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Business Trends

Retooled Japan Inc. triples profit in five years

Overseas acquisitions and restructuring fuel record tally

Japanese heavyweights such as Sony and Hitachi are back in top form after cutting unprofitable operations to focus on their best assets. (Photo by Akira Kodaka)

TOKYO -- Japan's listed companies achieved record net profit and sales for the year ended in March, as foreign acquisitions by the likes of SoftBank Group and lengthy restructuring efforts yielded broad improvements in earnings power.

Aggregate net profit for nonfinancial businesses grew roughly 30% to 28.78 trillion yen ($262 billion), according to full-year earnings releases from 257 companies and Nikkei forecasts for the rest. Fiscal 2017 represented a second record-breaking year in a row, as well as a near-tripling of net profit over the past five years -- a rare feat in an economically mature nation such as Japan.

One of every four companies broke their profit record, while overall earnings rose for 25 of the 32 nonfinancial sectors tracked by Nikkei. Sales totaled roughly 560 trillion yen, for a net profit margin in the 5% range -- the highest figure dating to 2000, when consolidated accounting gained traction in Japan.

The global economic recovery in recent years lifted many businesses. Those with exposure to the U.S. also enjoyed shrinking tax liabilities on paper thanks to the 2017 corporate tax cuts under the Trump administration, adding nearly 2 trillion yen to overall net profit in a one-time boost.

Deeper structural changes were also at play. Japanese companies have spent 43 trillion yen on foreign mergers and acquisitions since 2013, according to Dealogic. Many of these deals provided footholds in emerging markets, opening fresh opportunities for growth. SoftBank has made big-ticket overseas purchases in the information technology sector, including deals through its Saudi-backed Vision Fund.

Electric motor maker Nidec, known for its skill in selecting profitable acquisition targets, logged record profit in fiscal 2017, and the company's net profit margin has widened by more than 3 percentage points over the past decade. Net profit is projected to grow another 10% this fiscal year, despite an assumed exchange rate reflecting an appreciation of the yen to 100 to the dollar.

Companies also have dumped loss-making operations to focus resources on their strongest businesses, fundamentally increasing earnings power. Sony serves as a poster child for this strategy: After falling deep into the red earlier this decade, the electronics and media company overhauled its unprofitable electronics operations -- including televisions -- and has seen earnings surge from gaming and image sensors. Sony's operating profit hit a new record for the first time in two decades last fiscal year.

Hitachi took similar steps to arrive at record profit in fiscal 2017, including disposing of noncore operations such as logistics and power tools. The introduction of Japan's investor-friendly corporate governance code propelled restructuring efforts by many companies.

New players, too, have taken a greater role as growth drivers. Startups and massive, formerly public companies alike have debuted on the stock market in recent years. Nearly 100 companies listed in Japan last year, up from a paltry 19 in 2009.

Net profit of 1.6 trillion yen was contributed last fiscal year by companies that have gone public since 2000 and close their books in March. Start Today, which operates online clothing seller Zozotown, booked 20.1 billion yen in profit, roughly 20 times what it earned a decade prior. Net profit at M3, a site that offers medical product data, has surged by a factor of 40 since the business went public in fiscal 2004.

"Japanese companies have begun a new stage of growth," said Masanobu Kaizu, senior research fellow at Nomura Securities.

But a strong yen and rising resource prices in fiscal 2018 will put this robust earnings power to the test, while businesses no longer enjoy the on-paper gain from U.S. tax cuts that they received in fiscal 2017. Aggregate pretax profit appears to have dipped 2% on the year during the January-March quarter.

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