Japan earnings: AI boom lifts profits, tariffs take a tollーNHK WORLD-JAPAN NEWS

Key Concepts

• Midterm Earnings: Financial results reported by companies for the first half of their fiscal year (April to September in this case).
• Japan Inc.: A collective term referring to major Japanese corporations.
• AI Boom: A period of rapid growth and investment in Artificial Intelligence technologies.
• US Tariffs: Taxes imposed by the United States on imported goods, impacting production costs.
• Digitalizing Internal Logistics: Implementing digital technologies to improve the efficiency of internal business processes and supply chains.
• Excessive Production: A situation where companies produce more goods than there is demand for, often leading to price competition.
• Nikkei 225: A stock market index representing the 225 largest and most liquid companies listed on the Tokyo Stock Exchange.
• Deflation: A general decline in prices for goods and services, typically occurring during periods of economic contraction.
• Inflation: A general increase in prices and fall in the purchasing value of money.

Midterm Earnings Performance of Japan Inc.

A significant portion of Japan Inc. has released their April to September midterm earnings. A survey by SMBC Niko Securities of 53 companies on the stock exchange revealed a combined net income exceeding 15 trillion yen (approximately $99 billion). This figure represents a slight decrease of 0.3% year-on-year.

Sectoral Performance and Key Drivers

• Semiconductor-Related Firms: These companies experienced strong performance, driven by increased demand from the AI industry. Profits for electronic manufacturers, including chip makers, rose by a substantial 36.7%.
• Securities Brokerages: This sector outperformed, posting profit increases of over 40%.
• Automakers and Transportation Sector: This sector faced challenges, with profits declining by 9% year-on-year. This downturn is attributed to US tariffs, which increased production costs.

Factors Influencing Earnings

• Trade Tensions and US Tariffs: US tariffs negatively impacted automakers by raising costs. However, some companies benefited from trade negotiations that led to reductions in US tariffs, contributing to upward revisions in full-year earnings forecasts for about 30% of the surveyed companies.
• AI Boom: Companies that capitalized on the trend of massive investments in AI, including data centers, saw favorable earnings.
• China's Economic Slowdown: A sluggish economy in China added to the headwinds faced by Japanese companies.
• Labor Shortages and Digitalization: Companies catering to businesses struggling with labor shortages and needing to invest in digitalizing internal logistics performed well.
• Competition from Chinese Companies: Companies in the steel, chemicals, and other material sectors faced difficulties due to competition with Chinese companies burdened by excessive production.

Stock Market Performance and Earnings Correlation

• Nikkei 225: The Nikkei 225 index rose by more than 10% in October. Companies in the AI sector, such as Adventist and Soft Bank, were key drivers of this surge.
• Broader Topics Index: While the broader topics index also climbed, it lagged behind the Nikkei 225. This divergence is seen as a reflection of the latest earnings reports.
• Tech Sector Strength: Strong earnings in the tech sector were largely in line with the record-breaking performance of the stock market. However, some share buying is considered excessive.

Service Sector and Retail Performance

• IT-Related Companies: Robust earnings were observed in IT-related companies, partly due to increased tech investment by other businesses.
• Retailers: The retail sector showed a lack of momentum. Despite rising prices in Japan, wage hikes have not kept pace, leading consumers to adopt a more thrifty approach.

Future Outlook and Economic Environment

• Continued Earnings Expansion: Matsumoto Fumio, chief strategist at Okasan Securities, anticipates continued expansion in Japan's corporate earnings.
• Inflationary Environment: The current environment of rising prices and wages, coupled with real economic growth that is not expanding strongly, is expected to lead to nominal increases in sales and profits for companies. This is a significant shift from Japan's past deflationary period.
• Shift from Deflation: In contrast to the deflationary era, where economic downturns led exporters to cut investment and wages, impacting domestic demand, Matsumoto does not expect a return to those conditions.
• Caution for Consumers and Workers: While the inflationary environment is positive for corporate earnings and potentially share prices, Matsumoto cautions that it does not automatically translate to improved conditions for consumers and workers.

Notable Quotes

• "A big chunk of Japan Inc. has released their April to September midterm earnings as of this Thursday." (Yuko Fukushima)
• "The combined net income came to over 15 trillion yen or about $99 billion. That was down .3% yearonear." (Yuko Fukushima)
• "Semiconductor related firms performed well thanks to rising demand from the AI industry." (Yuko Fukushima)
• "But automakers took a beating from US tariffs which pushed up cost." (Yuko Fukushima)
• "Matsumoto describes the midterm results as a mixed bag." (Yuko Fukushima, quoting Matsumoto Fumio)
• "Those companies that did well were firms who were catering to strong demand from businesses that are struggling with labor shortages and who need to invest in digitalizing internal logistics." (Yuko Fukushima)
• "Even though business sentiment was not so good, we also saw favorable earnings at companies that were able to ride the trend of massive investments into AI, including data centers." (Yuko Fukushima)
• "But companies in the steel, chemicals, and other material sectors had a difficult season as they had to compete with Chinese companies burdened with excessive production." (Yuko Fukushima)
• "Matsumoto says strong earnings in the tech sector were more or less in line with the record-breaking performance of the stock market. But he says some of the share buying was been excessive." (Yuko Fukushima)
• "The Nik225 saga index rose more than 10% in October." (Yuko Fukushima)
• "One thing that stood out in this earning season was that tech investment by companies also led to robust earnings in IT related companies." (Yuko Fukushima)
• "Something else that got our attention this earning season was that retailers actually lacked momentum." (Yuko Fukushima)
• "Prices are rising in Japan, but the pace of wage hikes has yet to catch up. So, consumers are becoming thrifty, slipping into austerity mode." (Yuko Fukushima)
• "Matsumoto believes Japan's corporate earnings will continue to expand." (Yuko Fukushima)
• "For companies this environment will lead to increasing sales and profits nominally. So this is a big change from when Japan was in deflation." (Yuko Fukushima)
• "He cautions it does not automatically mean better times ahead for consumers and workers." (Yuko Fukushima)

Conclusion

Japan's midterm earnings season revealed a mixed performance for Japan Inc., with the AI boom and digitalization driving strong results in the tech and related sectors, while automakers faced headwinds from US tariffs. Despite global economic challenges and competition from China, a significant portion of companies saw positive earnings, with some benefiting from trade negotiation outcomes. The stock market, particularly the Nikkei 225, reflected this strength, with AI-focused companies leading the gains. Looking ahead, an inflationary environment is expected to support continued nominal growth in corporate sales and profits, marking a departure from Japan's past deflationary period. However, this economic shift may not immediately benefit consumers and workers, as wage growth lags behind price increases.