Buying opportunity seen as Tokyo blue chips turn red
By Anthony Rowley
M
ANY of Japan's so-called blue-chip companies have suddenly
turned into "red" chips -- they have gone into the red in the first half of fiscal 1998. Others expect to make losses in the second half of the year as sales continue to ratchet downwards and as the collapse of Asian markets adds to the corporate misery in Japan's recession-hit domestic market.
As with Japan's macro-economy, the picture in the corporate sector appears to be one of almost unrelieved gloom and few analysts are prepared to predict any significant improvement this side of the year 2000.
Good-bye growth: There is misery too among analysts, with some suggesting that Japan's economy is now "beyond the point of repair". One report, predicting a 2.6 per cent contraction in Japanese GDP in the year to March 31 next, was titled "A Farewell to Growth". Equity strategist Giles Ockenden at Jardine Fleming Securities in Tokyo is suggesting that the Nikkei-225 stock average, which currently stands at around 13,500, could fall to nearer 10,000 before the current economic crisis in Japan is over.
Yet even the most bearish analysts appear to accept that there is -- or will be -- a case for buying Japanese stocks before long. Mr Ockenden, for instance, argues that the worsening crisis will "radicalise Japanese people and corporates" and that the Tokyo stockmarket will rise again like a "phoenix from the ashes". Others believe that the Obuchi government may yet stave off a crash by throwing enough money at the economy.
Corporate sector pain is becoming acute. By one estimate, combined recurring profits in the first half of fiscal 1998 (ended Sept 30) for 820 non-financial firms listed on the Tokyo Stock Exchange's first section plunged 30 per cent from a year earlier. This is the largest half-yearly fall since 1975, when Japan was hit by the first oil shock. After-tax profits are meanwhile estimated to have dropped by 65 per cent.
The corporate results season is still in full swing, but a survey of 120 companies showed that actual operating profits in the first six months slumped by 53 per cent on the back of a sales decline of 8 per cent, while pre-tax profits plunged by 46 per cent.
Results from individual blue-chip companies highlight the dramatic nature of the profit collapse. NEC, Japan's largest semiconductor manufacturer and leading personal computer maker, fell into consolidated pre-tax losses of 24.5 billion yen (S$342.4 million) in the first half and the electronics giant has forecast a full-year loss at the consolidated level, its first in six years.
Meanwhile, Fujitsu, Japan's largest computer maker, reported a 68 per cent drop in consolidated interim pre-tax profit.
More shocking was news that flagship consumer electronics giant Sony Corp's consolidated operating profit in the first half fell by nearly 15 per cent -- despite a near 10 per cent rise in sales. Sony expects the situation to worsen in the second half and that red ink will flow for the first time in six years.
Toshiba, Japan's second biggest electronics maker, went into the red for the first time in 48 years. Electronics conglomerate Hitachi, meanwhile, reported its worst half-year profits since 1949 and declined to forecast for the full year.
The pain did not stop there. A group of 117 Japanese wholesalers reported their first-ever annual decline in sales and profits since records were begun in 1972, while major Japanese department stores also reported slumping revenues and profits.
Major restructuring: The core of the problem, according to many analysts, is that Japanese companies are refusing to face up to the need for major restructuring -- especially of their workforces -- and for cutting costs.
Rather than deregulate the economy so that new jobs can be created, the government is pleading with corporations to keep labour on, to avoid rising unemployment.
Some analysts believe that a collapsing economy will force a painful labour shakeout and that a host of other reformswill hoist rates of return on equity in Japan from around 2.5 per cent to near 10 per cent over the next few years. This justifies an "overweight position" in Japanese equities even now.
Other analysts believe that massive prospective fiscal stimulus in the shell-shocked banking system will help arrest the economic decline. Corporate earnings will then begin to benefit from as early as next year.
Either way, the bears do not look like having things all their own way in Tokyo.
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