Japanese corporations, by and large, chalked up their biggest profit gains ever in the financial year ended March 31, breaking previous records for the third straight year. But numbers can be misleading. Earnings statistics indicate economic movements and trends but do not necessarily tell what these changes mean. So a closer look at profit performance is in order.

The surge in big-business incomes suggests an economic recovery supported largely by exports to major markets such as China. In other words, weakness in domestic demand continues. This situation cannot help but raise questions about the makeup of the Japanese economy and the nature of the government's structural-reform policy.

One thing notable about fiscal 2004 earnings is that profits increased much more than sales. This shows that falling prices for materials have contributed significantly to cost reduction. In fact, an overwhelming number of large companies have registered double-digit profit increases from a year earlier. By contrast, two-digit sales increases have been recorded by a relatively small number, such as petroleum, machinery and steel companies benefiting from strong Chinese demand for raw materials as well as from higher oil prices.