Three cheers for the Bank of Japan, corporate profits and a weaker yen

The big news in Japan today is that the country’s current account surplus more than quadrupled in the six months to September. The sharp uptrend is credited to a weaker yen that’s improving the trade picture and spurring returns on overseas investments.

The 8.7 trillion yen ($70.7 billion) figure for April-September — the first half of the fiscal year — was well up from the 2.0 trillion yen a year earlier, according to official data.

A weaker yen is also allowing Japanese companies this earnings season to post their highest profits ever, as the falling yen boosts exporters from Toyota Motor Corp. to Uniqlo-operator Fast Retailing Co.

Aggregate net income at 195 of the largest listed companies will expand 10% to a record 17.5 trillion yen ($153 billion) this fiscal year, based on analyst estimates compiled by Bloomberg.

A sliding Japanese currency boosts corporate profits by raising the value of overseas earnings. A depreciating currency also enables exporters to compete with foreign rivals by cutting prices in dollar or euro terms without undercutting their profit margins.

“Profits were pushed up somewhat surprisingly by the exchange rate recently,” said Tomohiro Okawa, a Japan equities strategist at UBS AG in Tokyo told Bloomberg. “Still, there’s not much more that monetary policies can do, and structurally, nothing has changed for these companies.”

On the investment side, the weaker currency is offsetting slumps in wages and local consumption, helping to propel the Nikkei 225 Stock Average to levels last seen seven years ago.

Prime Minister Shintaro Abe and Abenomics are being credited for these triple coups. Asia Unhedged believes the real hero is the Bank of Japan and its  monetary policy. While Abe was elected by promising to do “whatever it takes” to depreciate the yen, it was an independent central bank that moved the monetary levers that brought the yen down.

Abenomics, so far, has had a mixed record. But Bank of Japan Governor Haruhiko Kuroda’s stewardship of the central bank has been a stomping success.

 



Categories: Asia Unhedged, Japan

Tags: , , , , , ,