Firms in Japan likely to log lower profits amid tariff and political uncertainty
Net income across corporate Japan probably declined about 13% in the quarter that ended in June, mirroring last quarter's drop, said Laurent Douillet, Bloomberg Intelligence's senior equity strategist.
While tariffs caused global uncertainty, Japanese carmakers in particular have been losing momentum as the industry faced pressure from the levies. The Bank of Japan tankan survey in June showed worsening confidence in automakers. Last quarter, Toyota Motor and Honda Motor have both said tariffs would hurt their earnings.
U.S. President Donald Trump and Japan announced a trade deal that will see the U.S. impose a 15% across-the-board tariff on Japanese imports — including cars and parts — providing investors clarity after protracted negotiations. It's yet to be decided when the new rates will take effect, Japan's top trade negotiator Ryosei Akazawa said Wednesday.
The focus now shifts to how Japanese firms choose to pass on the additional costs. The U.S. accounted for 20% of Japan's total exports in 2024, according to the BOJ.
Japanese exports fell for a second month in June because of a sharp drop in the value of car and steel shipments. Automakers slashed U.S. export prices by 19% last month, the biggest drop since records going back to 2016, sacrificing margins to remain competitive through the tariff turmoil. If this trend extends across broader sectors, it could pressure corporate profits, Goldman Sachs economists led by Tomohiro Ota said in a note.
There is an underlying shift in earnings drivers including BOJ rate hikes, wider yield spreads and robust spending on artificial intelligence, which should boost the financial and technology sectors, BI said in a separate note.
Banks project another year of record profits and unveiled plans to buy back shares, even as they warned that trade tensions could hurt business and economic growth.
Mitsubishi UFJ Financial Group sees net income jumping 7.5% to ¥2 trillion ($13.5 billion) in the 12 months through March, while Mizuho Financial Group expects a 6.1% increase to ¥940 billion and Sumitomo Mitsui Financial Group anticipates a 10% gain to ¥1.3 trillion.
Demand for artificial intelligence remains robust. SoftBank Group may benefit from its U.S. technology partnerships, with unabated investment into AI infrastructure in the race for global supremacy.
Capital expenditure forecasts for AI have risen 16% since the start of the year, BI's Robert Schiffman said last month. This bodes well for earnings at AI memory chip and equipment-makers such as Tokyo Electron and Lasertec.
Other potential beneficiaries include Hitachi, NEC and Fujitsu as Japan increases defense spending and upgrades its digital infrastructure, BI's Douillet said. The sector appears largely insulated from tariff risks, according to BI. The software outlook in the Bank of Japan's second-quarter tankan survey suggests software spending this fiscal year might exceed 2024 levels.
NEC and Fujitsu generated about 80% and 70% of revenue from Japan last fiscal year, respectively. NEC's subsea cable business has a strong global market share thanks to the data-center investment boom, BI said. Rising defense spending and the country's energy policy should also underpin earnings at Mitsubishi Heavy Industries and Kawasaki Heavy Industries.
The MSCI Japan index price-to-earnings ratio sits between its European and U.S. counterparts, BI said, with the valuation gap due to Japanese companies' subdued operating margins and suboptimal capital efficiency. Gains in the index may become more volatile after the measure recovered from an April dip, Douillet said.
More broadly, shareholder returns will be watched closely after corporate buybacks reached a record last fiscal year and are on pace to top that.
Dividends are also expected to reach a record this fiscal year, with return on equity possibly rising, thanks in part to reduced shareholder equity following earlier returns, SMBC Nikko said in a note.
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