Japan April 30, 2009, 2:00PM EST

Japan's Export Rebound

With Japanese output and exports up, plus good news from Honda, Fujitsu, Sharp, and others, hopes rise for a recovery in the second half

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At last, there's some good news for Japan Inc.'s beleaguered executives. Even as Japanese companies report dismal earnings for the fiscal year, Japan's fabled export machine, which has been idling for months, may be returning to life. On Apr. 30 the government announced that output at Japanese factories and refineries was up in March for the first time in six months. That helped buoy the bellwether Nikkei 225 stock index by 3.9%—its first rise in four days—to 8,828.26.

The news came two days after Honda (HMC) surprised analysts by reporting a profit of $1.4 billion for the year ended in March. Also beating analysts' estimates was Mitsubishi Motors (7211.T), which reported on Apr. 27 a smaller-than-expected $567.6 million annual net loss; that was the company's first time in the red in three years, but it expects to turn a small profit this year. "We may be starting to see the bottom," President Osamu Masako told reporters.

Signs of improvement were evident a week earlier: On Apr. 22 the government announced that export volumes rose 1.5% in March compared with February—the first monthly gain in eight months. And for April and May the Economy Trade & Industry Ministry (METI) is forecasting more production gains, of 4.3% and 6.1%, respectively. "It looks like February marked the trough for exports," Macquarie Securities' (MQG.AX) Richard Jerram wrote in a report after the figures were announced. Taken together, the gains suggest that the outlook is brighter. "In the ideal scenario, the economy will hit bottom in the July-September period and grow slightly in the quarter after that," Fujio Mitarai, head of the powerful Keidanren business lobby and chairman at Canon (CAJ), said this week in an interview with the Nikkei, Japan's largest financial daily.

Lower Inventories

Make no mistake, Japan is still suffering from its worst postwar recession. From October to December, GDP contracted 12.1% on an annualized basis and likely shrank 14% in the January-March quarter. (For the entire fiscal year through March, the government estimates that the contraction was 3.1%, the first annual decline since 2001.) The yen isn't cutting into exporters' earnings as it was last year. But to save on costs, manufacturers had halted production for months, laid off tens of thousands of contract workers, and focused on getting rid of a surplus of flat-panel TVs, cars, and air conditioners.

One indication of how drastically they cut back: In the first quarter of this year, car shipments from Japan to overseas markets plunged 63%. During that period automakers managed to lower their inventories from 103 days' worth of product to 72. Now inventories are expected to be close to 55 days, the average before demand went south.

For some automakers that strategy seems to have paid off. Honda's announcement of its $1.4 billion profit came despite a $1.9 billion loss in the January-to-March quarter. Those results were better than what most analysts expected—as were Honda's projections for the year ahead. For the year ending in March 2010, Honda estimates pretax earnings of $417 million despite expecting sales to fall in the U.S. and Europe by 9.6% and 17%, respectively. Honda is expected to ramp up production at factories in the second half of the year.