For Japanese investors, it must have seemed the equivalent of turning lead into gold.

Unlike in the Middle Ages, the alchemy now relied on mixing central bank stimulus with a weakening yen to create rising profits and a stock market that soared to an eight-year high. But that was back in August, and the formula has since lost its potency.

By one measure, earnings in the world’s third-largest stock market are poised to retreat more than 20 percent this quarter, and for the first time since 2012 more Japanese companies are missing forecasts than beating them. Meanwhile, the yen just staged its biggest weekly rally since 2009 even though the Bank of Japan surprised the world by cutting interest rates to below zero.

“Whether it be quantitative easing or the weaker yen, the effect is getting smaller and smaller,” Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which manages $453 billion. “The problem is that we’re not seeing excitement domestically. The fact that the global economy isn’t good is impacting Japanese earnings, too.”

In many ways, Japan isn’t alone. Evidence is mounting that central banks’ easy money policies are having less ability to give their economies -- and asset prices -- a boost. In the U.S., Standard & Poor’s 500 Index companies are about to report the third consecutive quarter of declining income. Bank stocks in Europe are near a 3 1/2 year low as measures of risk in credit markets reach the highest since 2013.

“We’ve entered a period of stagnation,” said Shinobu Yonezawa, a quantitative analyst at Mizuho Securities Research & Consulting Co. in Tokyo. “China has become an issue and oil prices tumbled at the end of last year, changing the landscape for corporate earnings.”

Hitachi Tumbles

A Japanese casualty: Hitachi Ltd., which fell the most since 2011 last week after cutting its profit forecast 23 percent because of slowing China growth and plummeting oil.

The Topix dropped 4.4 percent last week, unwinding all of its gains from the BOJ’s shock adoption of negative interest rates on Jan. 29. Since Japanese equities tumbled more than 20 percent from a peak last month, rallies have faltered amid a global selloff spurred by tumbling oil prices and concern about the outlook for the world’s biggest economies. The Topix rose 0.8 percent in Tokyo on Monday, after sinking as much as 1.7 percent.

Declining Profits

For corporate profits, the consequences look bleak. Companies will post a 21 percent slide in net income in the three months through March, the biggest decline since the summer of 2012, according to figures compiled by Mizuho Securities on the nation’s largest firms excluding banks. The estimates are derived by comparing companies’ nine-month performances with full-year forecasts. Mizuho’s earnings-revision index, a measure of downgrades versus upgrades, dropped to minus 10.5 in January, the lowest since November 2011, Yonezawa said.

Of companies in the 1,934-member Topix that have reported earnings this quarter and for which Bloomberg had estimates, 52 percent have missed forecasts, the first time a majority have fallen short since the end of 2012. That compares with a year ago, when 67 percent topped projections, the data show.

“Companies are losing their earnings momentum,” Yonezawa said. “Sectors impacted by lower commodity prices, such as steel, oil and trading houses, are facing the most difficulties.”

The Topix Mining index, which includes oil explorer Inpex Corp., is set for a 38 plunge in net income for the full year, Mizuho’s data show. Inpex reduced its full-year profit forecast by 26 percent on Thursday, more than analysts estimated.

China Slowdown

Hitachi, which has businesses in everything from plants to consumer electronics, has seen the slowdown in China hit sales of construction machinery. It slashed its profit forecast for the year through March 31, disappointing analysts who had predicted an increase. Car parts maker Denso Corp. also lowered its estimate after changing its outlook due to a stronger yen.

Some analysts say the yen’s impact is overstated, and that current levels aren’t yet too damaging for corporate earnings. Lower oil prices could also give a boost to consumer spending. Another bright spot for Japanese stocks are valuations, which are among the lowest in the developed market. The Topix traded last week at 13.7 times earnings, compared with 15.6 for the S&P 500 and 14.3 for Europe’s Stoxx 600 index.

Yet even bulls see reason for caution. Goldman Sachs Group Inc. strategist Kathy Matsui cited Japan as one of the brighter prospects among global markets, saying in a December report that dependence on yen weakness is a myth as currency sensitivity has declined. The next month Goldman cut its six-month Topix target citing global macro turbulence, and said earnings disappointments are a key risk.

Consumer Prices

Japan is struggling to achieve stable inflation, with core prices rising just 0.1 percent in December from a year earlier. The BOJ’s target is 2 percent. Industrial production fell more than expected the same month, as did imports, exports and household spending.

Japan needs policies that will boost consumer spending to see a stock recovery, according to Norihiro Fujito, general manager of Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. He sees limits to what the BOJ can do, and argues that there needs to be more effective government reform to put the economy back on the right path.

“Abenomics isn’t easy,” said Sumitomo Mitsui’s Sera. “There’s nothing to show that we’ve had real reforms that have changed things from the core. There is no answer and there is no medicine. There’s so much uncertainty and it’s hard to pick the bottom for stocks. If the profit declines stop, then we’ll see money flowing back into Japanese stocks again.”

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