Japanese companies are showing resilience to rising interest rates, a stark contrast to many global economies, particularly the US. Despite a 30-year high in Japanese consumer price inflation at 3% year-over-year, the Bank of Japan has maintained a loose monetary policy, leading to a significant depreciation of the yen. This situation, coupled with strong corporate balance sheets, has allowed Japanese companies to manage the impact of soaring food and energy prices effectively.
Historically, a weak yen has boosted Japanese exports, but broad shifts in the economy mean its impact is now more nuanced. Nearly a quarter of manufacturing has shifted overseas, and companies like Hoya, which manufactures most products outside Japan and generates 75% of sales internationally, benefit significantly when repatriated profits are converted into yen. Hoya reported a 17% year-on-year boost in net profit and announced a ¥60 billion share buyback program. Similarly, Honda, with 85% of its production overseas, sees operating profits increase by ¥10 billion for every ¥1 depreciation against the US dollar.
The strength of Japanese companies' balance sheets is a key factor. They entered the recent period of monetary tightening with robust financial positions. Net interest income for non-financial companies in Q2 2022 was three times the recent quarterly average, representing roughly 35% of operating income. Furthermore, net "non-operating income other than net interest income" has risen over 50% since 2019, meaning operating income currently accounts for only about 60% of total profits. This financial structure makes Japanese stocks, especially currency-hedged ones, an appealing defensive play.
While the weak yen and rising global rates present challenges, Japanese companies are in a unique position. The shift to overseas production, not primarily for cheaper labor but to meet market demands, continues as Japan's domestic markets shrink. This strategic positioning, combined with strong financial health and the Bank of Japan's distinctive monetary policy, allows Japan Inc. to navigate the current global economic landscape with greater stability compared to economies like the US, where high debt, excessive inflation, and sharply rising interest rates are more pressing concerns.
Despite these advantages, international investors have largely shied away from the Tokyo market. Although the Topix is up 20% in yen terms since February 2020, it is down 7% in dollar terms, underperforming US and global indices. This reticence stems from past experiences with Japan's stagnant markets since the 1990s bust, making investors wary that "this time will be different," even as Japan's current economic characteristics become relatively attractive amidst global challenges.
