Japan's Biggest Companies Battle Back to Profit on Cost Cuts, China Boom

Japanese companies including Toyota Motor Corp. and Panasonic Corp. forecast profit will surge this year as exports and cost cuts power a recovery from the worst recession on record.

Net income will probably climb a combined 64 percent for the 107 Nikkei 225 Stock Average companies that have projected earnings so far for the year ending March 31, 2011. Toyota, which this week vowed to slash 290 billion yen ($3 billion) in costs, predicts profit will gain 48 percent.

The optimism tracks the companies’ expansion in China and India, where rising wages and consumer confidence fuel demand for cars, televisions, electric power generation and factory equipment. Panasonic, Toshiba Corp. and Hitachi Ltd., the nation’s largest private employer, aim to increase sales and production abroad to counter a declining population at home.

“The worst of the crisis is behind us,” Nissan Motor Co. Chief Executive Officer Carlos Ghosn said in an interview yesterday in Yokohama.

The outlook for rising profit helped propel the Nikkei 225 to a 5.2 percent gain in the first three months of the year, the fourth straight quarterly advance. The benchmark gained 2.2 percent to 10,620.55 at the 3 p.m. close in Tokyo.

Photographer: Kimimasa Mayama/Bloomberg

Carlos Ghosn, president and CEO of Nissan Motor, speaks during a news conference in Tokyo. Close

Carlos Ghosn, president and CEO of Nissan Motor, speaks during a news conference in Tokyo.

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Photographer: Kimimasa Mayama/Bloomberg

Carlos Ghosn, president and CEO of Nissan Motor, speaks during a news conference in Tokyo.

Japan’s economy will probably grow 1.8 percent this year, according to the median forecast of Bank of Japan board members, after 2009’s 5.2 percent drop, the biggest decline since comparable data were made available in 1955.

‘Conservative Estimates’

The 2010 target is less than a quarter of the 8 percent expansion forecast for China, which is set to overtake Japan as the world’s second-biggest economy this year. India is projected to grow 8 percent in the year to March 2011.

Companies may even beat their earnings forecasts, many of which are based on worst-case foreign exchange rate estimates, said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages about $3 billion.

“Most companies have made very conservative estimates for this year and results are likely to be better than expected, unless the world economy weakens,” Merner said. “Many stocks now look very cheap.”

Nissan Motor Co., which yesterday said profit may triple this year, boosted sales in China 68 percent to 243,000 vehicles in the three months ended March. The automaker, Japan’s third- largest, aims to raise output capacity in China by about 70 percent to 900,000 units a year by 2012.

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Howard Stringer, president and CEO of Sony, speaks during a news conference in Tokyo. Close

Howard Stringer, president and CEO of Sony, speaks during a news conference in Tokyo.

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Photographer: Tomohiro Ohsumi/Bloomberg

Howard Stringer, president and CEO of Sony, speaks during a news conference in Tokyo.

Grinding Down Costs

The expected rebound in earnings also shows Japan’s biggest companies are reaping benefits after paring costs by closing underused factories and firing workers. Sony Corp. Chief Executive Officer Howard Stringer last year oversaw plans to eliminate 16,000 jobs and shut eight plants. Panasonic in October said it had cut 29,155 jobs since September 2008.

The firings provide another reason for companies to look abroad for growth. Japanese employment has declined in 10 of the past 15 months on a seasonally adjusted basis, dropping to the lowest since 1990 in November.

Sony forecast its first annual profit in three years as demand for televisions picks up and after the electronics maker cut expenses by selling assets and eliminating jobs. Net income will probably total 50 billion yen this fiscal year, compared with a loss of 40.8 billion yen a year earlier, the Tokyo-based company said today.

No Overtime

Panasonic, which earlier this month said it intends to boost overseas sales to 55 percent of its total, projects net income of 50 billion yen for this year, compared with a 103.5 billion yen loss in the previous year. The company, the world’s biggest maker of plasma televisions, on May 7 said cost cuts will boost operating profit by 490 billion yen this fiscal year.

At Honda Motor Co., which expects profit to rise 27 percent to 340 billion yen this year, the outlook hasn’t been enough to ease some cost controls, said Akemi Ando, a Tokyo-based spokeswoman.

“Just like last year, we still don’t get overtime hours or take business trips unless there is an urgent need,” she said.

Toyota based its full-year forecast on exchange rates of 90 yen to the dollar and 125 yen to the euro, compared with an average 93 yen against the dollar and 131 yen against the euro last fiscal year. The company estimates annual operating profit is reduced by 30 billion yen when the Japanese currency rises 1 yen against the dollar.

Japanese exporters’ profit remains vulnerable, Merner said, citing “risks that include an overly strong yen, weak stock markets, continuing financial crisis in Europe, problems in BRICS, loss of investor confidence.”

The U.S. currency has averaged 93.37 yen since the April 1 beginning of Japan’s fiscal year. The euro has averaged 123.73 yen since April 1.

For Toyota, Japan’s biggest company and almost double the size of its nearest rival in market value, the expected turnaround may mark the end of its worst patch in its history. Battered first by the global recession, then by recalls that cost the company at least 170 billion yen, President Akio Toyoda said things are at last looking better.

“We are still in the middle of the storm,” he told reporters May 11. “But I am feeling that we can see clear skies in the distance.”

To contact the reporter on this story: Naoko Fujimura in Tokyo at nfujimura@bloomberg.net.

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