Japanese corporate profitability reaches new historical high, says report

03 December 2013   Category: News, Asia, Japan   By Asia Asset Management

Profit margins at Japanese companies have improved dramatically and are expected to show further improvements in the coming quarters, new research from Nikko Asset Management shows. Recurring pre-tax profit margins have been steadily expanding since 2003, when structural reforms first started to bear fruit in Japan’s major industries. Although the global financial crisis and subsequent disasters in Japan and the wider Asia region caused profit margins at Japanese companies to falter temporarily, Nikko AM’s research shows that recurring pre-tax profit margins have structurally improved, with the four-quarter average reaching a record 4.19% for the second quarter. They are expected to rise further in the quarters ahead.

Japan’s personal consumption figures grew slightly in the third quarter, leading to nearly 2% year-on-year growth, which is faster than the US or the eurozone. After the VAT hike in April 2014, Nikko AM expects a major drop in consumption, but for it to bounce back firmly in the third and fourth quarters of 2014.

With the Bank of Japan targeting a 2% inflation rate and the already announced VAT hike in April 2014, Nikko AM believes that wage growth is a key factor to the success of Abenomics policies and is confident that such will occur in early 2014. Large business groups have already signalled wage hikes and small- and medium-sized enterprises will have to follow suit, to some extent. Nikko AM’s view is that the Japanese equity market will already have factored in more optimistic valuations in this regard and investors should not wait until next March to fulfil their allocations.