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Facing growth challenges, Japan Inc. changes tack

TOKYO -- Based on the results of fiscal year 2015 in recent corporate filings, one in six Japanese companies is forecasting record pretax profits in the next year. Despite the headwinds of a stronger yen and slowing emerging economies, many companies see a bright future by creating new demand. 

Narita Airport, located just east of Tokyo, is not just an international travel hub, but also a product display area. Tourists are flocking to a museumlike space there to see housing device-maker Toto's state-of-the-art toilet technology.

Gallery Toto allows visitors to experience the company's signature product, the Washlet, a bidetlike device that attaches to a toilet seat. A woman in her 40s, traveling from the U.S. to Japan, looked delighted by the product and said that she wants to install one in her home. 

The Washlet hit the domestic market in 1980 and has since grown independently from global trends. Its popularity in Japan has not been reproduced in the rest of the world, but those days are over. 

Thanks to the growing popularity of the Washlet abroad, Toto expects its first record pretax profit in three years for the year ending March 2017 and overseas profitability to jump 200% from four years ago. 

President Madoka Kitamura said the product is gaining more recognition among a broad range of customers. In China, Toto's reputation for quality products has mainly spread by word of mouth.  

Meanwhile, in the white goods industry, air conditioner manufacturer Daikin Industries expects its pretax profit to hit a record high for the fourth consecutive fiscal year. President and CEO Masanori Togawa said the company aims to achieve double-digit sales growth in Asia on a local currency basis.

The driving force behind this boon is the high energy-saving performance of its units. In emerging countries, Daikin has been offering open access to its patents for air conditioners that support the latest advancements in refrigerants. The company began doing this even before starting to sell its products in those markets. By creating an environment that promotes widespread use of cutting-edge products at a faster pace, Daikin has been able to buck slowing growth trends. 

Rays of hope

Japan's automakers are expecting a decline in profit this year due to the yen's appreciation. Prominent listed companies have similar forecasts. However, communications companies and other nonmanufacturers are looking to expand their presence. 

Some companies are bucking the downward trend and boosting earning power by implementing structural changes to their revenue sources. 

A good example is Denka, a midsize chemical-maker that is expecting a record pretax profit this fiscal year.

Founded as a fertilizer-maker a century ago, the company has recently been achieving solid growth in influenza vaccine operations under its biomedical arm. Back in 1979, Denka acquired this unit from Toshiba to break into the health care field. In addition, Denka is focusing on diagnostic reagents and other health care-related supplies. President and CEO Shinsuke Yoshitaka said, "We will end [our reliance on] commodities and achieve growth in health care-related businesses."

Another example is Air Water, one of Japan's largest makers of industrial gas, which is predicting its highest-ever pretax profit this fiscal year.

A big part of its strategy is based on acquisitions: Air Water has bought roughly 100 companies, which now account for about 60% of the group's total sales.

Aiming for sustainable growth by cultivating midsize companies, Air Water has a unique business model that takes a cue from rodents: a species that is agile enough to adapt to changes in its living environment and flexible enough to enter new areas when necessary. Chairman and CEO Masahiro Toyoda calls it the "order rodentia style of business."

Air Water nurtures businesses to get them the biggest domestic share in niche markets. The Osaka-based company continuously improves its capabilities so that it is not heavily influenced by any particular trends in any particular industry. 

Using their money

Listed companies in Japan have been building their cash reserves, with their holdings topping 100 trillion yen ($900 billion). Of the 180 major companies that recently disclosed capital spending plans along with financial results, most intend to increase capital spending by 6% on the year. In addition, 100 of them will increase expenditure on research and development by 3%. Many are making aggressive investments to shift earnings structures. 

The number of merger and acquisition deals made by Japanese companies rose 8% on the year for the four months through April, according to Recof, a Tokyo-based consultancy specializing in the field.

To develop a new growth avenue, optical equipment maker Canon decided in March to buy Toshiba Medical Systems for 665.5 billion yen. In the same month, NTT Data, a unit under the Nippon Telegraph and Telephone group, announced that it has agreed to buy the information technology services business currently owned by U.S. computer-maker Dell.

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