Japanese stocks lagging corporate earnings

Stock prices lead the economy and corporate earnings by several months, textbooks say, and that is how we have learned

and come to believe. But looking at stock price movements from last year into this year, I cannot help but doubt that theory.

The quarterly operating profit growth rate has been closely linked to the stock price fluctuations with a one-quarter lag. Japanese stocks have become not a leading indicator of the economy, but a lagging indicator.

Corporate earnings that show improvements beyond expectations

Most of the listed companies are assumed to be those with capital of 1 billion yen or more in the corporate statistics for October-December, which is exactly as released.

(Year-on-year)

Sales ▲0.5%

Ordinary income +23.5%

(Sales operating margin) 8.2%

YoY ▼5.7%

Sales were slightly down, but ordinary income rose sharply by 23.5% year over year. Moreover, the ordinary profit margin on sales was 8.2%, a substantial improvement of 1.6% from the previous year.

The average of the dollar/yen exchange rate for Oct-Dec was 109.48 yen, which is almost 12 yen stronger than the previous year. This is a favorable result in such an environment. Even with such surprising earnings, the stock price fell only 5.7% year over year.

The rate of increase/decrease in ordinary income is lagging by one quarter relative to the Nikkei average’s fluctuations.

It shows the decline in the Nikkei Average by one quarter later than the quarterly earnings growth rate of the previous year.

(Ordinary income growth rate and stock price fluctuations)

(2016)

Ordinary income Stock price

01-03 ▲18.7% 04-06 ▲18.3%

04-06 ▲13.9% 07-09 ▲15.3%

07-09 ▲9.6% 10-12 ▲5.7%

10-12 +23.5% 01-03

(Note) Corrected the unusual part of 07-09

Recently, supported by a 23.5% year-on-year increase in the previous quarter’s earnings,

the year-on-year rise is about 15%.

Since the first to third quarters’ ordinary profits were unusually weak,

a rise of about 30% is expected. From data that reflects stock prices one quarter later,

there is expectation for stock prices in April-June as well.

The breakout from a consolidation phase will occur after entering the new fiscal year,

which will be after the new year begins.