Japanese firms have reported a 13% increase in net profits, but core operating profits show only a 3.3% growth, indicating weaknesses when excluding one-off gains and the impact of a weak yen. Investor focus on U.S. tariffs complicates the landscape, preventing significant gains in Japanese stock prices despite some positive earnings surprises.
Recent reports reveal that while Japanese companies have shown remarkable earnings growth, the overall outlook appears less encouraging than it may seem. Net profits for firms within the Topix 500 surged by 13% year-over-year, reaching an all-time high, with 60% of companies exceeding market expectations. However, when excluding factors such as the depreciating yen and one-off items, the situation appears less favorable.
Rie Nishihara, Chief Equity Strategist at JPMorgan Securities Japan Co., remarked that although bottom-line profits were strong, fundamental business operating profits were somewhat disappointing. Fumio Matsumoto, Chief Strategist at Okasan Securities Co., added that operating income grew by only 3.3% compared to the previous year, representing a stark contrast to the high growth observed in current profits, which he called an unusual discrepancy.
The weakening yen significantly impacted profitability, benefiting net income figures—but not operating profits—particularly among automotive and precision machinery sectors. For instance, Toyota Motor Corporation posted a remarkable net income of ¥2.19 trillion for the third quarter, exceeding analyst forecasts. However, its operating profit fell short of predictions, largely due to stagnant sales, affected by a recent certification scandal.
Despite these challenges, investors noted a generally positive earnings season, with net income (excluding the volatile figures from SoftBank Group) rising by 24%, marking the largest increase in four quarters. Analysts identified strengths among banks, AI-related businesses, and domestic firms in capital spending sectors such as construction.
The variance in stock performance suggests that not all noteworthy companies experienced robust results or share buybacks, indicating a lack of market absorption of these earnings reports. Investor concern surrounding U.S. tariffs may be obstructing share price increases, leaving the Japanese stock market stagnant amid ongoing trading policy uncertainties.
“There was a decent number of positive surprises, and overall the earnings were reassuring,” stated Kohei Onishi, Senior Investment Strategist at Mitsubishi UFJ Morgan Stanley. However, he indicated that the focus of the stock market seems more directed towards external factors such as U.S. tariffs than on domestic earnings performance.
In conclusion, while Japanese companies reported strong earnings growth, the underlying trend reflects substantial weaknesses in core operating profits. Factors such as currency fluctuations and external economic conditions are significantly impacting performance. These elements, combined with concerns regarding U.S. trade policies, may hinder the potential for stock prices to appreciate significantly in the near future.
Original Source: www.livemint.com
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