Don’t Be Fooled By Conservative Japanese Profit Forecasts, Says Goldman Sachs

Beware of the conservative Japanese approach to profit forecasts, Goldman Sachs cautioned in a report.

The brokerage warned that Japanese companies, which typically make conservative forecasts at the beginning of a financial year, may turn even more cautious in their estimates for the year started April 1 because of the yen’s sharp slide in recent weeks. The risk from such caution is that export-oriented companies may use a firmer yen in their calculations, resulting in a forecast that could fall short of market expectations and be perceived as a headwind, it said.

“As the year progresses, we expect earnings to come into line with our more bullish top-down earnings forecast, and our bullish stance on Japanese equity is intact,” it added in a report issued Wednesday.

Goldman Sachs had earlier this month unveiled a one-year price target of 16,000 points for the Nikkei Stock Average JP:NIK , saying that nearly half of the market trades below its book value.

So how conservative are Japanese companies really on their forex estimates?

Gaming giant Nintendo Co. NSANF JP:7974 , which released its fiscal year earnings Wednesday, forecast a net profit of 55 billion yen (around $550 million) for the current financial year, up from 7.1 billion yen in the year ended March 31. The company based its calculations on a dollar USDJPY exchange rate of 90 yen and a euro EURJPY exchange rate of 120 yen. At the time of writing, the dollar was just over 99 yen and the euro slightly under 130 yen.

Canon Inc. CAJ JP:7751 , meanwhile, made its own calculations with the dollar at 95 yen and the euro at 125 yen. The camera maker, which also reported earnings Wednesday, raised the 2013 estimates that it had first unveiled in January.

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