Japan Inc. Poised to Boost Forecasts in Vote on Abenomics

Japanese companies from Toyota Motor Corp. to Sony Corp. are poised to report earnings that will provide evidence on whether Prime Minister Shinzo Abe’s policies are leading to a sustained economic recovery.

Second-quarter profit is set to surge an average of 95 percent, after the yen’s biggest quarterly drop in 17 years, according to data compiled by Bloomberg. Companies are also expected to raise their full-year forecasts even as currency-related gains start to taper.

Japan’s stock rally, the developed world’s biggest this year, has investors seeking evidence that the monetary easing and fiscal stimulus dubbed Abenomics have done more than weaken the yen. The economy expanded an estimated 2.45 percent annualized pace in the three months through September, the fastest among the Group of Seven industrialized countries.

“There’s plenty of room for companies to raise their full-year forecasts,” said Satoshi Yuzaki, general manager at Takagi Securities Co. in Tokyo. He said the yen’s weakness relative to companies’ exchange-rate assumptions is driving expectations for forecast revisions.

Net income for more than 400 members of the broader Topix index probably increased 95 percent to an aggregate 4.80 trillion yen ($49 billion) in the three months ended September, from 2.46 trillion yen a year ago, according to data compiled by Bloomberg.

Revising Estimates

Investors are accustomed to market-moving forecast revisions in Japanese companies’ interim earnings reports.

Panasonic Corp. a year ago stunned the market by projecting a record 765 billion yen annual loss. Japan’s biggest consumer electronics maker forecasts net income of 50 billion yen for the current fiscal year, aided by the weaker yen, job cuts and a reorganization. Still, that’s lower than the 69 billion yen average of 15 analyst estimates compiled by Bloomberg.

Sony two years ago revised its guidance to an annual net loss of 90 billion yen, from a projection of 60 billion yen profit. For the year ending March 2014, the Xperia and PlayStation maker expects net income of 50 billion yen, in line with analyst estimates.

Earnings Surprises

Second-quarter profit rose 33 percent in aggregate for more than 100 Topix members that reported earnings yesterday and today, according to data compiled by Bloomberg. Among 29 companies that surprised the market, 19 beat analyst estimates and 10 missed them, the data show.

Recurring profit for companies in the Russell/Nomura Large Cap, excluding those in the finance industry, will probably grow 50 percent to 60 percent in the second quarter, compared with the firms’ own forecasts for an aggregate 16 percent increase, Nomura Securities Co. estimated.

“On average, I expect companies to raise their annual profit forecasts about 20 percent,” said Yuuki Sakurai, chief executive officer of Fukoku Capital Management Inc. “That should be doable, and is also good enough to keep investors from worrying too much. Maintaining forecasts will be taken as negative.”

Sumco Corp., a silicon wafer maker; machinery manufacturers including Mitsubishi Heavy Industries Ltd.; electronic device maker Seiko Epson Corp. and Japan Airlines Co. are among companies that will probably outperform their full-year guidance, said Kenji Abe, strategist at Citigroup in Tokyo.

Structural Reforms

“Corporate earnings will drive the market,” Abe wrote in a report that listed 12 companies with annual profit forecasts at least 20 percent less than Citigroup’s estimate.

Fujitsu Ltd., a computer services and hardware producer; machinery maker Fuji Electric Co. and watch and musical instrument manufacturer Casio Computer Co. are also among companies expected to beat analyst estimates, according to Nomura analysts led by Hiromichi Tamura.

Conversely, earnings disappointments would underscore concerns that Abe has yet to implement structural reforms, including streamlining labor laws, cutting corporate taxes and improving corporate governance.

Coutts & Co., the wealth management unit of Royal Bank of Scotland Group Plc, earlier this month said it was cutting holdings of Japanese shares on concerns Abe won’t win passage of the necessary reforms.

‘Conservative’ Forecasts

Komatsu Ltd., the world’s second-largest maker of construction equipment, cut its full-year profit forecast yesterday, citing slumping demand for mining gear in Latin America, Indonesia and Australia. Sales outside Japan and China plunged 30 percent, while domestic revenue rose 13 percent.

Japanese companies tend to be “conservative” and so are unlikely to raise their forecasts for annual earnings to match the consensus of analysts’ estimates, said Koji Endo, a Tokyo-based auto analyst at Advanced Research Japan in Tokyo. “There’s still another half year to go and there are many things that are unclear, such as the yen’s movement, stability of the U.S. market, and demand within Japan.”

Toyota will probably report quarterly profit grew 72 percent to 445 billion yen, according to the average of six analyst estimates compiled by Bloomberg. The world’s largest automaker projects a 62 percent jump in full-year profit to a record 1.48 trillion yen, compared with the 1.8 trillion yen average of 22 analyst estimates.

Tankan Index

“If Toyota raises their net income forecast to about 1.6 trillion yen, that would show that the company is feeling firm about its recovery, not simply on the currency-exchange rate, and that would be taken as a good sign by the markets,” said Satoru Takada, an auto analyst at Toward the Infinite World Inc.

The carmaker’s annual operating profit is boosted by about 40 billion yen for for each 1-yen weakening of the Japanese currency against the dollar, according to the company.

The yen’s decline versus the dollar also undergirds confidence among large manufacturers, which rose last month to the highest since the early stages of the 2007 global credit crisis. The Bank of Japan’s quarterly Tankan index of sentiment tripled to 12 in September from 4 one quarter earlier.

Machinery orders jumped to the highest since the Lehman collapse, a report released earlier this month showed, while consumer prices advanced the most since 2008 in August on higher energy costs.

Sales Tax

The effect of a stronger dollar, which makes Japanese exports more competitive, was the largest in 17 years in the three months through September, when the U.S. currency averaged

99.14 yen, 26 percent stronger than a year earlier.

Abe, who took office in December vowing to do “whatever it takes” to end declines in consumer prices, has promised a 5 trillion yen stimulus program to cushion the effect of a planned sales tax increase, the nation’s first since 1997, which takes effect in April.

Japan’s currency plunged starting in mid-November last year, when Abe’s campaign pledges to end deflation spurred speculation the central bank would dramatically increase its asset-buying program.

Executives at Toyota and other manufacturers had clamored for a weaker currency after seeing profit eroded by the yen’s climb to as high as 75.82 to the dollar in October 2011, 39 percent stronger than the 123 yen level set in June 2007.

“Markets are improving on Abenomics and the weaker yen,” said Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management Co. “We should see a good number of companies raising their profit forecasts.”

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