Japan Inc. Profit Doubles to Add Support to Economic Rebound

Japan’s top listed companies doubled earnings last quarter from a year earlier, exceeding already high forecasts and generating support for the economic recovery effort of Prime Minister Shinzo Abe.

With almost all of the Nikkei 225 Stock Average companies reporting, profit surged 103 percent and beat analyst estimates by 16 percent, the most in two years, according to data compiled by Bloomberg. Companies topping estimates range from Toyota Motor Corp. and Sony Corp. to Shiseido Co. and Kobe Steel Ltd.

The magnitude and breadth of the profit surge means Japan’s leading companies have the money to help stoke the economy -- through investment, dividends and higher wages -- which would aid Abe’s effort to break two decades of stagnation. Slumping corporate investment has hindered the recovery, with gross domestic product figures released today showing companies cut spending for a sixth straight quarter.

“The first quarter got the fiscal year off to a great start,” said Takashi Aoki, a fund manager at Mizuho Asset Management Co, which oversees about $33 billion. “There will definitely be more capital spending, and increased spending will definitely stimulate the economy further.”

Capital investment by enterprises fell at a 0.4 percent annual pace last quarter, according to today’s GDP report by the Cabinet Office.

Companies Benefiting

Japanese companies are benefiting from Abe’s economic policies, including the weakening of the country’s currency. The yen’s 19 percent drop from the same quarter a year earlier made Japanese cars, auto parts, machinery, electronic components and home appliances more competitive abroad.

The earnings recovery shows Japan’s big companies are ahead of the broader economy. Gross domestic product rose an annualized 2.6 percent, after gaining 3.8 percent the previous quarter. The median estimate of 32 economists surveyed by Bloomberg News was for a 3.6 percent increase.

The Nikkei 225 companies have the most cash per share in more than a decade, according to data compiled by Bloomberg. Cash rose 19 percent last quarter for the 219 companies that have reported, the steepest jump in at least nine years, the data show. The companies had an average of 3,250 yen ($34) of cash and equivalents per share, the most since at least 2000.

Toyota’s Spending

Toyota’s cash and marketable securities rose 11 percent to $37 billion as of the end of June, the most among listed non-financial companies in Japan, according to data compiled by Bloomberg.

The automaker is bucking the broader trend with capital spending and research expenditures set to jump 10 percent this fiscal year. Toyota, whose earnings were boosted by the weaker yen, is also paying workers the highest bonuses since 2008 while planning higher dividends.

Japan’s six biggest carmakers reported total net income of about 848 billion yen for the quarter ended June, beating analyst estimates 14 percent.

Toyota raised its forecast for annual profit to 1.48 trillion yen on Aug. 2 from a May forecast of 1.37 trillion yen, citing better than expected margins.

“It’s unusual for a company to be raising their forecasts this early on,” said Nicholas Smith, a Tokyo-based strategist at CLSA Asia-Pacific Markets. “Things are finally coming together for them.”

Sony Forecast

Sony, Japan’s largest consumer electronics exporter, raised its annual sales forecast 5 percent, citing the weaker-than-expected currency, after reporting first-quarter profit of 3.48 billion yen, beating analysts’ estimates.

The Nikkei companies’ surpassing of analyst estimates by 16 percent compares with 2.8 percent for the 449 companies in the Standard & Poor’s 500 Index that have reported so far, according to data compiled by Bloomberg. The U.S. index’s members had an aggregate 3.6 percent earnings-per-share growth, the data show.

Japan’s broader Topix index, which includes more than 1,600 companies, showed total earnings per share reported last quarter beat analysts estimates by 14 percent, while profit jumped 93 percent.

‘Wealth Effect’

Nippon Yusen K.K., Mitsui O.S.K. Lines Ltd. and Kawasaki Kisen Kaisha Ltd., the country’s three biggest commercial fleets, returned to profit in the first quarter as a weaker yen boosted repatriated earnings.

A shift from overseas growth to investing in Japan, where decades of stagnant growth and an aging population have discouraged expansion, has become a measure of success for Abe’s efforts to revive growth.

Since Abe’s Liberal Democratic Party won power in December, the prime minister has shot two arrows aimed at ending 15 years of deflation and reviving growth. The first was a monetary policy that doubled purchases of bonds to pump cash into the economy. The second was a fiscal stimulus plan that boosted government spending.

Gains at exporters have sparked the country’s biggest stock rally since 2005, prompting consumers to spend more, said Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute in Tokyo.

“Retailer profits are gaining as higher share prices provide a wealth effect to consumers,” said Nagahama.

Consumers Upgrade

Japan’s consumer prices rose at the fastest pace in four years in June as stimulus by Abe and the Bank of Japan prompted a slide in the yen that boosted import costs.

Citigroup’s Inflation Surprise Index for Japan rose to a level unseen since June 2012 and the highest among the G-10 economies. Consumer prices are likely to increase gradually, the BOJ said Aug. 8.

“More people are buying themselves things that are a little bit better than what they usually buy,” said Mikihiko Yamato, deputy head of research at JI Asia in Tokyo. “While people’s salaries are not increasing, bonuses are rising and I think they will spend a lot in the December holiday season.”

A separate gauge of corporate goods prices released by the BOJ today showed an increase of 2.2 percent, the biggest since August 2011.

Economic growth last quarter was driven by private consumption, public investment, and net exports, according to the Cabinet Office’s report. Consumer spending, which accounts for about 60 percent of the economy, rose 0.8 percent from the previous quarter.

Some Disappointed

Some investors were disappointed with fiscal first-quarter earnings that rose less than they had expected. The broader Topix index has dropped 5 percent in the past month, trimming this year’s gain to 33 percent.

“People in the market had already expected the weak yen will boost profit,” said Yoshihiro Ito, chief strategist at Okasan Online Securities in Tokyo. “Companies still need to increase capital spending before consumer spending will be invigorated.”

The Nikkei 225 fell 0.7 percent as of the close in Tokyo, and has lost 1.2 percent since the end of June.

Still, the benchmark has climbed 30 percent this year, headed for the biggest annual gain since 2005, and the best performance among the 18 biggest equity indexes tracked by Bloomberg.

“It will take three quarters to a full year to see the volume effect on exports from a weaker yen,” said Nagahama of Dai-Ichi Life. “This may also mean we can have hope for positive surprises in the current quarter.”

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