Weaker yen boosts profits of major Japanese companies by 3 trillion yuan in 2022 fiscal year

International Business News – Looking at major Japanese companies, in the 2022 fiscal year (ending in March 2023), the yen depreciation is expected to boost operating profits (part of which are ordinary income and corporate profits) by about 3 trillion yen. This is equivalent to 40% of the total operating profits in the 2022 fiscal year, and the yen depreciation has become the main factor to offset the headwinds of rising raw material prices and the new coronavirus epidemic. On the other hand, the rapid yen depreciation tends to be corrected, and the exchange rate dividend in the 2023 fiscal year is likely to be significantly reduced. In the background of economic slowdown worries, the uncertain performance outlook of Japanese companies will continue.

Among the Nikkei Average component stocks that have disclosed their financial results for the 4-12 months period, 32 companies have been counted according to the data related to their financial statements to calculate the impact of exchange rate on their annual operating profits.

Compared with the 2021 fiscal year, the yen-to-dollar average depreciation was more than 20 yen, and according to 29 companies including Toyota, SUBARU, and Murata Manufacturing Co., Ltd., the exchange rate contributed to the growth of profits. The profit growth effect reached 2.99 trillion yen, accounting for 36% of the total operating profit (8.2535 trillion yen). If this dividend is excluded, operating profits will decrease by 35% (currently forecast to increase by 2%), highlighting the scenario of the performance of major companies in the 2022 fiscal year supported by the yen depreciation.

On the other hand, three companies, Tokyo Gas and JFE Holdings, which import raw materials, suffered a decrease in profits due to the exchange rate.

The industry that has benefited the most from the depreciation of the Japanese yen is the automobile industry. The combined same-store profit growth effect of the seven major Japanese automakers for the 2022 fiscal year was 2.1 trillion yen, accounting for 47% of the total operating profit. Toyota had the largest effect, increasing profits by more than 1.1 trillion yen, offsetting the decline in profits due to rising raw material prices (1.6 trillion yen). Even SUBARU, which mainly serves the North American market, had an effect of 80% of the expected operating profit for the 2022 fiscal year (300 billion yen). In the electronics sector, Murata Manufacturing and Mitsubishi Electric also benefited from the depreciation of the yen.

Expectations of monetary easing by the Bank of Japan (BOJ) pushed the dollar-yen exchange rate above 130 yen at the beginning of the year, turning it towards yen appreciation, but it is now fluctuating around 136 yen again. The average expected exchange rate of the major Japanese companies for the first quarter of 2022 was 131 yen, and if it remains at the current level, it will be a factor in raising the performance expectations of export companies for the 2022 fiscal year.

However, the exchange rate bonus will be significantly reduced in the first quarter of 2023. Looking at the same-store profit growth effect of 29 companies on a quarterly basis, it increases from 570 billion yen in April-June 2022 to 930 billion yen in July-September 2022 and 1.09 trillion yen in October-December 2022. However, it decreases to 390 billion yen in January-March 2023.

In the 2023 fiscal year, Japanese export companies may not benefit significantly from the depreciation of the yen. This is because if the current exchange rate (1 dollar to approximately 136 yen) continues, it will be the same as the full-year average for the 2022 fiscal year (136 yen), and the profit growth effect of the yen depreciation will disappear. When companies release their earnings forecasts, they are cautious in setting the exchange rate in order to avoid a downward revision. Indeed, among the companies that have already ushered in the new fiscal year as of December 2022, Prudential Financial set the expected exchange rate for the 2023 fiscal year to 1 dollar to 123 yen. Looking at the exchange rate as a whole, the expected exchange rate is expected to be a factor in lowering profits by about 51 billion yen, calculated on the basis of adjusted operating profit.

Daiwa Securities’ data shows that a 1-yen appreciation of the yen against the US dollar will reduce the ordinary income of Japanese companies in the 2023 fiscal year by 0.4%. For the 2023 fiscal year, the forecast profit as of December 2022 is expected to increase by 0.9% from the 2022 fiscal year, assuming an exchange rate of 140 yen. If other factors remain unchanged and the current exchange rate is maintained, the risk of profit decline will be strengthened. Ino Chikara of Daiwa Institute of Research also warned, “We cannot expect the effect of yen depreciation to boost corporate performance in the 2023 fiscal year, and there is a possibility of a decline in profits.”