Forecasts From Nissan and Sony Provide Japan Inc. Reality Check

Forecasts From Nissan and Sony Provide Japan Inc. Reality Check

MAYUMI NEGISHI and HIROYUKI KACHI

Nov. 1, 2013 7:21 p.m. ET

TOKYO—Surprise cuts in profit forecasts from Nissan Motor Co. 7201.TO -2.14% andSony Corp. 6758.TO -11.13% are giving pause to believers in Japan’s corporate recovery and highlight the risks still facing the country’s biggest brands. Nissan cut its full-year profit outlook by 15% on Friday, blaming weakness in emerging markets and big recall costs, and overhauled its management.Sony, a day earlier, slashed its annual earnings forecast by 40% following box-office flops and weak sales of televisions. The consumer-electronics company’s shares slid 11% on Friday.

The downbeat news from two Japan Inc. heavyweights has added a sober tone earnings reports of the latest quarter—a contrast to the sharp upward revisions that dominated six months ago amid a fresh optimism sparked by government-stimulus policies.

After more than two decades of starts and stops, hopes are high that Japan’s economy is on a mend. Helped by an ultra-easy monetary policy and fiscal spending, consumer prices and industrial production have risen, and companies are starting to raise corporate investment. The Nikkei is up 37% in the year, as investors bet that this time, Japan will shake off its doldrums.

But Nissan and Sony are supplying a reality check for some short-term investors. Both companies had blamed the strong yen for past woes.

“There are still so many uncertainties ahead: the health of the economies in the U.S. and in China, the impact of the sales tax hike next year, and then there are the individual risks each company faces,” said Yoshihiro Okumura, general manager at Chibagin Asset Management.

Sony and Nissan alone won’t dent interest in Japan from long-term overseas investors, Mr. Okumura noted. “It’s just that the winners and losers will become very clear,” he said.

The companies are two of the big standouts in an earnings season that is still relatively upbeat. Based on results logged by the 532 companies listed on the first section of the Tokyo Stock Exchange that reported second quarter earnings results as of Thursday, net profit at nonfinancial firms nearly quadrupled in the April-September first half from a year ago, helped by a yen that at the end of September was 26% weaker than a year ago, according to SMBC Nikko Securities Inc.

The weak yen has been a crucial driver in higher earnings and stock prices for the export-led economy, as the cheaper currency makes Japanese goods more competitive in global markets.

Led by electronics and auto sector firms, almost 30% of the companies lifted their annual forecasts. But even when they did revise up, Japanese firms were ultraconservative, considering how strong first-half earnings were. For the full business year, the surveyed companies on average revised up their net profit outlook by a mere 2.4%.

And, like Nissan and Sony, 15% of companies reporting so far have cut their forecasts, despite all the optimistic news.

Machinery makers have led the downward revisions so far, but a clear line divided the winners and losers in the machinery sector as well. Excavator-maker Komatsu Ltd. cut its outlook on Monday, after logging a profit fall on weak demand for its mining equipment. That was in contrast to rival Hitachi Construction Machinery Co., which logged a profit rise and kept its outlook unchanged.

If anything, Prime Minister Shinzo Abe’s reflation policies and a weaker yen help investors differentiate the exporters that worked hard and whose growth strategies are right from the ones who got their strategies wrong, Daiwa Securities Senior Strategist Eiji Kinouchi said.

“Companies can’t use the strong yen as an excuse anymore,” he said. “I think this will put pressure on underperforming companies to actually do something.”