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Japan Inc. to exceed 7% pretax profit margins for first time in decades

Strategic focus on strengths pulls likes of Sony, Komatsu to record profit

Sony uses its competitive sensor technology for its new "aibo" pet robot.

TOKYO -- Corporate Japan's profit machine is humming, churning out record profits and fueling a spirited stock market rally, with the benchmark Nikkei Stock Average rising to its highest level in nearly 26 years in early November.

The country's listed companies are on track to post record combined net profit for a second year in a row, as the effects of years of structural reforms and the recovery of the world economy buoy bottom lines.

The pretax profit margin of listed companies will surpass 7% in the current fiscal year through March for the first time since the collapse of asset-price bubbles in the early 1990s.

The ratio rose to 7.8% in the April-September period of this year, indicating that the profitability of Japanese companies has reached a new level.

There are three key factors that have boosted the ability of Japanese companies to coin profits.

Selective strategies

One is the strategy of selecting and concentrating their operations that they have pursued since the financial crisis, which began in 2008. In response to the global recession, they have concentrated their resources on businesses that can generate cash.

Sony, for instance, has been focusing its strategic efforts on areas where it has competitive power, such as the semiconductor and gaming businesses.

The company has ramped up investment to expand the production of semiconductor sensors, becoming the world's leading manufacturer of the devices.

The electronics maker plans to raise its production capacity for semiconductor sensors by 10% by March, mainly through improvements in the production process at its Nagasaki plant, and is considering ramping up production capacity for the products by an additional 10-20%.

Sony's semiconductor sensors, used mainly in smartphones and security cameras, are popular because of their high picture quality, with sales growing steadily.

The semiconductor business has been the driving force behind Sony's profit growth. Operating profit is expected to hit an all-time high  in the current financial year ending March 2018 for the first time in 20 years, with the profit margin in the semiconductor unit expected to reach 17%.

Sony's strategic focus on semiconductors and gaming has paid off handsomely. The company has poured money and manpower into these areas while avoiding expansion in those where it faces fierce competition from lower-cost rivals, such as the smartphone and TV markets.

The company's cumulative losses in the 10 years since the financial crisis began have shrunk to about 470 billion yen ($4.21 billion). Sony had a tough decade, including a single-year net loss of 455 billion yen in the financial year ending in March 2012.

Japanese companies more widely have also lowered their break-even points, meaning they need fewer sales to cover their total business costs and generate profits.

Manufacturing strength

Komatsu is now reaping the benefits of its strategic decision to maintain production capacity despite a decline in demand in the key Chinese market, according to CEO Tetsuji Ohashi.

When global demand sank around 2012, the major construction machinery maker started slashing fixed costs -- mainly labor expenditure -- while keeping its global network of some 40 manufacturing plants intact.

The company's cost-cutting efforts have started paying off, with higher profits as demand has begun to bounce back.

The average break-even ratio of major Japanese manufacturers now stands at around 60%, the lowest level since the 1980s, according to Mitsubishi UFJ Morgan Stanley Securities.

A third key factor behind the country's strong profit picture is price hikes.

Japanese oil companies have rescued themselves from the corrosive gasoline price war due to growing resales between businesses, and have managed to raise prices by cutting supplies through consolidation of the industry.

JXTG Holdings, an oil refiner created in April through a merger between JX Holdings and TonenGeneral Sekiyu, is expecting to post net profit nearly 20% higher than the total net profit that the two companies racked up in the last fiscal year.

Another factor contributing to the earnings of Japanese companies has been the weaker yen, currently trading at around 111 yen to the U.S. dollar.

By comparison, in the year ended March 2008, the average pretax profit margin for the country's companies was 6.6%, when the yen was even weaker, trading at exchange rates around 114 yen per dollar.

Despite the improvements, Japanese companies are still no match for their Western rivals in terms of profitability.

The net profit margin among U.S. and European companies for the current year are slightly above 11% and 8%, respectively, while in Japan it is a mere 4.7%, according to Thomson Reuters.

To keep their profits on an upward trajectory, Japanese companies need to rev up their growth strategies further in order to see bigger sales.

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