June 11, 2014 1:38 am JST

Market players bullish on Japan Inc.'s earnings

MAKOTO KAJIWARA, Nikkei senior staff writer

TOKYO -- Investors are increasingly confident that Japanese businesses will surpass their conservative profit projections for this fiscal year, but these high hopes may pose an obstacle to further stock market growth.

     The Nikkei Stock Average fell more than 120 points Tuesday, but investors are far from bearish -- the index had risen 8% over the prior three weeks. Profit-taking started as the index neared its March 7 close of 15,274, seen as a line of upward resistance.

     There were positive signs as well. Ihara Chemical Industry rebounded for the first time in three days to renew its year-to-date high, and its trading value nearly quintupled from the previous day.

     On Monday, the company upgraded its earnings guidance for the just-ended November-April half. It maintained the projection for the fiscal year ending Oct. 31, but it has already reached 80% of its net profit estimate with half a year to go. Investors remain hopeful that full-year profit will beat the estimate.

     Investors appear to be heartened by the prospects of earnings upgrades. Asoka Woehrmann, co-chief investment officer at Deutsche Asset & Wealth Management, increased the company's Japanese stock allocation last month, focusing on issues sensitive to economic trends, in anticipation of stronger-than-projected earnings.

     He expects exports to grow as the global economy recovers and Japanese consumers start to spend again in a few months after getting used to the higher sales tax.

     Last week, research firm QUICK surveyed market players about their reactions to companies' newly released fiscal 2014 pretax profit guidance. A majority of participants, 59%, said that the projections were lower than expected. When asked about future developments, 82% responded that businesses will upgrade their estimates.

     In light of the effects of the consumption tax hike and other uncertainties, market players read executives as adopting a wait-and-see stance with conservative guidance.

     Nonfinancial companies see pretax profits growing about 2% this fiscal year -- but a tally of projections from Nomura Securities analysts shows them jumping 7.6%.

     It is still too early for adjustments to guidance for the fiscal year ending March 31, so investors hoping to confirm earnings upgrades are looking to companies with different accounting periods.

     Sumitomo Rubber, Shimano and Sumco, which end their fiscal years in December, have upgraded their projections, and their shares have outperformed the Nikkei average lately. Market players anticipate a similar trend for a large group of companies that close their books in March, lifting the market as a whole.

     But with 82% of investors predicting upgrades, it is unlikely that modest revisions will move the needle much. If companies are forced for some reason to revise their guidance downward, the defiance of investors' high expectations is liable to set off heavy selling.

     International Strategy & Investment, a U.S. research firm influential among global hedge funds, warned last month that the future is not all bright for Japanese businesses. Three countries account for 30% of Japan's exports: China, whose economy continues to weaken; South Korea, where consumers are cutting back in the wake of April's ferry disaster; and politically tense Thailand.

     Businesses should build up their growth potential to the point where they can bounce back from unexpected setbacks. If they are fortunate enough not to face head winds, their efforts will pay off in the form of higher share prices.