London: At first glance, the earnings results and forecasts delivered by Japanese companies over the past two weeks should have been great news for investors.
Big names from Toyota to Sony outperformed in the quarter to June, and one in six listed groups raised its guidance.
Yet Japanese stock prices have barely rebounded from their July lows, the Nikkei remains 15 per cent below its high for the year, set in April, and the mood among shareholders, policymakers and many executives is gloomy.
To see why, all it takes is a quick look at the yen. After surging during the financial crisis, the currency is rising again, trading close to last November's 14-year high against the dollar of 84.80 yen.
So far this year, it has climbed 7 per cent against the dollar and the South Korean won and a full 15 per cent against the euro.
"It is only Japanese companies that are doing business in the face of big currency risks," Masayuki Naoshima, trade minister, complained last week.
Takahiko Ijichi, senior managing director at Toyota, said the outlook for the currency was "impossible to judge".
The big threat in the coming months is that, just as in the wake of the banking meltdown, the yen will stay strong even as the global economy slows. Domestic production fell in June and economists say Japan is heading for a more sluggish second half.
In spite of the yen's gains against the dollar, the outlooks released by many Japanese groups, including Toyota, Sony and Canon, still assume an average rate of 90 yen to the dollar this year.
Toyota raised its net income estimate by 30 billion to 340 billion yen for the year ending next March.
Correlation
Nicholas Smith, equity strategist at MF Global said: "More often than not, a strong yen has gone with a strong stock market.
This is because the yen was strong because successes by Japanese companies made Japanese assets attractive, driving up the yen. This time, the strength of the yen reflects the weakness of the US and Eurozone economies. And for a country that lives or dies on trade, the weakness of export markets is a disaster."
Compounding woes
The yen's strength compounded companies' woes during the recession by making their exports less competitive just as foreign demand was shrinking rapidly.
A simultaneous tumble in the won allowed South Korean rivals such as Samsung and Hyundai to take market share.
According to Toyota, currency swings chopped 760 billion yen from its bottom line at the nadir of the downturn.
Since then, the yen has gained a further 15 per cent against the dollar, forcing the company to slash costs and wind down domestic production more aggressively that it would have done otherwise.
— Financial Times
