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Japan Inc. sees record profit despite the stronger yen

Premium goods, internet-related business strong; BOJ provides favorable backdrop

Japanese companies' streamlining efforts and aggressive acquisitions are starting to pay off.

TOKYO Japanese listed companies' aggregate net profit is likely to reach an all-time high in the fiscal year ending March 2017, breaking the record set two years earlier. Their aggregate revenue is expected to fall for the first time in seven years, with a stronger yen than in the previous year, but their overall profitability is seen rising significantly thanks to robust sales of higher-end products and services. Improved global economic sentiment is another factor behind higher profits for a wide range of industries, including semiconductors, chemicals and telecommunications.

Nikkei Inc. tallied figures from April-December earnings reports and full-year earnings projections released by listed companies that close their books at the end of March, excluding financial institutions. Aggregate net profit is expected to rise 11% in fiscal 2016 from the previous year. The figure is seen rising 50% on the year for the second half, which runs through March.

Manufacturers expect a 1% year-on-year decline in net profit for the full year, better than the 9% drop for the April-December period. Toyota Motor expects net profit to fall 26% for the year, but this is an improvement over the company's earlier forecast of a 33% drop; the figure was revised upward in February. Nonmanufacturers predict a profit increase of 29%. Trading houses forecast a 190% jump and telecom companies project a 33% increase.

The yen averaged slightly stronger than 109 to the dollar for the third quarter ended December, about 12 yen stronger than a year earlier.

Profits were high in the fiscal year ended March 2015 thanks largely to a weaker yen; the projected profit increase for fiscal 2016 despite the stronger yen testifies to companies' greater earning power, as well as the improved global economic sentiment. The Bank of Japan's monetary easing has also helped companies raise profits.

The ratio of net profit to sales for Japanese listed companies is expected to exceed 4% for the first time in fiscal 2016 to an all-time high.

While the future of the global economy remains uncertain, many companies have grown stronger on the back of products they alone can provide. Confectionery maker Morinaga & Co. is enjoying robust sales of Carre de chocolat, a higher-priced chocolate rich in polyphenols. Polyphenols are said to promote cardiovascular health, making Carre de chocolat especially popular among health-conscious elderly and middle-aged consumers. Underwear maker Gunze, meanwhile, has seen growing sales of higher-priced seamless items.

Many companies are improving earnings in such growth markets as e-commerce and the internet of things. Start Today, which operates online clothes shopping site Zozotown, raised its net profit margin by 7 percentage points on the year in the October-December quarter. The company has increased the number of brands it handles, helping raise both the number of users and the value of goods sold through its site.

Daifuku, which produces automated systems for sorting and conveying goods in warehouses, is another company benefiting from the growing online shopping market. "With the growing size of warehouses, our systems have become more complex and profitable," said the company's president, Masaki Hojo.

The spread of IoT is benefiting a wide range of semiconductor-related industries, including chemicals, materials and electric machinery. Tokyo Electron, a major maker of semiconductor production equipment, bested its quarterly record for orders in the October-December period and expects its net profit margin to improve by just over 1 percentage point this fiscal year. Hearts United Group is benefiting from the spread of smartphone games. The company has seen growing demand for its testing services to detect and correct programming errors.

The Bank of Japan's monetary easing has also had positive effects on companies' earnings. Mitsubishi Estate is enjoying strong property sales partly because of expanded lending to real estate funds.

Many companies are also reaping the fruits of rationalization efforts. Hitachi has separated businesses with little relation to its core business, such as logistics and financial services, from its group earnings. This has reduced the fixed costs related to non-core businesses and improved its earnings structure. In the October-December quarter, Hitachi's consolidated sales fell about 10% due to the sell-off of businesses and a stronger yen, but operating profit rose 4%. Japan's adoption of a corporate governance code "has prompted many companies to pursue higher profitability with shareholders in mind," said Chisato Haganuma, chief strategist at Mitsubishi UFJ Morgan Stanley Securities.

Earnings at trading houses and nonferrous metals companies have improved largely due to a turnaround in material prices and an improvement in China-related businesses. Since November, a weaker yen has also contributed to higher earnings. However, for companies that import raw materials and fuels, a weaker yen and higher raw materials and fuel prices are eating into profitability. The Chugoku Electric Power Co. has lowered its net profit forecast for fiscal 2016 because of the rising cost of coal used in thermal power generation.

Some companies that depend mainly on domestic demand, such as Yamato Holdings, are suffering from shrinking profit margins due to rising personnel expenses and growing outsourcing costs amid labor shortages. "Next fiscal year, raw material costs could lower profitability for food and chemical companies," said Kazuhiro Takahashi, senior equity strategist at Daiwa Securities.

The external environment also abounds with uncertainty. The administration of U.S. President Donald Trump has yet to work out specific policies, and there are concerns about their impact on foreign exchange rates and other economic factors. Political risks are also rising in Europe. "The Trump administration's 'America first' stance is a source of concern. We are worried about trade friction," said Keigo Matsubara, chief financial officer of Mitsui & Co.


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