TOKYO -- Japanese stocks got off to a somber start in the new fiscal year that began Friday, as fears spread that businesses have yet to fully grasp how the yen's appreciation trend will affect their earnings.
The Nikkei Stock Average tumbled 594.51 points to close at 16,164.16. "I didn't expect this heavy selling," a disconcerted Takatoshi Itoshima of Commons Asset Management said, referring to shares of Panasonic. After the electronics giant issued a bleaker forecast for fiscal 2016 the previous day, its stock sank 13% at one point, becoming the second-biggest decliner on the first section of the Tokyo Stock Exchange.
The stock's plunge is attributed in part to Panasonic's projection that operating profit will fall to 375 billion yen ($3.35 billion) in the year ending March 2017, or down 9% from the fiscal 2015 estimate. What alarmed investors in particular was that the company used an exchange rate of 115 yen to the dollar in its projection -- a weaker yen than the currency's Friday close of 112.19. So they punished the manufacturer for failing to thoroughly reflect the yen's strengthening in its earnings outlook.
A softer yen was also seen in the Bank of Japan's latest Tankan business sentiment survey released Friday. The projected rate for big companies came to 117.46 yen to the greenback for fiscal 2016.
These numbers clearly are disturbing market players. "Corporate Japan as a whole has yet to sufficiently factor in the yen's appreciation, which makes it impossible to see the 'bottom' of their earnings," said Seiji Arai of Mitsubishi UFJ Morgan Stanley Securities. The Panasonic "shock" spread to rivals and to other exporters. Murata Manufacturing slid 4% while Mazda Motor tumbled 5%.
It is common knowledge that because businesses do not adjust their exchange rate assumptions frequently, earnings forecast revisions lag behind actual changes in the forex market. Data going back to 2012 shows that swings in exchange rates were only reflected in the projected earnings per share of blue chips three months later at the earliest.
If this trend holds true, it means that possible deterioration in exporter profits resulting from the yen's sharp appreciation has yet to surface. Corporate Japan is expected to give conservative forecasts amid the Chinese economic slowdown, but downward revisions are a real possibility later in the fiscal year.
When businesses cut their forecasts, their price-earnings ratios rise. In this case, even if their stock prices fall, their shares would not seem so undervalued.
Among the small group of gainers Friday was telecommunications company KDDI, which has raised its dividend for 14 straight years. Amid subzero interest rates, "money will flow to companies likely to offer higher payouts" as an alternative to fixed-income instruments, said Shunsuke Kobayashi at the Daiwa Institute of Research.
Still, Friday's sell-off seemed to send the message that such support is far from adequate.