Japanese corporate earnings season already looking negative

With the Nikkei falling towards its 200 day moving average following the faltering tech heavy Nasdaq, it seems to us that some pedestrian global investors who piled into Japan earlier this year could be liquidating their positions. To be sure, we have seen this script before as Japan’s stock market comes to vogue by foreign buying, attracted to its valuations and prospects for better shareholder returns, only to be hit by the deteriorating earnings picture. 

Indeed, hopes for support from the coming earnings season are already looking misplaced from what we have seen thus far at this early stage in the earnings season. To put it more broadly, Japanese firms are toning down their second half recovery hopes. This also comes despite a huge tail wind from the weaker yen which clearly is no longer as impactful on the earnings picture as sales volumes deteriorate further. What is evident is that this weaker earnings trend has caught many analysts off guard. 

Judging by factory automation-related specialists which have reported results, capital expenditure is slowing across the globe with weakness in China and Europe looking especially severe. Although some component suppliers are suggesting that the global smartphone market is bottoming out, there is little evidence to suggest that any notable and sustained pickup in utilisation rates are on the offing anytime soon. Continued decline in spending in data centres has also been evident despite high hopes of AI-related outlays coming to the rescue. 

Among a few bright spots within the manufacturing sector, semiconductor-related tool makers seem to have seen huge sales growth from Chinese chip makers which have been hoarding equipment in anticipation of tighter export restrictions that have recently come to pass. However, as we have also noted, we think this Chinese hoarding has likely peaked and prospects for falling sales and orders from the region could prove a huge drag on earnings of tool makers in the coming term. 

Another earnings bright spot has been the auto-related segment which has notably recovered from the past two years of chip shortages, allowing for a big ramp up in Japan’s car production and strong top-line growth for those especially geared to the US market. However, even here, US dealer inventories have been normalising and we may be close to peaking sales while incentives look to have bottomed out. What is also worrying is that the ratio of US subprime auto loans which are at least 60 days behind payments breached 6% in September, the highest since 1994. 

With BOJ’s policy board meeting scheduled for later this week, we continue to think the central bank is under huge pressure to either further adjust or disband its yield curve control as inflationary pressures continue to be building up while the weak yen is starting to raise import prices once again. Should Japan’s central bank capitulate, the prospects for a snap-back in yen could only add more drag on future earnings of exporters and multinationals which have populated our short sell picks in Japan.