Partner Insight: Japanese corporate profits have risen to record levels in recent years. Jupiter's Dan Carter, Fund Manager, examines how Japanese companies are reacting to the situation, and what the implications are for Japanese equity investors.
The last couple of months have been especially busy ones for us, including a packed schedule on a research trip to Japan and many meetings with Japanese companies in London. We are bottom-up investors, and such peaks in our research activity can generate an almost overwhelming quantity of company-specific information, but we also recognise the value of perspective and seeing the bigger picture.
That is why we think it is crucial for us to step back, look at any common threads that run through our research, analyse the corroborating evidence and observe what themes are emerging. One of these common threads is the way in which Japanese companies are reacting to their historically high level of profits.
Until recently, the pre-tax profits of Japanese companies had oscillated within a range of around 2%-4% for about 60 years. There was understandably a trough in profit margins at the time of the global financial crisis, but the ensuing recovery has apparently resulted in a breaking of the usual cycle, as margins rose back up to 4% but kept climbing, hitting 6% recently. It has been an unprecedented move.
This dramatic shift in profitability has been due to several factors, but one of the more significant ones has been the moderation of labour expenses: when measured as a percentage of GDP, labour costs for Japanese companies have been falling since the early 1990s.
Japan's corporate sector has traditionally been smart about cutting costs when times are tough, especially when the yen has been strong. A profitability boom on this scale is something they haven't encountered before, however, so we have been fascinated to see how they are responding. From our recent research it is clear that, for many companies, the answer is that record profits provide the opportunity to accept the higher up-front costs required to grow their businesses.
Click here to read the full article from the exclusive Guide to Emerging Markets, Asia and Japan from Jupiter Asset Management and hear more from Dan Carter on the changing face of Japanese corporates