Overseas demand drives strong industry profits, Japanese stocks start the third-quarter earnings season robustly.

Driven by overseas demand, the Q3 performance of Japanese stocks already disclosed is significantly better than Q2, with the core driving force of profit momentum coming from overseas demand sectors, while domestic demand industries remain relatively weak.

According to Chase the Wind Trading Desk, JPMorgan stated in its November 4th report that about 30% of companies on Japan’s TSE Prime Market have released Q3 reports, and the performance is significantly better than that of Q2: revenue for July-September increased by 2.8% year-on-year, operating profit by 11.0%, and net profit surged by 28.7%.

The core driver of this profit momentum comes from the overseas demand sector, while domestic demand industries remain relatively weak.

In terms of sub-sectors, electronics & precision instruments (including Hitachi, Fujitsu, NEC, Advantest, etc.) were the main contributors to net profit growth, while electric power & natural gas sectors also performed strongly. In contrast, the auto sector’s net profit declined by 0.6 percentage points year-on-year, and the food sector dropped by 0.1 percentage points due to weak consumption.

More than 50% of companies beat the Bloomberg consensus estimates, but the upside surprise rate for export-oriented manufacturers (15.4%) is much higher than for domestic demand-oriented companies (7.2%).

The report points out that export-oriented companies performed better, partly because market expectations were relatively conservative given tariff impacts and uncertainty in the U.S. economy.

Although 52 companies have raised their full-year guidance, major auto manufacturers have yet to announce earnings, and tariff impacts remain unclear.

Notably, Japanese companies continue to assume an exchange rate of 144 yen to the dollar for fiscal year 2025, below the current market rate of 154 yen, which provides a buffer for overseas business profitability.

Share buybacks show signs of recovery. Since October, TSE index components have announced 0.7 trillion yen in buyback plans, in line with the same period in 2024. Advantest announced a 150 billion yen buyback (2% of free float), and Recruit Holdings plans a 250 billion yen buyback (3%).

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