Midterm Financial Results: Companies Should Review ‘Earning Power’ Anew

Editorial

15:00 JST, November 16, 2024

The performance of listed companies continued to recover after the COVID-19 pandemic, but their midterm financial results were down for the first time in four years due to poor performance in sectors such as the automobile industry. Companies should review their “earning power” and reaccelerate growth.

Almost all of the companies listed on the Tokyo Stock Exchange have reported their interim financial results for the half-year period through September. The total final profits of about 1,300 of the companies that make up the TOPIX index — excluding SoftBank Group Corp., which sees a high degree of fluctuation in investment business profits, and financial firms — decreased compared to the same period last year.

In the auto industry, whose companies do business with a wide array of partners, it is a cause for concern that five of the nation’s seven major automakers — including Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. — saw a decline in profits.

In addition to intensifying sales competition in the U.S. market, Japanese automakers have fallen behind Chinese companies in the Chinese market, where electric vehicles (EVs) are becoming more widespread.

The effects of foreign exchange rates were also a major reason that profits fell across the manufacturing industry. At present, the yen is weak at around ¥155 to the dollar, but in August and September, the yen temporarily strengthened to around ¥139 to the dollar, and profits earned overseas were reduced when converted into yen.

The weakening of the yen and strengthening of the dollar that began in spring 2022 was a tailwind for exporting companies, and they continued to post record profits. They should examine the latest financial results and use them as an opportunity to reconsider strategies for boosting profitability, rather than relying on exchange rates.

Corporate retained earnings have been at record highs for 12 consecutive years, exceeding ¥600 trillion at the end of fiscal 2023. This is the result of a failure to adequately invest or raise wages.

Real wages have been in a long downward trend since April 2022, and they have yet to achieve stable growth. The Japanese economy is at a point at which it should be transitioning to a growth-oriented economy led by investment and wage increases. Companies should accept the weight of their responsibilities.

Uncertainty about the future is increasing. U.S. President-elect Donald Trump has advocated protectionist policies, such as the blanket imposition of tariffs of 10%-20% on all imports. From next year, when his administration takes office, there is a possibility that there will be an increased number of challenging situations that Japanese companies will be forced to deal with.

The incoming Trump administration intends to take a tough stance toward China. It could be an effective strategy for Japan and the United States to deepen their cooperation in the fields of semiconductors and digital technology. During a visit to Japan, the head of U.S. semiconductor giant Nvidia Corp. also expressed his hope for cooperation from Japanese companies.

In the digital field, major electronics companies such as Hitachi, Ltd. and NEC Corp. have seen growth in services related to information technology and artificial intelligence. Many such companies have seen an increase in profits.

It is important for IT and semiconductor-related companies to use their strong performance to enhance their supply chains in the digital and semiconductor fields.

(From The Yomiuri Shimbun, Nov. 16, 2024)