Markets

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Japanese companies are either overly bullish on the yen or sandbagging their forecasts in the hope of enjoying an upside surprise.

Sony Corp. shares had an 11 percent pop on Wednesday, equating to a $5.6 billion increase in market cap, after the company boosted its outlook for sales and operating profit. As we pointed out on Tuesday, the real hero behind the blowout earnings wasn't a sudden rush of demand for PlayStations or TVs, but a weakening yen.

A lower Japanese currency helps boost the bottom line of firms that get revenue from overseas but report in yen. If sell-side analysts swallow a company's guidance, a CFO can in effect engineer earnings beats using unrealistic assumptions for the currency.

Topix on a Tear
Strong corporate earnings are giving buoyancy to Japan's benchmark equities index
Source: Bloomberg

Nintendo Co., Panasonic Corp., Fanuc Corp., TDK Corp. and NEC Corp. are all markedly bullish about the yen, basing their earnings outlooks on currency strength not seen in a year and certainly not predicted by markets. If the yen fails to reach those levels, results stand to surpass companies' forecasts.

Fanuc, for instance, while tweaking up its profit outlook on October 25, sees the yen averaging 105 from October through March, remarking that the robot maker's financial situation "is expected to remain unpredictable, due to concerns including foreign exchange fluctuation and geopolitical risks." In other words, it's leaving itself wiggle room. 

These wayward predictions aren't without precedent. After all, we're talking about a volatile currency that averaged 101.34 per dollar in the September quarter last year, 12 percent stronger than the current level.

Instability
When looked at quarter by quarter, it's clear the Japanese yen has been been quite restless over the past two years
Source: Bloomberg

Japan Inc.'s consumer goods sector, which includes electronics makers, has so far posted an average 23.7 percent upside surprise to net earnings for the September quarter on sales that have beaten by 5.6 percent.

Lucky Leverage
Earnings have beaten estimates by a wider margin than sales for export-focused members of the MSCI Japan Index
Source: Bloomberg
Note: Consumer electronics companies such as Nintendo, Panasonic and Sony are classified under Consumer Goods. Data as of Nov. 1, 2017, for companies that have already reported in the Aug.-Nov. period.

Panasonic, for example, posted a 12.9 percent increase in sales from a year earlier (surpassing estimates by 6.8 percent). Forex gains accounted for 38 percent of that growth. For operating profit, which beat by 14 percent, fully 94 percent of the growth can be attributed to a weaker yen. At Nintendo, which is enjoying strong sales of its Switch console, 24 percent of its ordinary profit, which includes non-operating items, came from currency effects (it was hit by a huge forex loss in the prior year). 

Sony, with around 68 percent of revenue from overseas, seems willing to moderate its view. In April, it saw the yen averaging 105 per dollar for the fiscal year ending March 2018. By August, this was changed to 110, and now it's been tweaked to 112.

But there are plenty of stubborn blue chips that refuse to accept a weaker yen will stick, despite Prime Minister Shinzo Abe's re-election signaling the continuity of policies that have spurred a more than 20 percent decline since he took office in December 2012. 

Nintendo continues to see the yen strengthening to 105 by next March (averaging 108.3 for the year), a view it's held since at least April although the currency hasn't hit that level for almost a year. Others are drinking the same kool-aid, with NEC keeping its estimate at 105 yen and TDK mildly less bullish with a forecast of 108 yen per greenback.

Corporate CFOs may argue they can be forgiven for getting it wrong, given that even currency traders have no idea. Just a month ago, forward markets pointed to the yen at 106.8 per dollar at the end of March; now it's closer to 113 yen. In the past year predictions have swung from 117.8 to 106.5.

Where Will the Yen Be?
Forward currency markets are far less bullish on the currency than Japan Inc.
Source: Bloomberg

But as strong results and upgraded outlooks drive the Topix toward resistance levels set in the early 1990s, let's take those yen and earnings forecasts with a pinch of salt.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shuli Ren in Hong Kong at sren38@bloomberg.net
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net