Japanese companies report strong earnings

Share prices in Japan rebounded towards the end of the month, boosted by strong earnings announcements from leading companies and positive corporate earnings and macroeconomic data from the US. Overall, the Nikkei 225 index fell by 0.3% during the month, while the Topix rose by 0.8%.

Investors in Japan had been unsettled by events in Greece, as the International Monetary Fund (IMF) agreed a €110bn (£95bn) aid package to help Greece tackle its debt crisis and credit ratings agency Standard & Poor’s downgraded the credit ratings of Greece, Spain and Portugal.

The IMF expects Japan’s economy to grow by 1.9% during 2010, compared with its forecast four months ago of growth of 1.7%. Exports are helping the country’s economic expansion, driven by increasing demand from developing economies, and major exporters have benefited from the yen’s ongoing weakness against the US dollar. For example, LCD screen maker Sharp expects net income to rise by more than 1000% this year amid soaring demand for 3D panels.

The Bank of Japan (BoJ) continues to look for ways to support Japan’s economic recovery and is considering additional monetary easing measures to boost growth. The central bank aims to increase credit to lenders in order to ensure they in turn are able to lend to Japanese companies, thereby supporting the economy.

Japan’s economy has been lifted by improvements in overseas economic conditions, but the BoJ remains concerned there is insufficient momentum to support a self-sustaining recovery in domestic private demand. Nevertheless, the Tankan survey of Japanese business sentiment indicated that sentiment continued to improve, particularly among larger companies.

The BoJ maintained Japanese interest rates at 0.1% in April. An improvement in private domestic consumption has been underpinned by loose monetary policy, despite relatively high unemployment. The BoJ expects economic progress to be restrained for some time, but believes that, once the corporate sector picks up, the household sector will follow suit. Household spending, wages and job vacancies appear to be on the rise, although the rate of unemployment increased to 5%.

Prices fell for a 13th consecutive month during March. Cheap imported products from China and India are helping to keep prices down, although the effects are being offset to some degree by higher commodity prices. The BoJ expects the problem of deflation to abate once demand improves, but warned that high commodity prices might eventually lead to a larger-than-expected rise in inflation.