(Yomiuri: February 9, 2016 – p. 9)
Exchange rates and trends in the world economy, particularly trends in China, are the keys to predicting future corporate performance [in Japan].
Yen depreciation and dollar appreciation achieved through monetary easing have driven the recovery of corporate performance since the launch of the second Abe cabinet in 2012. Export companies make up a large percentage of market capitalization in Japan, and yen depreciation has the effect of pushing up earnings overall.
In anticipation of the interest rate hike in the United States for the first time in nine and a half years, the yen fell to the 123 yen level to the dollar at the beginning of December. The exchange rate has returned to the 117 yen level as it has become more widely thought that U.S. interest rates will be raised slowly.
Toyota Motor Corporation estimated the exchange rate for fiscal 2015 to be 120 yen to the dollar. They say that their annual operating profit decreases by 40 billion yen if the yen appreciates by one yen. If the yen continues to appreciate, it will be a factor that pushes down profits for Toyota and other export-oriented manufacturers.
For the construction equipment and steel industries, the focus is on whether the Chinese economy will recover. If the Chinese economy slows further, construction and other demand will decrease, and it will lead to a further drop in the prices of resources, such as iron ore. This will impact other emerging economies and be a major blow to Japanese companies operating overseas.
Under “Abenomics,” the Abe administration aims to create a virtuous cycle in the economy by encouraging capital investment and wage increases by companies that are performing well. Takashi Ohba, [a senior strategist] at Okasan Securities says, “Unless corporations’ concern over their future can be resolved, they will not be able to take the step of making capital investment and raising wages. If corporate performance worsens, there is a possibility that Abenomics will fail.”