[Awakening Japan]② Japanese Companies Improving Profit Structures Focus on Environmental and Space Future Industries Investment

Toyota and Sony Operating Profit Exceeds 1 Trillion Yen
Strong Corporate Performance Boosts Capital Investment
Export Growth, Wage Increases, and Consumption Improvement
Expecting Continued Virtuous Cycle Structure

"Japanese companies that have improved their profit structures through long-term restructuring are actively investing in future industries. The pace of development in eco-friendly and space development sectors far surpasses that of Korea, leading to vigorous efforts to find new growth engines."

Park Sang-jun, a Japanese expert and professor at Waseda University's International Academy, recently emphasized the improvement of corporate profits as a key factor in viewing the Japanese economy. Professor Park said, "This year's rise in Japanese stock prices is not only due to quantitative easing but also because of strong corporate earnings," adding, "Operating profits of leading Japanese companies such as Toyota and Sony have exceeded 1 trillion yen, and companies that have improved their structure through active restructuring are seeing improved profitability." He noted, "In the first half of this year, the number of employed people in Japan is the highest in its entire history (since 1954)," and assessed that "when corporate performance is good, employment numbers are also strong, indicating a gradual recovery trend in the Japanese economy."

Capital Investment Exceeds 100 Trillion Yen for the First Time in 32 Years

Along with the improvement in profitability of Japanese companies in the first half of this year, the strong capital investment by Japanese companies is also a noteworthy factor. According to the Nissei Basic Research Institute, nominal capital investment this year is expected to reach 101 trillion yen, up 4.5% from the same period last year, and is projected to increase by 3.8% to 105 trillion yen next year. It is the first time in 32 years since 1991 that Japan's capital investment has exceeded 100 trillion yen. It is also the first time in history that it has exceeded 100 trillion yen for two consecutive years. Lee Ji-pyeong, a special professor at the Department of Convergence Japanese Area Studies at Hankuk University of Foreign Studies, diagnosed, "Although capital investment slowed in the second quarter, considering that capital investment stagnated for a long time during Japan's long-term recession, if the recovery trend in capital investment continues for a long time, it will greatly help the recovery of the Japanese economy." Jang Sang-sik, head of trend analysis at the Korea International Trade Association, also said, "The increase in Japan's capital investment can be interpreted as being linked to domestic investment."

Strong corporate earnings are bringing a favorable wind to the Japanese stock market. This year, the Nikkei 225 index reached its highest level of the year in June, enjoying a historic boom not seen in 33 years. The historical record high was 38,915.9 on December 29, 1989, and whether this can be surpassed in the future has become a key point to watch. Although global stock markets have generally entered a pause phase recently, the Japanese stock market continues to show relatively favorable momentum. Oh Han-bi, a researcher at Shinhan Investment Corp., said, "Both Japanese stock prices and earnings momentum rank among the top among major countries' stock markets," adding, "The earnings momentum over the past three months (3.7%) even exceeds that of the U.S. stock market (2.2%), and the difference in earnings momentum is resulting in differences in stock price momentum."

The background of the Japanese stock market boom lies in the Bank of Japan's continued easing policy and expectations of improved corporate earnings due to yen depreciation. The Bank of Korea's Tokyo office evaluated, "Since COVID-19, the rate of increase in ordinary profits in manufacturing has been high, with a clear rise in stock prices in key export sectors such as electronics and machinery," and added, "Expectations for economic recovery due to pent-up demand post-COVID, the influx of foreign tourists, and unusually high wage negotiations have also influenced the rise in stock prices, reflecting structural changes in the Japanese economy."

Stock Market Boosted by Foreign Investors' Net Purchases... Key to Creating New Growth Engines

In particular, foreign investors have driven up the stock market by purchasing large amounts of Japanese stocks. Expectations for expanded shareholder-friendly policies played a role in this. The Tokyo Stock Exchange has urged companies to take active measures to enhance corporate value, and since the March fiscal year-end, many listed companies have increased dividends and expanded share buybacks. For companies whose price-to-book ratio (PBR) continuously falls below 1, strong requests for management improvement plans have been made, which has positively influenced the stock market. The investment by Warren Buffett, the father of value investing, in the five major trading companies (Mitsubishi, Mitsui, Itochu, Marubeni, Sumitomo) also ignited investor sentiment.

Researcher Oh said, "Excluding the financial sector, ordinary profits and margins of Japanese companies hit record highs in the second quarter this year," adding, "Corporate earnings support the capacity for wage increases, the yen-dollar exchange rate remains at a high level, and exports centered on the U.S. region continue to be strong due to the robust U.S. economy." He explained that companies are gaining the strength to pay higher wages, and the fact that profits are increasing and margins are not being eroded despite inflationary pressures raises expectations for additional wage increases in next year's spring labor negotiations. Accordingly, he expected a virtuous cycle structure connecting export growth → wage increases → consumption improvement.

Another notable change is that Japan, which had been passive about digitalization, is now accelerating in this field. Professor Park Sang-jun said, "The fields where Japan is currently focusing its investments the most are digitalization, eco-friendly technologies, space, and quantum computers," adding, "The fact that Japanese companies are actively investing in future industries and revitalizing the economy is a point that Korean companies should also pay attention to." As the Japanese economy stands at a crossroads to escape deflation, Professor Lee Ji-pyeong forecasted, "The key is whether Japan can avoid a vicious cycle of massive capital outflows overseas and accelerated yen depreciation due to internationally low interest rates, while meeting the large-scale investment demand for digital innovation and green innovation by Japanese companies, thereby strengthening new growth potential."

Meanwhile, the Organization for Economic Cooperation and Development (OECD) raised Japan's growth rate forecast to 1.8%, up 0.5 percentage points from the June forecast of 1.3%. South Korea's growth rate was predicted to remain at 1.5%, the same as the previous forecast in June. If this forecast materializes, South Korea's economic growth rate will fall below Japan's for the first time since the 1998 financial crisis.

Japanese Prime Minister Fumio Kishida holding a press conference ahead of attending ASEAN and G20 meetings
[Image source=Yonhap News]