TOKYO—The yen's recent dramatic drop is giving hard-hit corporate Japan its biggest break in years, raising hopes of a long-awaited earnings recovery.
In a first glimpse of the brightening outlook, camera manufacturer Canon Inc.7751.TO +2.86% on Wednesday forecast that net profit would rise 14% in 2013, after dropping 9.7% last year. In anticipation of the weaker yen's benefits, investors have bid Canon shares up nearly 40% since mid-November, when the yen slide started. The yen's depreciation prompted videogame maker Nintendo Co. 7974.OK +1.03%on Wednesday to double its profit outlook for its full fiscal year even as the company slashed its sales projection.
"The weaker yen is a tailwind for export manufacturers like us," Canon Chief Financial Officer Toshizo Tanaka said at a news conference. He called the company's currency outlook "conservative" because of economic uncertainty in the U.S., Europe and China.
That sentiment is likely to be repeated by Japanese executives through the end of next week as the country's multinational companies issue earnings reports. Daiwa Securities estimates that profit growth at the top 200 Japanese companies will nearly double to 13% for the fiscal year through March, reversing a 16% decline in the previous year, assuming exchange rates remain roughly at current levels for two months.
Since mid-November, when the yen's depreciation started in anticipation that a new Japanese government would take a hands-on approach to fighting deflation, the dollar has soared nearly 15% against the Japanese currency. The dollar hit ¥90.88 late Wednesday in Tokyo, after trading below ¥80 for much of last year. The yen's decline has been even more sharp against the euro, driving the European currency up 22% to ¥122.55.
The weaker yen offers a boost to Japanese exporters in several ways. It helps increase earnings made abroad when they are repatriated into yen. A weaker yen also helps lower the price abroad of goods manufactured in Japan and exported. The yen's tumble has been especially beneficial for country's electronics and automobile sectors, which for years have grumbled about a strong yen sapping profit.
The anticipated earnings boost from the currency swing—combined with optimism over the economic stimulus plans of Prime Minister Shinzo Abe, who took office in December—is evident in the Japanese stock market. Since mid-November, the Nikkei 225 stock index is up 28%. It closed at a 33-month high on Wednesday at 11113.95.
Electronics makers and auto manufacturers are outperforming the benchmark index. Shares of Sony Corp. 6758.TO +2.35% and Panasonic Corp. 6752.TO +2.78% are up more than 50% since mid-November. Panasonic reports earnings Friday, and Sony, next week. Shares of Toyota Motor Co., 7203.TO +6.06% Nissan Motor Co.,7201.TO +4.29% and Honda Motor Co. 7267.TO +3.32% have gained more than 35% over the same period. Honda reports earnings Thursday, and Toyota and Nissan follow next week.
A five-year run of largely unchecked yen appreciation has cast a cloud over Japan's corporate sector, which also has suffered as an aging population has shrunk the home market. In the electronics industry, the strong yen exacerbated the struggles of Japanese manufacturers to compete globally, saddling them with a cost disadvantage while rivals elsewhere in Asia innovated faster. Frustrated by the Japanese government's inability to curb the yen's rise, the country's auto makers threatened to close factories at home because it didn't make financial sense to produce cars in Japan.
South Korean manufacturers Samsung Electronics Co. 005930.SE -0.56% andHyundai Motor Co. 005380.SE -1.97% snatched market share away from Japanese rivals, helped by several years of won weakness and yen strength. But some of those advantages are eroding with the weaker yen. The won has strengthened 27% against the yen since June 1.
"As a major exporter, we're very pleased with the recent weakening of the yen," Hideaki Omiya, president and chief executive of Japan's Mitsubishi Heavy IndustriesLtd., 7011.TO +10.35% which makes airplanes and ships, told reporters this week. "Ideally we'd like to see a bit more yen weakness."
A weaker yen isn't good for all Japanese companies. Manufacturers that produce goods abroad to sell here, such as makers of discount clothing, might feel the pinch. So, too, could companies that import raw materials into Japan. one vulnerable sector: utilities, which are more dependent on fuel imports since the 2011 Fukushima Daiichi disaster prompted nearly all of the nation's nuclear reactors to be shut down.
In addition, years of actions to offset the strong yen—moving production outside of Japan and using overseas suppliers who can be paid in dollars or euros—could mean the benefits of a yen slide would be less pronounced than in the past.
At Sony, the yen's move against the dollar—positive or negative—doesn't affect its bottom line. Ten years ago, each one-yen movement against the dollar could swing operating profit by ¥6.5 billion. The electronics maker since has decreased its exposure by incurring more costs in dollars rather than yen.
Sony has been less successful in striking a balance with the euro. The company still struggles to offset its revenue from Europe with an equivalent amount of euro-based costs. A one-yen increase in the average full-year euro-yen rate will lift Sony's operating income by ¥6 billion, according to the company.
For some companies, the recent yen decline isn't enough and are calling for still more. Toyota CEO Akio Toyoda said the ideal level is ¥100 to the dollar. "The yen isn't weakening yet. It's just in the correction phase from the abnormally strong yen before," Mr. Toyoda told reporters last month. Toyota generates 70% of its sales outside of Japan.
The strong yen has benefited Japanese companies by lowering the price of overseas assets. That has helped facilitate expansion overseas, through building facilities and buying foreign companies. Japan posted a second record year of cross-border acquisitions last year, with companies spending $113 billion, according to data tracker Dealogic. Boosted by blockbuster purchases, including Softbank Corp.'s9984.TO +3.99% $34.6 billion acquisition of Sprint Nextel Corp., S -0.61% Japanese companies became the second-largest corporate acquirer world-wide, behind U.S. companies.
The weaker yen will make all that more expensive for Japanese companies but isn't likely to curb their appetite for overseas investment. Daisuke Nakano, a partner at consulting firm Roland Berger in Tokyo, said Japanese companies will continue to seek ways to neutralize currency risk and pursue growth outside their shrinking domestic market.
"Overseas investment is an issue of utmost urgency for Japanese firms," Mr. Nakano said. "There may be a modest cutback in the amount of overseas investment that Japanese companies will be planning to make [because of the yen's weakness], but I don't think they will hold back investment substantially."
—Yoshio Takahashi and Kana Inagaki contributed to this article.
