Japan Inc. overcomes falling revenue to log record profit
Non-manufacturing sector flourishes despite strong yen
TOKYO -- Corporate Japan delivered a record profit for fiscal 2016 despite headwinds from a strong yen that pushed down sales, as trading houses rebounded from a resources plunge and communications companies rode the smartphone boom.
Listed companies' net profit climbed 18%, the first increase in two years, as 461 of these businesses logged records, according to a Nikkei survey of 1,555 companies that close their books in March. Sales dipped 3% as the rapid appreciation of the home currency ate into overseas revenues. This marks the first time that Japan Inc. has reported a record profit despite lower sales since consolidated reporting began in earnest in the 2000s.
The survey excludes financial firms, but includes embattled conglomerate Toshiba's unaudited fiscal 2016 results released Monday, which showed a 950 billion yen ($8.52 billion) net loss.
The average exchange rate in fiscal 2016 was 108.3 yen to the dollar, 11.8 yen stronger than the previous year. This was the yen's biggest rise since the currency strengthened by 13.8 yen against the dollar after the 2008 financial crisis. Revenue fell for 25 of the 32 industries represented in the survey, from steel to precision machinery to shipping.
Profit grew in non-manufacturing sectors by just under 40%. Trading houses saw the largest improvement, no longer encumbered by large losses from falling resource prices and buoyed by the recovery of non-resource businesses. Itochu, for example, showed a 47% jump in net profit, driven largely by its improved food business. Japan's five largest traders saw net results improve by 1.28 trillion yen.
Communications companies also performed well, thanks to swelling revenue tied to smartphone data. SoftBank Group tripled its net profit on the year to 1.42 trillion yen, joining Toyota Motor, which also saw net profit top 1 trillion yen.
Companies that improved their earnings power by raising prices stood out. Obayashi and Japan's three other major general contractors each set a net profit record by improving margins through price negotiations for redevelopment projects. Revenue at Taisei and Shimizu retreated due to a lack of large projects, but both companies still reported record earnings.
Mitsui Fudosan and Japan's two other major real estate companies also enjoyed record net profit as a result of increased office rents and condominium prices. "Rising office rents have finally taken hold," said Hiroshi Katayama, a director at Mitsubishi Estate.
In the manufacturing sector, net profit advanced just 5%. Out of 17 industries, earnings improved for 10, such as food and chemicals. Although the strengthening yen reduced overseas revenue, food concerns like Yakult Honsha and Kikkoman were still able to attain record profits by shifting to products with higher margins.
But earnings in the auto, electronics and shipping sectors deteriorated sharply, shaving about 1 trillion yen off Japan Inc.'s total. Shippers like Nippon Yusen incurred significant losses from falling freight rates. Automakers such as Toyota and Mazda Motor saw lower profits, undercut again by the appreciating yen.
"The power of companies to improve profit against headwinds by controlling retail prices and costs was clear from their earnings reports," summarized Takashi Ito of Nomura Securities.
Looking ahead to fiscal 2017, Japan Inc. is expected to report gains in both revenue and profit. Automakers are likely to drive earnings on tailwinds provided by a softer yen. Trading houses are also likely to maintain their strong performance, as natural resource prices recover.