Japanese companies recently reported impressive earnings growth, but the underlying trend appears less solid than it seems, indicating that these results alone are unlikely to drive Japanese shares beyond their current narrow range. According to Bloomberg data, net profits for Topix 500 firms rose 13% year-over-year to a record high, with 60% of firms exceeding expectations, marking a significant recovery from a previous quarter’s downturn. However, the outlook dims when accounting for the effects of a weak yen and one-off items. Rie Nishihara, chief equity strategist at JPMorgan Securities Japan Co., noted, “While bottom-line profit was strong, core business operating profit was relatively weak.” Fumio Matsumoto, chief strategist at Okasan Securities Co., pointed out that operating income—reflecting earnings from core business activities—grew only 3.3% compared to the previous year, which is over 10 percentage points lower than the growth in current profits, creating an unusually large disparity. This gap is partly attributed to the weak yen, which boosts current and net income but not operating profits, particularly for automakers and precision machinery manufacturers. For instance, Toyota Motor Corp. reported net income of ¥2.19 trillion in the third quarter, exceeding analysts’ forecasts by ¥1 trillion, yet its operating profit fell short of estimates by more than 10%. This shortfall is linked to Toyota’s declining sales, which have dropped for four consecutive quarters compared to the previous year, partly due to a certification scandal. Although there was an initial rise in shares, Toyota has underperformed the Topix by about four percentage points since the earnings report. Nonetheless, investors generally view the earnings as positive. Excluding SoftBank Group, known for its volatile bottom line due to significant investments in global tech startups, net income increased by 24%, marking the largest rise in four quarters. Analysts identified areas of strength, including banks, AI-related companies, and domestic firms involved in capital spending, such as construction companies. Some stocks that performed well were not necessarily those that reported strong results or initiated share buybacks, suggesting that the market may not have fully absorbed the earnings information, according to Nishihara. Positive earnings may not have translated into higher share prices as investors remain focused on U.S. tariffs and the uncertainty surrounding trade policy, making it challenging for benchmarks to break free from their narrow ranges over the past six months and hindering the potential for Japanese stocks to achieve the remarkable gains seen in recent years. “There were a decent number of positive surprises, and overall the earnings were reassuring,” stated Kohei Onis.