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Japanese corporate earnings growth to decelerate in 2019

Publication Date: 28 Nov 2018 - By ReachX Team By ReachX T.

Equity Fundamental Macro Multi Asset Equity Asia ex-China


Slowing global and domestic GDP growth will lead to a deceleration in earnings growth for Japanese corporates in 2019, according to a leading rating agency. 

In a note to its clients, Moody’s said there were risks for Japan Inc. on the horizon, even if the impact of rising trade tensions will be “manageable for now.”

"We are projecting GDP growth of 0.8% for Japan in 2019, while the EBITDA of rated Japanese companies will grow 1%-3%, slower than the expected pace for 2018," said Mihoko Manabe, Associate Managing Director at Moody's.

"Most sectors have stable outlooks, except utilities and pharmaceuticals, which have negative outlooks, while a cautious approach to financial management and investments will lead to a modest fall in leverage, supporting credit quality and ratings," Manabe added.

Moreover, the direct macro impact of a hike in US tariffs on Chinese imports will be manageable, with Japan's auto sector most exposed to trade frictions. However, high oil prices and tightening financial conditions in the US and Europe will pressure economic activity in the emerging markets, which will lower demand for Japanese exports.

Domestically, the government's ancillary measures will smooth, but not totally eliminate, the impact of the consumption tax hike to 10% from 8% in October 2019. The higher tax rate will likely weigh on consumer spending on many products.

Meanwhile, technological changes and the mature character of the domestic market will compel many companies to seek new investments.

Moody's outlook for each Japanese sector is as follows:

Automotive (Rated ‘stable’ by Moody’s): For Japanese original equipment manufacturers, challenges will remain from weaker US sales and foreign exchange effects, which will reduce margins.

Telecommunications (Rated ‘stable’): Margins likely to decline as companies lower rates in response to government pressure.

Steel (Rated ‘stable’): Profitability will be stable amid solid demand in both export and domestic markets. However, an escalation of trade disputes could disrupt market conditions and weigh on profitability.

Shipping (Rated ‘stable’): Despite overall stable business fundamentals, leverage remains very high. Companies are also exposed to business volatility.

Utilities (Rated ‘negative’): Capital investments will keep leverage high and the importance of financial strength will rise as regulatory protection weakens.

Trading Companies (Rated ‘stable’): Earnings and cash flow will be steady from relative stability in commodity prices.

Electronics (Rated ‘stable’): The strong investment needs of domestic corporates for digital transformation will support the revenue growth of technology companies.

Oil & Gas (Rated ‘stable’): Credit metrics will steadily improve on oil prices that are on average higher but prices will be range-bound.

Pharmaceuticals (Rated ‘negative’): The business environment in Japan is weak due to rising pricing pressures. Overseas growth increasingly important to offset declining domestic sales.

Real Estate (Rated ‘stable’): Asset yields will remain low toward 2020 and bring down overall portfolio yields.


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