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Stocks

Precarious oil poses yet another risk to Japan investors

TOKYO -- While investors in Japanese shares are largely focused on Greece's debt crisis and China's stock market crash, the plunge in oil prices Monday could create a third overseas risk by weighing on earnings at U.S. companies.

     The Nikkei Stock Average advanced 264 points Tuesday, retracing 60% of the previous day's losses. Buying was broad, with issues benefiting from low oil prices faring especially well. ANA Holdings and Japan Airlines each hit year-to-date highs, while the Nikkei average's electric power and paper and pulp subindexes both gained about 3%. Traders picked up some food stocks as well.

     The trigger was a drop in the price of West Texas Intermediate, an international benchmark for crude oil futures. Its decline has picked up speed since late June, in apparent tandem with the Greek crisis. It plummeted nearly 8% on Monday alone to a roughly three-month low. Investment funds and other traders have turned more risk-averse.

     In Japan, cheap oil is a boon to companies driven by domestic demand in particular, as shown by Tuesday's buying trends. It holds down import costs, offsetting the weak yen, and stimulates consumer spending by making gasoline cheaper. But a further steep decline in oil prices could pose a new risk, experts warn.

     The epicenter of the shock would be the U.S. The Dow Jones Industrial Average retreated again Monday, with Exxon Mobil and Chevron both falling around 1%, outpacing the Dow's 0.28% decline. "Concerns mounted that the sharp drop in oil prices will cause oil giants' earnings to undershoot, which pushed down the Dow as a whole," said Hirokazu Kabeya at Daiwa Securities.

     In the U.S., energy concerns have a significant impact on overall corporate earnings. U.S. businesses will start announcing April-June earnings Wednesday. The market expects major companies to log a year-on-year aggregate net profit decline of 3% for the quarter -- the first such decrease in five years and nine months -- led by a 60% plunge at energy companies.

     Earnings at U.S. companies often exceed expectations, so an overshoot is likely for last quarter as well, Kabeya said. However, the sudden drop in oil prices after a period of recovery will weigh on July-September earnings. If earnings growth looks unlikely to resume in October-December, U.S. stocks, which have remained broadly flat since the start of the year, would face heavy downward pressure.

     Most analysts expect the impact on Japanese stocks to be limited for the time being because differences in monetary policy have broken down the link between the Japanese and U.S. markets. But it could be a different story if risk-sensitive investors move money between assets, rattling U.S. stocks. Expectations of brisk earnings at Japanese companies are predicated on a strong American economy.

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