(Feb 20): Japanese companies have logged record quarterly profits in the three months that ended in December, underpinning the Nikkei 225’s advance to near a historic peak.

Net income at Topix 500 companies rose 46% from year earlier to a record ¥13.9 trillion (US$93 billion or RM443.16 billion) in the October-December quarter, according to data compiled by Bloomberg. Excluding Softbank Group Corp, whose earnings are volatile due to its heavy investment in global tech companies, profits still rose 25%.

The strong earnings suggest the rally that’s pushed major share indices towards record highs has more room to run. Overseas investors from BlackRock Inc to Robeco Institutional Asset Management and Warren Buffett have voiced bullishness towards Japanese stocks.

Surprisingly strong US economic data and a cheaper yen have bolstered exporters including Toyota Motor Corp. Some domestic firms are reaping the benefits of inflation, which lets them push up prices, and improving corporate governance is also making investors more bullish.

“Companies’ mindsets have changed,” said Takashi Hiroki, the chief strategist of Monex Securities Inc. “We’ll see more price hikes as companies are able to pass on cost increases, and that supports their solid earnings and higher stock prices.”

Toyota was among firms that raised their guidance, predicting higher full-year profits due to recovering popularity in hybrid cars and robust US demand. A strong US market helped many other Japanese companies.

Japanese firms have been able to boost profits even after the economy fell into a recession as it contracted for two straight quarters through December. That’s because more and more firms have been able to improve their margins as lingering inflation in Japan allows companies to pass on rising costs to consumers.

Tech underperformers

Some industries marked weak results despite the overall earnings boom. Shares in a number of companies in the electronics sector underperformed after they slashed their annual guidance, suggesting the long-awaited recovery in the chip industry is still patchy. Those firms in one of the biggest sectors in Japan’s market include Alps Alpine Co, Ibiden Co and Taiyo Yuden Co.

Meanwhile, a slump in China’s economy hit companies that are reliant on the world’s second-biggest economy for profits like factory automation equipment maker Omron Corp.

Among the best performers on the other hand were tourism-related firms as well as food companies, as they reaped the benefits of higher prices on top of a rebound in tourists from abroad visiting the nation.

Oriental Land Co, the operator of Tokyo Disneyland, had an operating profit margin of 35.5%, the highest since at least 2005. Railway operators such as East Japan Railway Co and Central Japan Railway Co revised up their guidance. Snack maker Calbee Inc also beat market expectations after price hikes.

All in all, Japanese firms posted an average 10% operating profit margin in the last earnings period, compared with 8.4% a year earlier, according to JPMorgan Chase & Co strategists including Rie Nishihara. Toyota’s margin was 14% last quarter, the highest since at least 2001, according to data compiled by Bloomberg.

The overall strength in earnings is raising optimism as the Nikkei came close to its 1989 peak. Many analysts have raised their price target for the stock gauge in recent days.