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Automakers Fuel Japan’s Longest Profit Growth Streak Since 2007

Japanese exporters led by Toyota Motor Corp. (7203) are set to report higher third-quarter profit as a weaker yen fuels the country’s longest stretch of earnings growth since 2007.

Net income for Japan’s largest non-financial companies probably rose about 52 percent in the three months ended December, a fifth straight quarter of aggregate increase, data compiled by Bloomberg show. Earnings almost doubled on average in each of the previous four quarters, nine times faster than the Standard & Poor’s 500.

Toyota, the world’s most profitable automaker, is set to report an estimated fourfold increase for the quarter after vehicle demand jumped in the U.S. and recovered in China. Panasonic Corp. (6752) and Hitachi Ltd. (6501), Japan’s two biggest employers after Toyota, are also benefiting as rising profits bring Prime Minister Shinzo Abe closer to ending 15 years of deflation.

“It has definitely been a while since we’ve seen a steady growth streak this long,” Hisao Matsuura, a strategist at Nomura Securities Co., said by phone. “The risks that affected things until last year -- the debt crisis in Europe, natural disasters, emerging markets slowdown and U.S. uncertainty -- have gone.”

Growth in the past five quarters is also stronger than the previous gain of that duration. Net income rose 83 percent on average in the past five periods, compared with the 14 percent average over the five quarters ending in March 2007, data compiled by Bloomberg show.

The profit surge propelled the benchmark Nikkei 225 Stock Average (NKY) last year to its biggest advance since 1972

Yen Effect

The growth comes as a weaker yen boosts the value of overseas earnings, especially at companies that had already cut costs to cope with a currency near a postwar high over the previous year. The dollar averaged 98 yen in 2013, compared with 80 yen in 2012. The average so far this year is about 104 yen.

The figures are based on earnings and projections for all 414 non-financial companies on the Topix index for which quarterly data back to March 2006 and estimates for the quarter ended in December are available.

Net income probably climbed about 40 percent in the three months ended December for companies on the Russell/Nomura Large Cap Index, excluding financial firms, Nomura estimates. The period will be the first quarter of slowing growth since the fourth quarter of 2011, the Nomura forecast shows.

Higher Base

The wave of rising profit comes amid sales and output growth at carmakers combined with the increasing use of electronic parts such sensors, batteries and cameras, benefiting some of Japan’s biggest manufacturers.

Panasonic, recovering from two straight annual losses, counted on automotive systems for 37 percent of revenue in the three months ended September, the biggest contributor. Sales of car systems including lithium-ion batteries, drive control systems and parking cameras were 650 billion yen ($6.3 billion) in the period, more than triple the 188 billion yen a year earlier.

The maker of televisions, cameras, solar panels and home appliances expects to double auto-related revenue to 2 trillion yen by March 2019 and is in talks with car-parts makers for acquisitions and alliances, Yoshihiko Yamada, head of the auto and industrial systems unit, said in an interview last month.

Hitachi, an industrial group that makes everything from power-plant equipment to telecommunications gear and auto parts, more than tripled net income to about 70 billion yen in the three months ended December, according to the average of four estimates compiled by Bloomberg.

Abenomics Winners

Abenomics, the prime minister’s program of monetary easing that weakened the currency, stimulus spending and advocacy of wage increases, is starting to show benefits for companies, Hitachi Executive Vice President Toyoaki Nakamura told reporters in October when the company reported second-quarter earnings. Demand for car parts in the U.S. and China is also boosting profit, he said.

“Automakers and machinery makers have really benefited from the increase in overseas earnings,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “Those gains drove stock prices higher, which in turn stimulated domestic personal consumption.”

The profit surge has yet to prompt wage increases that Abe and economists have said are needed to sustain growth. While the prime minister has called for incomes to advance more quickly than inflation, prices will jump five times faster than wages in the fiscal year starting in April, according to a Bloomberg survey in December.

Electronics Woes

Consumer electronics makers including Sony Corp. (6758), Nintendo Co. and Sharp Corp. are still struggling as demand for TVs, personal computers and cameras slumps and casual video-game players shift to cheap or free titles played on smartphones.

Nintendo will probably report net income fell 9 percent to 38.7 billion yen for the three months ended December, based on the average of five analyst estimates compiled by Bloomberg.

The maker of Wii U consoles and the Mario and Zelda games on Jan. 17 forecast a surprise 35 billion-yen annual loss, blaming poor sales of the console.

Sony will probably report net income of 24.5 billion yen in the three months ended December, compared with a 10.8 billion-yen loss a year earlier, based on the average of three analyst estimates compiled by Bloomberg.

Competition from South Korea’s Samsung Electronics Co. and Apple Inc. for smartphone sales and the shift by consumers to tablets away from PCs have sidelined Japan’s iconic device makers amid the broad recovery of manufacturers in the country.

Growth Outlook

The rebound in spending, a 73 percent surge in the Nikkei 225 since mid-November 2012 and the weaker Japanese currency are also driving up consumer prices.

The Bank of Japan on Jan. 22 maintained its forecast that core consumer prices will rise 1.9 percent in the year starting April 2015.

The central bank’s estimate, which scrapped references to the economy facing “uncertainty,” excludes the effect of a planned sales-tax increase to 8 percent in April.

The jump will probably damp earnings (TPX) growth in the first half of the year, said Matsuura of Nomura.

“By around July, growth should be back on the current track,” Matsuura said.

Deflation’s End

Earnings expansion may push the Nikkei 225 to 18,000 yen this year, according to Nomura’s 2014 outlook for Japan. The benchmark rose 1.5 percent to 15,209.19 yen as of 9:09 a.m. in Tokyo.

Japan’s 15-year bout with deflation has seen a series of economic recoveries vanish after a few quarters. The previous surge from 2005 to 2007 briefly lifted the Nikkei 225 above 18,000 yen, before the collapse of Lehman Brothers Holdings Inc. in September 2007 sparked the global credit meltdown and recession that dragged the benchmark to below 7,000 yen intraday in 2009.

Japan Inc.’s recovery from the Lehman shock was cut short by its March 2011 earthquake, tsunami and nuclear crisis. The rebound from that disaster was stymied when floods in Thailand disrupted production at makers of auto parts, hard drives and electronics components supplied to carmakers and consumer electronics companies based in Japan.

After that, Europe’s credit crisis and a yen that stayed near a postwar high held back expansion at some of Japan’s biggest exporters.

The economy probably grew 3.6 percent in the third quarter, on an annualized basis, according to a Bloomberg survey of economists. That would be the fifth quarter of growth, the longest expansion since the six quarters beginning in 2005.

“This recovery is different,” said Ryuta Otsuka, a strategist at Toyo Securities Co. “Consumer sentiment is very good, spending is growing and so I don’t think the sales tax will have a big impact.”

To contact the reporters on this story: Anna Mukai in Tokyo at amukai1@bloomberg.net; Dave McCombs in Tokyo at dmccombs@bloomberg.net

To contact the editors responsible for this story: Frank Longid at flongid@bloomberg.net; Young-Sam Cho at ycho2@bloomberg.net

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