Moody's: Japanese corporates to remain cautious in 2016 on muted domestic and global growth

Moody's Japan K.K. says that muted domestic and global GDP growth will support broadly stable earnings for Japan's (A1 stable) non-financial corporates in 2016, although those in steel and oil & gas remain most pressured.

"Japan's corporates remain cautious under subdued domestic and global conditions, and will broadly focus on cutting costs, reducing leverage and maintaining credit quality and ratings," says Masako Kuwahara, a Moody's Vice President and Senior Analyst.

"Nevertheless, moderate overseas economic growth should support exporters and global manufacturers, while lower oil and commodity prices will benefit importers and domestic companies -- even if partially offset by the weaker yen," adds Kuwahara.

Kuwahara was speaking on the release of Moody's 2016 outlook presentation for Japanese non-financial corporates.

Moody's expects 0.5%-1.5% GDP growth in Japan in 2016, behind the already modest 2.5%-3.5% growth rate expected for the G20 economies.

But while China's (Aa3 stable) economic slowdown drives the softer outlook for many economies, Moody's expects relatively limited direct impact on Japanese corporates.

In addition, corporate earnings should be supported by a gradual improvement in emerging market economies, while the weakened yen should benefit the foreign earnings of most corporates.

By sector, Moody's says Japan's steel and oil & gas corporates are most exposed to sluggish domestic demand and growing uncertainty from China's economic slowdown. These factors will keep EBITDA under pressure, with EBITDA to decline 10%-15% for oil & gas companies.

Low but stabilizing raw material prices will prevent the steel companies from incurring further sizeable valuation losses, but also pressure the profit margins of exploration and production companies.

Moody's says corporates in Japan's auto sector continue to benefit from solid demand in the US and Europe and a weaker yen. And while their limited exposure to China insulates them from related risk in the near term, in the longer term this could jeopardize their market position.

In the telecom sector Moody's expects competition to intensify as new mobile virtual network operators (MVNO) enter the market and the government continues its indirect intervention. Nevertheless, margins will remain largely supported by the effective oligopoly status in the mobile sector.

Business fundamentals in the shipping sector remain weak, but will not materially decline says Moody's. After a sluggish year last year, shipping companies should see modest EBITDA growth in 2016, as the impact of overcapacity in the sector is offset by cost reductions. Bunker fuel prices will remain low, but so will freight rates.

Moody's further expects Japanese utilities' companies will see EBITDA drop in 2016 absent the boost from the sharp decline in oil prices seen in 2015. The industry is also undergoing substantial restructuring, which could intensify competition, increase earnings volatility and unpredictability, as well as credit risk.

The restructuring could lead the credit quality of the electric utilities to start diverging over the longer term, although the ultimate credit impact will depend on the pace at which the restructuring unfolds, and the amount of time taken for the utilities to strengthen their financial profiles.

Moody's expects broadly stable conditions for corporates in the general trading, electronics and pharmaceutical sectors.