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Japan-Update

Corporate Japan wary of yen's renewed strength

Earnings remain solid, but further appreciation could dampen investor sentiment

Japan's Suzuki Motor produces some cars at home for export, like the Swift subcompact shown here.

TOKYO -- Exchange rates hold less sway over corporate earnings in Japan nowadays, but the yen's recent strength could still take the shine off Japanese companies' bumper earnings.

Although much of corporate Japan forecasts brisk results for the year ending March, a stronger yen would erase some of their profits. The average assumed exchange rate for the January-March quarter stands at 109.50 yen per dollar for companies that close their books at the end of March. At 106.19 yen as of early Saturday, the Japanese currency is now considerably stronger than that assumed rate.

A higher yen reduces procurement costs for electricity and gas companies that purchase oil and natural gas in dollars, but it hurts industries reliant on exports, like autos, machinery and electronics. Because exporters make up a larger proportion of the Japanese industry, the yen's appreciation is a negative event for Japanese businesses overall.

Many companies are reducing their foreign exchange risks through such measures as expanding overseas production and parts procurement, but canceling out the effects of currency swings is difficult. Nomura Securities estimates that listed Japanese companies' full-year pretax profit drops 0.4% for every 1 yen appreciation against the greenback.

In the nine months ended December, a weaker yen lifted the combined operating profit among Japan's seven major automakers by a little more than 480 billion yen ($4.52 billion at today's rate).

Despite the robust April-December results, however, "We have kept our full-year forecast unchanged because the outlook for exchange rates is uncertain," said Masahiko Nagao, a director and managing officer at Suzuki Motor.

Full-year profit for both Mitsubishi Electric and Hitachi sheds about 2 billion yen for every 1 yen appreciation against the dollar.

Mitsubishi Electric is working to reduce this impact by expanding overseas procurement, among other measures.

Hitachi has "set aside 30 billion yen for dealing with exchange rate fluctuations and other changes in macroeconomic environment," said Mitsuaki Nishiyama, Hitachi's chief financial officer. But further appreciation of the yen could detract from fiscal 2018 earnings.

"Foreign exchange's impact on Japanese companies may get bigger in the future, since Japanese companies' overseas sales ratios are going up," warned Takashi Ito of Nomura Securities.

Many of the companies with a March fiscal-year ending are currently calculating their projections for the next year. If they factor in the recent yen strength heavily and come up with conservative forecasts, it could dampen investor sentiment and weigh on Japanese equities.

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