With concerns about intervention by the authorities showing no sign of easing, strong corporate earnings are emerging but the upside for Japanese stocks is becoming increasingly limited. Concern is growing over the contribution of yen-dependent profits.
Concerns that the authorities may intervene in the foreign-exchange market again are complicating sentiment among Japanese stock investors. The prevailing view that intervention could push the yen higher and pressure exporters' profits is raising the bar for further share-price gains.
Many companies have exceeded analysts' expectations in the April-June quarter, but cases of share prices falling the day after strong earnings announcements are becoming increasingly common. Investors are sensitive to the yen's movements and the pace of interest-rate hikes, and the view is spreading that the risk of a stronger yen will weigh on stock-market performance.
Experts point to the possibility that the past strength driven by a weaker yen could unravel, and say future upward earnings revisions will require improvement in underlying business conditions rather than currency effects. Caution is spreading toward stocks whose profit growth was driven primarily by the weaker yen.
Examples include Honda, whose earnings benefited from a weaker yen that boosted operating profit, and Canon and Takeda Pharmaceutical Company, whose share prices retreated as the yen's positive effect faded. Investors are increasingly pursuing a bottom-up approach to stock selection.