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Business trends

Corporate Japan's earnings at a record high

Good times could end, though, as protectionism takes hold abroad

A coal mine is being developed by Mitsubishi Corp. in Australia.

TOKYO -- Listed Japan is swimming in record profits.

As resource prices recover and a formerly strengthening yen has regained some of its weakness, the combined net profit of Japan's major listed companies is poised to hit a record this fiscal year for the first time in two years.

The combined net profit for the year ending March is expected to rise about 10% from fiscal 2015.

However, overseas uncertainties, including the tumultuous presidency of Donald Trump in the U.S., loom large in the year ahead.

The domestic front is also posing challenges as the working age population shrinks and companies have trouble filling jobs.

Coking coal

The price of coking coal, which fell below $80 per ton at one point in fiscal 2015, has since skyrocketed to $300. It is the first time in five years for the price to reach this level.

In fact, prices for a wide variety of resources, including oil, have bounced back.

Trading house Mitsubishi Corp. is on course to post 440 billion yen ($3.88 billion) in net profit for fiscal 2016, an increase of about 590 billion yen from the previous 12 months, when the company sunk into the red.

This is not an outlier. The aggregate net profit at the resource divisions of Japan's five major trading houses may go up more than 1 trillion yen.

The driving force is not the U.S. economy but robust growth in emerging countries.

According to Hajime Takada, chief economist at the Mizuho Research Institute, China "is boosting growth with public investments" ahead of the Chinese Communist Party's national congress this autumn. This has spurred domestic demand for resources and private consumption.

The value of chipmaking equipment orders received by Tokyo Electron in the October-December period broke a record set a decade or so ago.

"I believe orders will continue to be strong," President Toshiki Kawai said.

Again, thank China, which accounts for one-third of global smartphone sales, now at about 1.5 billion units.

Smartphone demand is forecast to further surge 3% this year.

What is more, the number of chips being fitted into smartphones is on the increase, so chipmaking equipment is on a hot streak.

In another field, Yamaha is selling more musical instruments in rural China and has hopes of bringing its net profit to the highest level in 13 years.

Last February, Komatsu, the big construction vehicle maker, noticed that its machines at Chinese construction sites were being used more. Since then, purchases of new equipment have been on an upswing, senior executive Yasuhiro Inagaki said.

The yen's new trajectory is also inflating Japanese companies' profits.

A representative of Mitsubishi UFJ Morgan Stanley Securities said this will lift "the recurring profit of 1,300 or so major companies by around 500 billion yen this fiscal year."

Honda Motor increased its pretax profit estimate by 155 billion.

Upheaval risks

The corporate earnings environment is, however, increasingly subject to change. In the U.S., "there is a likelihood that protectionist policies under the Trump presidency will affect the real economy," Goldman Sachs Japan's Kathy Matsui said.

In fact, protectionism is the 600-pound gorilla that everybody is talking about. Trump owes his electoral victory to fanning the flames of it. In Europe, it manifested itself in Brexit's successful "leave" campaign. And it could motivate voters in other European countries who will be called on to go to the ballot box in the coming months.

There are also problems in China, which has too much production capacity on its hands and too many souring loans in its financial sector.

Some Japanese business executive are becoming anxious about what next year might bring.

Others are preparing. Hitachi will divest its logistics, finance, toolmaking and other noncore divisions. It may also do some downsizing at overseas plants and at its nuclear-related businesses, where profit margins are expected to remain below 5%.

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