September 01,11:00 JST, 2016

Corporate profits declined for the third consecutive quarter

Corporate profits in Japan continued to decline for the third consecutive quarter in April-June. Current profits declined by 10.0% year on year in the quarter. 

Yen appreciation is an obvious reason. Manufacturers' profit suffered 22.4% year on year decline in the quarter. However, it is not just yen. Non-manufacturers also suffered a year on year decline of 3.1%. The lackluster domestic economic activities, especially that of private consumption, lies in the background of the generally sluggish corporate profits environment.

On the capital expenditure front, Japanese companies seem to be continuing to invest, but at a slower speed. In the April-June quarter, corporate capital investment grew by 3.1% year on year, decelerating from 4.2% in the previous quarter. In the current economic cycle, the corporate capital investment seems to have peaked after growing 11.2% year on year in the July-September quarter. It is quite possible that the year on year growth in the corporate capital expenditure would be negative in the next quarter.
The decline in corporate profits and the slowing capital expenditure is another evidence that the Abenomics/Kurodanomics experiment is failing. The sharp yen depreciation between 2013 and 2015 enabled Japanese companies to expand their profit to a report level. However, unlike in the expansionary phase in 2002 to 2006, Japanese companies are diverting far less amount of cash to investment.  
The sharp appreciation in yen since early 2016 also shows that the market no longer believes that the Japanese policy makers are capable of influencing the exchange rate market. In our view, Japanese corporate profits are likely to stagnate through the course of 2016-17.