The risk that Japan may take further steps to support the yen is casting a shadow over corporate earnings outlooks, as investors weigh the impact of any currency appreciation on exporter profits.
Over the past two years, a weak yen has been a primary driver for Japanese exporters exceeding earnings expectations, particularly as many companies had set more optimistic foreign exchange forecasts. For instance, Honda Motor Co reported last week that foreign exchange contributed 91 billion yen to its first-quarter operating profit, pushing results above market estimates.
Frank Benzimra, Head of Asia Equity Strategy at Societe Generale, stated, "Market sentiment is cautious right now. The yen is undoubtedly a risk factor that the stock market needs to watch." He noted that with the effects of recent joint intervention by Japan and the US waning, equity investors are concerned the Bank of Japan may accelerate its pace of rate hikes. He added that any further currency volatility would pressure the stock market, especially automaker shares.
While most companies this quarter have reported results exceeding analyst forecasts, not all have translated into share price gains, with some stocks declining even after earnings releases. Data shows that in the April-June quarter last year, companies with net profit that beat expectations saw their shares outperform the MSCI Japan Index by an average of 1% the day after the results. This year, however, companies that surpassed earnings estimates have underperformed the index by 0.5%.
As the yen's trajectory becomes increasingly unpredictable, investors are growing skeptical of companies that rely on a weak currency to boost profits. Several prominent exporters that posted strong quarterly results, including camera maker Canon Inc and pharmaceutical company Takeda Pharmaceutical Company Limited, have seen their share prices subsequently decline.
Industry strategists Laurent Douillet and Aditya Khanduja wrote in a report, "The market's reaction is cautious, with the drivers for earnings beats being currency fluctuations rather than operational improvements." They warned that with authorities demonstrating "official resolve" to stabilize the yen, future earnings upgrades will require stronger operational performance to support them, not just favorable exchange rate moves.
Chris Smith, a portfolio manager at Polar Capital, suggested that the increasingly discerning attitude of investors reflects a shift in strategy rather than a broader headwind for the Japanese market. He indicated that as uncertainties surrounding the yen, geopolitics, and the AI capital expenditure cycle rise, more traders are pivoting to bottom-up investment strategies instead of buying a basket of exporter stocks. He predicted that manufacturers with strong demand channels, such as chip equipment makers, should remain resilient even if the yen appreciates.
Benzimra stated that any significant strengthening of the yen, such as the move seen in the summer of 2024, would exert broad downward pressure on Japanese stocks. "There will be growing questions about whether the Bank of Japan should tighten monetary policy ahead of its September policy meeting," he said. "If we see a sudden spike in yen volatility again, it will act as a drag on the market."
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