The Coming Week in Asia: Of Yen Strength and Dwindled Profits
TOKYO -- All in all, the past week wasn't a very pleasant one for the Tokyo equity market, and the weeks ahead don't look so great either.
While investors in the U.S. worry about what the
is going to do, Japanese players will be mired in their own, homespun mud: earnings. It's week two of the fiscal 1999 earnings rush and so far, the results have been quite atrocious. Many companies have seen profits slashed due to high costs from mergers, restructuring and pension fund deficits. Although all this spending to revamp Japan Inc. is great in the long run, it still hurts the books in the meantime. The only shining stars seen so far are chip makers such as
Sharp
(SHCAY)
, which saw net profits surge 510%, to
28.1 billion ($260 million), as the mobile phone market continues to explode.
But weak domestic economy aside, another huge reason why profits dwindled the past fiscal year that closed March 31 was the sudden and surprising surge of the yen. Any time a Japanese exporter sells a product overseas when the yen is strong, that's less profit for the company when the sale is converted back into the home currency. A strong yen also makes Japanese companies less competitive at home. There is a reason that the
Ministry of Finance
, under the auspices of the
Bank of Japan
, has over the past year often intervened in an attempt to weaken the yen.
The dollar weakened to an average of
113.84 during 1999, down about
4 from the previous year. And against the troubled euro, of course, the yen was even stronger. This is expected to cut into the profits of Japan's big auto makers such as
Toyota Motors
(TM) - Get Free Report
,
Nissan Motors
(NSANY)
and
Mazda Motors
, all of which are reporting earnings next week.
"In the short-term, there are so many things -- like the performance of U.S. stocks -- that will affect Japan's equities," says Brenda Reed, fund manager of
Fidelity Investment's
(FJPNX) - Get Free Report
Japan Fund. "So as a long-term investor, that's why I focus on companies that have global operations and can boost earnings when things are not so good at home."
Reed says she likes Toyota, which is one of the top 10 holdings of her fund, because the company has outperformed the
Topix 100
index even though domestic car sales have plummeted for three years straight. And despite the strong yen, the surge in car sales in the U.S. has boosted share prices by about 78% over the past year, helping her fund rise 102.45% over the same period.
Toyota, which will release earnings Wednesday, is expected to announce a group operating profit of
709 billion ($6.5 billion) for fiscal 1999, down 8.4% from the previous year. Net profits, however, are expected to be around
400 billion, up from
356 billion a year ago.
Nissan will be releasing its earnings on Friday, and nobody is expecting any pleasant surprises from this automaker. Nissan, which is 36.8% owned by France's
Renault
, said it expects a group operating profit of about
46 billion, but analysts are calculating losses to the tune of
630 billion. Mired in a three-year restructuring program, while overseas car sales plummet, many are waiting around for Nissan to introduce its new car line (expected sometime this fiscal year) before investing in shares again.
Mazda, which will release earnings Friday, says net profits will likely be between
25 billion and
40 billion. The automaker exports almost two-thirds of its cars overseas with the help of
Ford Motors
(F) - Get Free Report
, which holds a controlling minority stake. Investors, which have kicked Mazda shares down 36% over a year, reportedly want to see whether the firm survives as a pseudo-Japanese entity or will be swallowed whole by Ford.
The three automakers can blame anything and everything for their paltry earnings -- the high cost of mergers, restructuring and a weak domestic economy -- but it's rather easy to predict what auto officials will be saying first and foremost when explaining results this year: "It's the yen, stupid."
