TOKYO -- The return on equity for Japan's largest companies will surpass 10% as earnings continue to expand at machinery and appliance makers while businesses increasingly snap up their own shares, according to projections for fiscal 2018 from the four major brokerages here.
The projections also see the collective ROE for nonfinancial corporations on the Tokyo Stock Exchange's first section reaching 9.3% for the current year ending in March, continuing a trend of increases over the past several years.
Return on equity, or net profit divided by capital, shows how much profit a company generates using capital provided by shareholders. Lifting aggregate ROE above 10% would indicate that Japanese companies are utilizing their capital as effectively as their international counterparts.
The manufacturing sector, including electrical equipment and machinery, is expected to lead the way in corporate earnings growth. Nomura Securities projects a 12.4% increase in pretax profit for machinery makers during fiscal 2018 compared with the forecast for the current year, as well as a 7.9% gain for producers of electrical and precision equipment.
Sales of electronic components will increase for automotive and other applications, and factory automation investment looks to remain high, said Hisao Matsuura, chief strategist at the brokerage.
Demand for semiconductors will grow over the long term, benefiting from technologies tied to artificial intelligence and the "internet of things," though temporary slowdowns should be expected, said Hajime Kitano, head of equity research at Mizuho Securities, another of the four brokerages.
Industry realignments and price hikes also may lift earnings. The consolidation of the containership businesses of Nippon Yusen, Mitsui O.S.K. Lines and Kawasaki Kisen Kaisha will slash costs. Higher prices for services should boost earnings for ground transportation companies, said Kazuhiro Takahashi, senior equities strategist at Daiwa Securities.
Stock buybacks also are expected to buoy the aggregate ROE. Calls for stronger corporate governance have heightened awareness of giving back to shareholders, so "we can expect high levels" of stock repurchasing into the future, said Keiichi Ito, chief quantitative analyst at SMBC Nikko Securities.
China's economy is viewed as one risk factor for Japanese corporate earnings. Tighter monetary regulations in that country could prompt temporary economic slowdowns next fiscal year, said Masashi Akutsu, chief equity strategist at SMBC Nikko Securities.
Japan's labor shortage offers another potential risk. Food makers unable to raise product prices may suffer an earnings decline due to higher costs for labor and logistics, Takahashi said.