(Bloomberg) -- Halfway through Japan’s reporting season, companies are mostly hitting their marks, but some high-profile cautious outlooks from blue chips like Toyota Motor Corp. risk sapping optimism for the rest of the financial year.
Almost 60% of firms have beaten earnings estimates in the latest quarterly reports, with technology and consumer discretionary firms doing best and health-care and financial companies lagging, according to data compiled by Bloomberg. But some investors are worried the earnings recovery could soon unravel as companies such as Toyota struggle to deal with high raw material costs and supply disruptions.
The world’s biggest automaker forecast a 20% decline in operating profit for the current fiscal year despite posting robust annual car sales, citing an “unprecedented” rise in costs for logistics and materials. That even Toyota, known for its meticulous cost-cutting, sees higher expenses far outweighing the benefits of a cheaper yen spells trouble for many other Japanese manufacturers.
“Toyota’s weak guidance will have quite a big impact on the market as a whole,” said Masayuki Kubota, chief strategist at Rakuten Securities Inc. “This suggests Japanese manufacturing as a whole is likely to be in a tough situation when it comes to annual guidance.”
Robot manufacturer Fanuc Corp. was another closely-watched Japanese bellwether that disappointed investors with its earnings outlook this season.
Vulnerable Position
Japan’s stocks look vulnerable to a negative shift in sentiment, having outperformed global peers so far this year. The Topix Index has fallen just 8%, compared with a more than 18% slump in the MSCI AC World ex-Japan Index.
On top of increased costs, Japan’s corporates are dealing with a sluggish domestic economy and increasing risks to growth in key markets, the US and China. And while a weak yen could be seen as a positive for exporters, this time it is aggravating the impact of surging commodity prices, hitting some businesses and consumers much harder than before.
Yen Freefall Has Fewer Benefits for Japan Inc. As Economy Shifts
“A cheaper yen should benefit some industries linked to exports but they are facing headwinds due to the rise in commodity prices, while domestic-demand oriented companies are also suffering from import inflation,” said Hiroshi Watanabe, senior economist at Sony Financial Group.
Margin Pressure
The gap between producer and consumer inflation in Japan has hit the highest since 1980, suggesting increased pressure on profit margins for companies that have traditionally balked at pushing through price rises. But analysts have yet to downgrade their earnings forecasts, which are at the highest in at least 17 years, according to data compiled by Bloomberg going back to 2005.
Still, one cohort likely to see a strong profit recovery this financial year is domestic-demand oriented firms even as they face higher import costs, given the prospect of a gradual reopening in the economy later this year. Many tourism-related companies, such as train operators and airlines are forecasting their best year since the pandemic, with border restrictions due to ease.
Premium Friday
Investors will get a better sense of the outlook for Japan’s companies Friday, once they have time to digest a veritable firehose of data. Over 600 Topix members are scheduled to report, almost 30% of the benchmark’s constituents, according to data compiled by Bloomberg.
Among the blue chips reporting are telecommunications giant KDDI Corp, automaker Honda Motor Co. and a slew of financials led by Sumitomo Mitsui Financial Group Inc.
©2022 Bloomberg L.P.
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