The risk that Japan takes more steps to bolster the yen is taking some of the shine off corporate earnings, as investors weigh the impact of any turnaround in the currency on exporters’ profits.
Results have largely exceeded analysts’ expectations this season, but not all have translated into share price gains and some companies have even seen their stock fall after earnings despite the beat.
“The mood is cautious now,” said Frank Benzimra, head of Asia equity strategy at Societe Generale. “The yen is certainly a risk to watch for the equity market.”
Equity investors are concerned that faster interest rate hikes by the Bank of Japan are possible as the impact of the recent joint market intervention by Japan and the US wanes, Benzimra said. Any further currency volatility would pressure stocks, especially those of automakers, he added.
For the April-June quarter last year, companies whose net income beat estimates outperformed the MSCI Japan Index by 1% on average the day after their results, according to data compiled by Bloomberg Intelligence. This year, firms that beat estimates underperformed the gauge by 0.5%.
The yen’s weakness has been a major driver of earnings beats by Japanese exporters in the past two years, especially as many firms had set their FX assumptions at stronger levels. Honda Motor Co., for example, last week reported that forex had added ¥91 billion to its first-quarter operating profit, helping it to surpass market estimates.
As the yen’s moves get more unpredictable, investors are becoming skeptical about companies that rely on the weak currency to boost profits. Several high-profile exporters that posted strong results this season saw their share prices decline in the aftermath. These include camera maker Canon Inc. and drugmaker Takeda Pharmaceutical Co.
“Markets responded cautiously where FX, rather than operational improvement, drove the beat,” wrote Bloomberg Intelligence strategists Laurent Douillet and Aditya Khanduja in a report.
With authorities showing “official determination” to stabilize the yen, “future earnings upgrades will need to be supported by stronger operating performance rather than favorable exchange-rate movements,” they warned.
Growing investor selectivity points more to a shift in strategy than a broader headwind for Japan’s market, according to Chris Smith, a portfolio manager at Polar Capital in London.
As uncertainty around factors like the yen, geopolitics and the AI capex cycle grows, more traders are turning to bottom-up investing rather than buying a “blanket basket” of exporters, he said. Manufacturers with strong demand pipelines, such as chip-gear makers, should remain resilient even under a stronger yen, he predicts.
However, any sharp appreciation in the yen, such as that seen in summer 2024, would exert widespread downward pressure on Japanese equities, said Societe Generale’s Benzimra.
“You’re going to see more and more questions on whether the BOJ should be tightening” ahead of its policy meeting in September, he said. “If we see the yen volatility moving suddenly higher again, that will be a drag on the market.”
With assistance from Aditya Khanduja.
This article was generated from an automated news agency feed without modifications to text.
