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TOKYO (Reuters) – Analysts are sanguine about Japanese corporate earnings this year in the expectation of swift economic recovery from the coronavirus outbreak, though some strategists and investors caution such optimism could be misplaced.
A reality check could come within weeks as Japanese companies begin announcing results for the January-March quarter, revealing the extent to which bottom lines have been hit so far by business closures and worldwide travel bans.
Earnings per share (EPS) at firms listed on Japan’s Topix index (TOPX) have fallen 8% since the start of year, Refinitiv data showed based on analyst estimates. That compares favourably with 15% at U.S. firms and as much as 20% in Europe.
(GRAPHIC: Earnings downgrades during the coronavirus outbreak – https://fingfx.thomsonreuters.com/gfx/mkt/azgvoozrvdx/200422D.png)
Though a decline, the Japan estimate looks particularly rosy considering the global economy is set for its deepest recession since the 1930s.
But there are more dire forecasts based on “top-down” forecasts using macro economic projections rather than forecasts for individual companies. JPMorgan (NYSE:JPM) sees a 23% fall in Japanese corporate profit under its base scenario and 35% in a bearish scenario.
“I think the focus is now more on the degree of recovery than how bad the second quarter will be,” said Masayuki Murata, general manager of balanced portfolio investment at Sumitomo Life Insurance. “By the end of June, markets will be looking at how much economic rebound there will be in the next 12 months.”
Investors recognise that bottom-up, business-by-business EPS forecasts tend to move slowly and could be lowered.
“Everyone will be more cautious. Some will reduce spending,” said Murata. “We shouldn’t expect things to return to the same.”
Murata expects the Topix EPS to fall to around 80 from 112 at the end of last week, and for the Topix to bottom around 1,200 from 1,414. That would be about 15 times estimated earnings.
The novel coronavirus outbreak has so far been relatively limited in Japan, with less than 10 cases per 100,000 people compared with about 180 in Germany and 250 in the United States.
Even if the virus is contained domestically, however, dependence on demand overseas – where government restrictions on movement and business activity have been more stringent – is likely to mean reduced corporate revenue.
“Almost two-thirds of Topix profits are ultimately generated overseas. Moreover, among major economies, Japan’s GDP is one of the most highly sensitive to global trade,” said CLSA strategist Nick Smith.
“This is why Japan was hit so hard by the global financial crisis, despite having a banking system that had minimal exposure to subprime lending.”
Profit at companies making up the MSCI Japan Price Index (MIJP00000PUS) fell as much as 70% during the 2008-9 crisis, more than double that of peers.
(GRAPHIC: Earnings downgrades during the global financial crisis – https://fingfx.thomsonreuters.com/gfx/mkt/dgkvlnbovbx/200422A.png)
If Japan’s economy shrinks 5.2% this year, as forecast by the International Monetary Fund, the Topix EPS should fall about 46% this year, said senior quants analyst Masahiro Suzuki at Daiwa Securities.
Suzuki pointed to the yen, which rose as much as 25% against the U.S. dollar during the financial crisis, shrinking profit that Japanese firms earned overseas when converted to yen.
The yen’s trade-weighted effective level is currently near the average of the past seven years and about 25% below its 2009 peak.
