Photographer: Yuriko Nakao/Bloomberg

Japan Posts Best Profit Margins in a Decade as Trade Threats Loom

  • Profitability amid strong yen ‘very encouraging’: Pictet
  • Nation’s firms face risk from rising global protectionism: UBS

Japan equity bulls looking for a catalyst to reignite the nation’s flagging stock rally can take heart from the latest crop of earnings results.

Companies listed on the first section of the Tokyo Stock Exchange have scored a recurring margin of 7.9 percent for April-December, the highest level for the period since at least 2006, according to Mitsubishi UFJ Morgan Stanley. While the figure was boosted by non-manufacturing firms returning to profitability, manufacturing margins also improved on cost cuts and cheaper raw material prices, the brokerage said in a report based on data as of Feb. 6.

“It’s very encouraging,” said Hiroshi Matsumoto, the head of Japan investment at Pictet Asset Management. “The past nine months included a period of very strong yen, and still many companies managed to protect earnings, it’s amazing. They’ve strengthened their balance sheet with years of efforts coming to fruition.”

Topix companies have reported total adjusted earnings per share growth of 23 percent year-on-year so far in the current quarterly reporting cycle, with the greatest growth seen in the oil & gas and basic materials industries. The earnings growth has been achieved even as sales have declined 2.3 percent.

Matsumoto says Prime Minister Shinzo Abe’s attempt at rekindling price growth has helped as well, as companies are facing less deflationary pressure. The combination of these efforts has resulted in solid earnings that call for a “reasonably bullish” stance toward Japanese equities. 

The Topix index surged to a one-year high on Jan. 5 after Donald Trump’s surprise U.S. election win fueled a global equities rally and a weaker yen. But stocks have traded sideways since then as investors grapple with escalating uncertainty over new trade and tax policies from the U.S., Japan’s largest export destination. Risks are also seen in the European Union, which faces a major test in the upcoming French election.

“Japan is obviously the exporting country benefiting from global free trade. But the tide has changed,” cautions Toru Ibayashi, the Tokyo-based head of Japanese equity investments at UBS Group AG’s wealth management unit. “What we’re going to see is more protectionism, all over the world. Once U.S., the world’s largest economy, starts doing it other large economies will follow. This is the global trend and it’s not reversible.”

For now, all eyes will be on Trump’s meeting with Abe in Washington on Friday. “It’s possible that the talks won’t have any references to trade or currency policies though, and if that happens, shares may end up being left directionless,” said Yoshihiro Ito, chief strategist at Okasan Online Securities Co.

— With assistance by Toshiro Hasegawa

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