June 1, 2016, 14:00 JST

End of Abenomics boom in corporate profits

Corporate profits in Japan continues to decline. In the January-March quarter of 2016, current profits declined by 6.8% quarter on quarter to 15.85 trillion yen. Current profits have declined for the past three consecutive quarters, by 16% accumulatively.

By sector, both manufacturers and non-manufacturers suffered significant declines in their profits in the January-March quarter. Manufacturers' current profit declined by 8.0% quarter on quarter. Non-manufacturers' declined by 6.2% quarter on quarter. Relative to their recent peak, manufacturers’ profit is down already by 30%.

On the capital expenditure front, Japanese companies have not started to cut their investment yet. In the January-March quarter, corporate capital investment grew by 1.4% quarter on quarter. However, we do see a slowdown in the pace of their investment. On year on year terms, the growth in capital investments seems to be peaking off from 11.2% in the July-September 2015 to 4.2% in the January-March 2016 quarter.

Return of deflation in corporate sales?

Another concerning development is the continued shrinkage in sales. For both manufacturers and non-manufacturers, sales have been shrinking in the past few quarters. For non-manufacturers, the decline in commodity prices is probably the chief cause of the decline in sales as the category includes wholesale companies and electricity generators.  

Despite the decline in corporate profits, Japanese companies are still quite profitable and they are unlikely to embark on drastic restructuring in their investments and payrolls. At 4.9%, profit margin of Japanese companies is still well above their historical norm. At the same time, corporate investments are likely to remain sluggish. Japanese companies were unusually conservative in their capital outlays in the past few years. 

In our view, the Abenomics boom has ended for Japanese corporate profits. The Abenomics boom in the last three years was supported by a sharp depreciation in yen, benign global growth environment and an expansion in fiscal spending in the aftermath of 2011 earthquake. The Japanese government seems to be preparing another round of fiscal stimulus, but a fiscal stimulus alone is unlikely to replicate the fortunate condition Japanese companies were in through 2012 to 2015. Japanese corporate profits are likely continue to face a strong headwind through the course of 2016-17.