Japan’s Market Signals Better Times

Corporate earnings will rise 69 percent this year, analysts say | “The cautious mood following the quake is gone”

Lynn Thomasson, Yoshiaki Nohara, and Lu Wang

Bank of Japan Governor Shirakawa


After plunging in the aftermath of last year’s earthquake and nuclear disaster, Japanese stocks may be poised for a comeback. Profits for the large-cap companies in the Nikkei 225 Stock Average will rise 69 percent this year after plunging 31 percent in 2011, according to more than 2,600 analyst estimates compiled by Bloomberg. “The worst is over for Japan in terms of earnings,” says Masafumi Oshiden, an investment manager at ING Mutual Funds Management (Japan). “Consumer spending is improving and corporate earnings are rebounding. The cautious mood following the quake is gone.”

Investors are betting the profit forecasts will turn out to be accurate. Trading at 24.5 times reported earnings, Japanese equities are the most expensive among the world’s 60 biggest markets, data compiled by Bloomberg show. If profits rebound as analysts forecast, Japanese price-earnings ratios will fall back in line with global stocks. Bulls say the current high valuations are justified because an economic recovery will help Japanese stocks make up some of the ground they have lost to other major equity gauges since global markets bottomed on March 9, 2009. The Nikkei 225 is up 35 percent since then, compared with 89 percent for the MSCI All Country World Index and 104 percent in the Standard & Poor’s 500-stock index. One reason: Policy makers in Tokyo have committed to spend 20 trillion yen ($246 billion) to rebuild towns and spur economic growth. Bank of Japan Governor Masaaki Shirakawa pledged during a speech in New York in April to continue adding monetary stimulus.

Pessimists point to combined annual losses from Sony and Sharp of 900 billion yen and an economy that has contracted three of the past four years as evidence the Nikkei 225 has come too far, too fast. Japan still faces a shrinking population and the world’s highest debt burden. “There are several drags on Japanese shares,” says Shane Oliver, the Sydney-based head of investment strategy at AMP Capital Investors. “One of them is ongoing deflation, which acts as a disincentive to spending and is also a huge constraint on company profits. The other is a relatively strong yen, which is actually a drag on growth and competitiveness.” A strong yen makes Japanese products more expensive abroad, inhibiting exports.

There are signs that the yen’s strength may be ebbing. So far this year the currency has fallen 8.7 percent vs. nine developed-nation peers as the Bank of Japan set an inflation goal of 1 percent and expanded asset purchases by 10 trillion yen in February. The currency is forecast to decline 3 percent, to 84 per dollar, by the end of the year, according to the median estimate of 75 analysts surveyed by Bloomberg. That will help boost corporate profits and stock prices, according to Rob Taylor, a fund manager at Chicago-based Harris Associates. Japanese executives “have been taking a lot of costs out and trying to be able to make money in this very harsh environment,” says Taylor, who owns shares of Toyota Motor. “Then you get the yen weakening, and then you’ll start to really see those earnings snap back.”

The bottom line Japanese stocks’ high price-to-earnings ratio of 24.5 indicates investors expect companies to show robust profit growth.


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