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Nikkei rise a blessing for Japan Inc

TOKYO: A nearly 30 percent rebound in Tokyo stocks in the financial year just ended should result in windfall gains for recession-hit Japan Inc, helping it to post its first profit rise in three years, analysts say.

The 28 percent surge in the key Nikkei 225 average in the year to its 20,337.32-point close on March 31 - its highest financial-year end in four years - has been a boon to bluechip firms, enabling them to draw on latent gains in equity portfolios and to record one-off profits from sales of cross-held shares.

"The rising Nikkei was a beneficial factor for corporate earnings," said Yoshiyuki Okada, a deputy general manager at Daiwa Institute of Research (DIR). "It helped firms recoup part of hefty loss charges from restructuring."

And the next year could be even better.

Some expect Japan Inc, hit in recent years by sluggish earnings amid the worst recession in half a century, to make a full comeback in the business year starting this month as firms benefit from restructuring forced upon them by the economic troubles.

The DIR predicted parent-only sales at big Japanese firms, excluding financials, would rise in 2000/01 for the first time in four years, with an expected 19 percent rise in current profit.

For the year just ended, cost-cutting alone should result in a 6.3 percent current profit rise after a painful 25.8 percent fall in 1998/99, the DIR said. Current profit is pre-tax and includes gains and losses from non-operational activities such as stock investments.

"Share prices and corporate earnings are seen entering a healthy cycle," said Tomoko Fujii, an economist at Nikko Salomon Smith Barney. Signs Japan's economy may be on track for recovery, even after slipping back into recession in the last half of calendar 1999, have boosted sentiment, she said.

Fujii expected bullish earnings prospects, estimating a 25.6 percent rise in 2000/01 consolidated pre-tax profits at non-financial firms listed on the Tokyo bourse's first section. This compared with an estimated 14.5 percent rise in 1999/2000.

Kathy Matsui, a Goldman Sachs strategist, said investors would expand the scope for stock picks in coming months, with Japanese firms further stepping up sweeping restructuring efforts to cope with a tough business climate and to fend off the increasing threat of becoming takeover targets.

Among top beneficiaries of the surging Nikkei were Japan's long-troubled banks, estimated to have generated more than two trillion yen in one-off gains from the sales of cross-held shares in the last year.

Japan's traditional business practice of cross-shareholdings are being unwound as rapid economic change loosens the "keiretsu" links binding groups of Japanese firms to their bankers.

DIR banking analyst Akira Takai said Japan's top 17 banks are expected to have recorded a 47.6 percent jump in unrealised net profits in their shareholdings to 8.31 trillion yen ($78.66 billion) at the end of March, from the end of September.

The Bank of Tokyo-Mitsubishi, currently the largest by assets, had the biggest chunk at 1.31 trillion yen, followed by Sanwa Bank's with 1.16 trillion, DIR said.

Japan's top banks, with rapid consolidation set via planned mega mergers, would underline their profit turnaround for 1999/2000, analysts said. Still, the road ahead is bumpy because they remained saddled with 20 trillion yen worth of potential problem loans at the end of last September.

Analysts said any major setback in the U.S. economy could nip corporate recovery in the bud, with the consequent cooling of global demand hitting Japan's mighty manufacturers hardest.

Another risk factor was Japan's tighter accounting rules that take effect from the new business year and which could result in hefty loss charges.

Under the new rules, firms must value certain assets at market value. Current rules allow them to list all assets at book value - the price paid - regardless of actual market value, enabling them to conceal hidden asset losses.

The change could result in listed builders - owners of hefty loss-making sale properties from the bubble years - reporting nearly three trillion yen in appraisal losses, analysts said.

Firms must also disclose pension shortfalls - estimated at some 50 trillion yen. Companies such as Toshiba Corp and Tokyo Electric Power Co Inc have already moved to mop up the shortfalls by taking loss charges in 1999/2000.

Moody's Investors Service said it would watch whether firms have sufficient resources to cover future liabilities and cash payments. "And if an issuer's financial resources are considered inadequate, Moody's will take the necessary rating actions."-Reuters