Japan Inc. Profits Double as Cost-Cutting CEOs Pace Recovery

Japanese companies that made tough decisions about exiting businesses, closing factories and revamping management led a doubling of corporate earnings last quarter to the highest level since 2007.

Net income jumped to about 5.5 trillion yen ($55 billion) at more than 1,280 of the largest listed non-financial firms, the most since a credit meltdown sparked a global recession six years ago, based on data compiled by Bloomberg. Profit climbed from 2.25 trillion yen a year ago, the fastest jump since 2010.

Companies showing profit surges include Panasonic Corp., which has cut 71,000 jobs; Mazda Motor Corp., which is shifting car production to Mexico; and Toyota Motor Corp., which overhauled management and halted new factory construction. The gains, also fueled by a weaker yen, contrast with disappointing results at firms such as Sony Corp., which resisted calls to spin off assets or close money-losing businesses.

“Companies that made efforts to cut costs and restructure before the yen started to weaken are the ones really showing growth,” said Tetsuro Sugiura, chief economist at Mizuho Research Institute. “Japanese companies had fallen back in global competition because they weren’t able to cut businesses and cut people or were late in doing this.”

Panasonic has undergone one of the more dramatic makeovers, shifting its focus from consumer electronics to alternative power products such as solar panels and batteries. The company, once a leading television maker along with Sony and Sharp Corp., plans to stop making plasma TVs by March.

Panasonic Transformed

Kazuhiro Tsuga, who took over as Panasonic president in June 2012, has exited some unprofitable smartphone and plasma panel operations. Japan’s third-largest listed employer has been trimming its workforce since 2011 and last month raised its forecast for net income this fiscal year to 100 billion yen.

“Panasonic is going forward in rebuilding its business, and their path to recovery is clear,” said Satoshi Yuzaki, general manager at Takagi Securities Co. in Tokyo.

Operating income at Sharp beat estimates in the second quarter after cutting costs under a multi-year restructuring plan that included shutting some facilities and selling assets. The company last month reported its first net income since 2011 as a weaker yen and reduced costs helped its display business return to profit.

Toyota President Akio Toyoda, 57, in March cleared out the remnants of top management inherited when he took the helm in 2009 in a move to restore the fortunes of the world’s biggest carmaker after years of turmoil.

Toyota Profit

The carmaker, Japan’s largest manufacturer, raised its full-year net income forecast 13 percent to a record $1.67 trillion yen. Profit in the three months ended September jumped 70 percent to 438 billion yen, more than that of the next five biggest Japanese carmakers combined.

Earlier this year, the carmaker announced its decision to halt planned factory openings for three years to avoid taking on excess capacity.

“We want to be strategic in our investments,” Nobuyori Kodaira, a Toyota executive vice president, told reporters at the time.

The move signals a new course for the carmaker after a decade of racing to increase output.

Mazda raised its forecast for net income this fiscal year to a record 100 billion yen, 30 percent more than previously projected and almost triple last year’s profit.

The carmaker, Japan’s most export-dependent and which posted four straight annual losses until 2012, had responded to the losses by cutting jobs, moving some production to Mexico and forging shared production agreements with rivals including Toyota and Fiat SpA.

Abenomics Anxiety

The profit increase comes as pressure mounts on Prime Minister Shinzo Abe and his so-called Abenomics. Monetary easing and fiscal stimulus haven’t been enough to accelerate the economic recovery, even as a weaker currency stokes some exporters’ profit.

Gross domestic product rose at an annualized 1.9 percent in the three months ended in September, down from 3.8 percent the previous quarter, the Cabinet Office reported Nov. 14 in Tokyo.

The growth slowdown draws attention to the lingering question of whether companies benefiting from Abenomics will return the favor by investing more to stimulate the broader economy.

Cash per share for all companies on the Topix index climbed to 597 yen in the three months ended in September, 49 percent more than a year earlier, the fastest growth and the highest since at least 2004.

Capital Spending

A sustainable economic recovery requires automakers to increase capital spending, spreading new business from partsmakers to materials producers and construction companies, said Keiichi Ito, a quantitative strategist at SMBC Nikko Securities Inc.

The increase in profit last quarter hasn’t been enough to spark such a surge across the economy. Japanese companies eased off on capital-spending growth in the second quarter and failed to step up exports. Corporate investment increased 0.7 percent, down from 4.4 percent.

To add momentum to the recovery, the prime minister is backing legislation in the parliamentary session ending Dec. 6 for tax incentives to encourage corporate investment and the establishment of strategic economic zones for reduced business regulation.

Abe needs to motivate companies that are still in cost-cutting mode, said Ito of SMBC Nikko.

Hirai’s Challenge

For Sony Chief Executive Officer Kazuo Hirai, the unexpected loss in the three months ended September dashed expectations that the country’s biggest electronics exporter was back on track after a record loss in fiscal 2012. The slump prompted questions about the company’s course since Hirai took over in April 2012 from Howard Stringer, who oversaw four straight annual losses.

“Sony’s ability to change tack and act early when conditions deteriorate will be tested,” Masahiro Ono and Hiroshi Taguchi, analysts at Morgan Stanley MUFG Securities Co. in Tokyo, wrote in a report dated Nov. 14. “Asset sales to obtain cash flow and maintain net profitability are more likely to accelerate.”

Hirai, 52, is holding on to unprofitable units even as consumers shift to tablets and smartphones, markets dominated by Apple Inc. and Samsung Electronics Co. Hirai rejected billionaire shareholder Daniel Loeb’s demand earlier this year for a partial sale of entertainment assets. Loeb accused the movie unit of having a “bloated corporate structure.”

Slow Pace

“Sony has to get out of a lot businesses and they are going too slow,” said Edwin Merner, the president in Tokyo of Atlantis Investment Research Corp., which manages about $300 million in assets. “The president is failing and if he continues to behave the way he has, the company will fail.”

Sony has dropped 1 percent, while Panasonic has climbed 7.2 percent in Tokyo trading since Oct. 31, the day both companies reported earnings.

Companies including Nissan and Japan Tobacco Inc. are taking the opportunity to revamp operations.

Nissan, Toyota’s biggest Japanese rival, cut its annual earnings forecast by 15 percent after reporting second-quarter profit that missed analyst estimates. In response, Chief Executive Officer Carlos Ghosn announced a management overhaul aimed at boosting operating profit margins to 8 percent by the year ending March 2017.

The profit miss followed slowing sales in some emerging markets and a recall of 910,000 vehicles that Goldman Sachs Group Inc. estimates will cost the company about 15 billion yen.

Acting Now

Japan Tobacco, Asia’s largest listed cigarette seller, said it would take steps to reduce costs in Japan, where cigarette demand is slumping. The company plans to cut 1,600 jobs and close four factories in Japan to boost profitability, it said Oct. 30, a day before announcing quarterly earnings.

Net income jumped 65 percent to 139 billion yen in the second quarter to September as sales rose 12 percent to 611.2 billion yen.

“People are looking at companies already showing recovery signs and asking whether they’d take this opportunity to clean up their business structure,” said Ito of SMBC Nikko. “That process is going to be absolutely necessary for a recovery.”

Before it's here, it's on the Bloomberg Terminal.