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Business trends

Japan Inc. expects net profit dip after long climb

Slowing smartphones sales, rising resource prices and stronger yen hinder corporate earnings outlooks

Japanese companies expect to fall behind American peers for earnings growth in fiscal 2018 after beating international markets for several years.

TOKYO -- Corporate Japan forecasts a falloff in net profit this fiscal year following a record high, as managers confront rising resource prices, slowing smartphone sales and an appreciating yen.

Net profit appears headed for a decline of about 4% to around 27.8 trillion yen ($253 billion) at the nation's nonfinancial businesses during the year ending in March 2019, based on official outlooks from the 766 companies that released fiscal 2017 earnings by Thursday and projections for the rest.

Aggregate profit soared roughly 30% last fiscal year to an estimated 28.78 trillion yen, and growth rates have outstripped those in many other global markets for several years. But Japan is expected to fall behind peers including the U.S. this fiscal year with the first drop in net profit since fiscal 2015.

The rebounding yen serves as one factor. Most companies estimate the currency will be stronger on average this fiscal year than the current 109 yen to the dollar, seemingly spooked by the appreciation tear in late March that put the exchange rate on the order of 104 yen. Honda Motor anticipates an average rate of 105 yen this fiscal year, 6 yen stronger than in fiscal 2017. That rate should crimp profits earned abroad, contributing to the automaker's projection of a 16% drop in operating profit and a 46% decline in net profit.

Japan's aggregate pretax profit shrinks at a rate of 0.5% for every 1-yen rise against the greenback, Mizuho Securities estimates. A projection for a 5-yen appreciation from the prevailing rate implies a 2.5% profit drop is on the way, for example.

Higher resource prices will put further strain on companies. As oil prices climb, so will the costs of fuel and materials such as plastics. Mitsubishi Chemical Holdings expects net profit to fall 13%.

"Rising prices of raw materials such as naphtha will weigh heavily" during the year, Chief Financial Officer Hidefumi Date said.

Japan's electronics sector will suffer a jolt as global smartphone sales continue to slow. Alps Electric sees net profit declining 21% in fiscal 2018 as revenue from smartphone components falls short of previous expectations, failing to offset costs associated with expanding production facilities.

"It will take until June for the smartphone market to adjust," said Yoichiro Kega, a director.

Companies also will not repeat last year's nearly 2 trillion yen on-paper profit boost from the hefty U.S. corporate tax cut. Without that one-time boost, the estimate for fiscal 2018 aggregate net profit might have represented growth instead of a decline of just over 1 trillion yen.

Operating profit -- a more direct indicator of earnings power -- looks to rise about 3% in fiscal 2018, maintaining its recent climb. Earnings could even beat that projection if exchange-rate headwinds prove milder than expected.

Some companies expect to buck the trend and continue their recent net profit growth. Electric motor maker Nidec anticipates sales in growing fields such as automotive components will bring record profit, despite assuming an exchange rate of 100 yen to the dollar. Toilet maker Toto also sees profit growing thanks to the brand's strong reputation in China.

Nintendo expects sales of games for its Switch platform to help the company achieve a third straight year of profit growth. Yamato Holdings, parent of Japan's top door-to-door shipper, envisions net profit nearly doubling on the year as rate hikes begin to pay off.

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