests fiscal 2014 could be tough for Japanese earnings

MASATAKA MAEDA, Nikkei senior staff writer

TOKYO -- Thanks to a limp yen, Japanese companies may log their biggest profits of all time in the fiscal year through March. Depending on currency movements, however, the story may be very different in fiscal 2014.

    Japanese listed companies generated an aggregate net profit of 19.13 trillion yen ($185 billion) for the nine months ended December, a 72% increase from the same period of the previous year. The figure covers companies that close their books in March and excludes electric utilities, companies listed on start-up markets and companies whose accounting periods for fiscal 2013 are less than a year.

     The projected net profit of these companies for the full year through March is 22.59 trillion yen, up 49.6%. If we include companies listed on Jasdaq and Mothers, and companies that do not close their books in March, the figure rises to 28.36 trillion yen.

     The previous record for all listed companies was 25.51 trillion yen, logged in fiscal 2007. Given that the projected figure for fiscal 2013 is 11.1% higher than the 2007 figure and the number of listed companies has grown by 9%, we can expect a new all-time high.

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But a big reason for the ballooning earnings is the weakening yen. Take Toyota Motor, for example. The carmaker's net profit for the first nine months of fiscal 2013 increased 877.9 billion yen to 1.526 trillion yen. Of that increase, 800 billion yen was thanks to the weak yen.

     Canon, which closes its books in December, got even more help from currency trends. Its operating profit for 2013 was 337.3 billion yen, up 13.4 billion yen on the year. But weak sales pushed down operating profit by 116.8 billion yen, and other negative factors weighed on operating profit by an additional 87.4 billion yen.

     Because of the falling yen, however, the company was able to more than make up for the slide. According to the company, the depreciation of the yen lifted its fiscal 2013 operating profit by 217.6 billion yen. This means if the Japanese currency had not lost so much strength, Canon would have posted a big decrease in operating profit.

     The stock market has probably already priced in many factors regarding the performances of listed companies for fiscal 2013. Investors are now trying to read the crystal ball for fiscal 2014.

     Perhaps the most likely scenario is a continued slide in the yen. That is because the Bank of Japan is sticking with its ultraloose monetary policy while the U.S. Federal Reserve is moving to exit its easing program. Should a resultant widening of the interest rate gap between the currencies generate more demand for the dollar, Japanese earnings may see another stellar performance in fiscal 2014.

     If history is any guide, however, the yen may very well gain muscle in 2014. For the past 42 years -- ever since the fixed exchange rate mechanism among major economies was abolished -- the direction of currency movements on the first trading day of the year and for the month of January has often set the tone for the entire year.

     This year, the yen rose against the dollar on the first trading day and in January as a whole. Of the 16 times that has happened over the past 42 years, the Japanese currency appreciated for the entire year in 12 cases. If history repeats itself this year, many Japanese companies may watch their earnings tumble.