US-China Quarrel, Japan Stumbles
07/09/2019 08:03 am MYT
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"In fact, Japanese manufacturers, being key players in the world’s merchandise trade, have already seen their businesses plunging and profits pulled down."

With the US and China slapping additional tariffs on each other’s products this week while promising even more toward the end of the year, countries that are heavily dependent on global trade or are integral parts of the global supply chain stand to be severely hit. In fact, Japanese manufacturers, being key players in the world’s merchandise trade, have already seen their businesses plunging and profits pulled down.

According to statistics released by the Ministry of Finance, corporate profits in Japan plunged 12%, year-on-year, in 2Q 2019. This followed a 10.3% growth in 1Q 2019. Table 1 shows the corporate profits of major industries. As shown, the manufacturing sector is the hardest hit, with corporate profits falling across the board. The information and communication electronics equipment segment bore the heaviest brunt due to the combined effects of a slump in the smartphone industry, the US-China trade war, and a worsening Japan-Korea relationship.

Apart from lower external demand, Japan’s corporate profits are expected to suffer from a double whammy of an appreciating Yen. Despite Japan’s sluggish economy, the Yen is facing further appreciating pressure due to its haven status. The worsening US-China trade conflict and intensifying Brexit chaos will send more investors flocking to Yen assets, thereby pushing up the currency.

Trump bashes China but Japan gets walloped instead. Abe should play more golf with Tariff Man. (Source: Wikimedia Commons)

Falling corporate profits would seriously affect investment activities. Investment in plant and equipment has already contracted for the manufacturing sector in 2Q 2019. As shown in table 2, the decline in investment was also rather broad-based. This is a worrying development because with a shrinking population, Japan badly needs capital investment to boost efficiency and productivity.

Falling corporate profits would constrain Japanese companies from conducting share buybacks and giving out dividends. Figure 1 shows that Japanese listed companies have conducted heavy share buybacks over the past few years as well as paying hefty dividends. These activities are expected to be curtailed this year and next year.

Recent economic data from Europe, the UK and the US have not been reassuring. This has affected Japan’s exports. With almost all of China’s exports to the US soon to be subjected to Trump’s tariffs, prospects for Japan’s exports are gloomy. Domestically, Japan‘s retail sales have been especially weak.   All said, with factors that could contribute to a rise in stock prices evaporating, the outlook for the Tokyo stock market is bleak. i Capital retains its bearish short-term outlook of the Tokyo stock market at a range of 13,000 to 22,500 for the Nikkei Average. A drop below 20,000 points would embolden the bears. i Capital is retaining its long-held long-term bearish outlook of the Tokyo stock market.

Note from Publisher
i Capital will not be published for the issue dated 19 – 25 Sep, 2019. However, during this period, will be updated as usual. Our office’s operating hours will not be affected. Volume 31, number 6 of i Capital will hence be dated 26 Sep – 2 Oct, 2019.

The haze is back. According to the Department of Environment’s Air Pollutant Index (API), the API readings have reached unhealthy levels in many parts of Malaysia; some have even reached “very unhealthy” levels. This health hazard has plagued Malaysia, Indonesia, and Singapore for decades. Although forest fires caused by extreme dry weather play a part in the problem, the habit of Indonesian farmers using fire to clear land has been the main culprit. While the Amazon rainforest fires have caught global attention and the Brazilian government was under heavy criticism from the global community, the Indonesian government has received much kinder treatments from her neighbours and indiffercne from the global community. Apart from apologising, the Indonesian government really needs to put a stop to this perennial health and safety hazards that have been affecting millions of people.

Meanwhile, shareowners of Bhd are reminded to attend the 15th AGM on 21 Sep at the Sime Darby Convention Centre, Kuala Lumpur.
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