Japanese Stock Market Outlook

SMAM monthly comments & views - December 2015 -

Japanese Economy

Private consumption recovered in 3Q and also negative effects from slowdown in China seems gradually easing for Japanese economy. Fiscal and monetary measures can be expected in Japan early next year, which should make Japanese economy more light-footed on its recovery path.

• GDP forecast for FY2015 was upgraded from +0.6% to +0.8% on recent observation of rebounds in private

consumption and possibly stabilizing exports and industrial production. Forecast for FY2016 was also upgraded from

+0.9% to +1.0%.

• 3Q (Jul-Sep) GDP was -0.8% QoQ annualized, for which cut down in inventory and weak private capital investment

were main cause. Private consumption has recovered in 3Q and it is expected to lead the GDP growth going forward.

GDP is forecast to start growing again from 4Q.

Japanese Stock Markets

Risk-off mode has moderated, which made global markets to rebound. The Japanese stock market will be in a range bound move as US interest rate hike is forecast in Dec. The market will find a more spring in its steps in early next year when fiscal and monetary measures are brought in as expected.

• Markets rebounded from the trough on additional policy measures and confirmation of continuing economic

growth in the US. PER for Japan stays low and attractive compared to US and Europe.

• There is a huge potential if shareholder returns from Japanese companies improves to catch up peers in the

US and Europe. If such improvements can be achieved, it would make a strong tailwind for Japanese stocks for

the long term.

Executive summary

1

Notes: Macro and market views are as of November 16th and 18st 2015 respectively, and subject to updates thereafter without notice

Outlook for Japanese Economy

2

3

GDP forecast for FY2015 was upgraded from +0.6% to +0.8% on recent observation of rebounds in private

consumption and possibly stabilizing exports and industrial production. Forecast for FY2016 was also

upgraded from +0.9% to +1.0%.

For FY2016, private sector is expected to show a reasonable growth, consumption at +1.9%, housing

investment at +4.1% and capital investment at +1.7%. Contraction in the public capital investment is the main

drag, for which “special spending program of reconstruction from the earthquake and tsunami in 2011” comes

to an end.

Notes: E=SMAM forecasts. SMAM views are as of Nov. 16th, 2015 and subject to updates thereafter without notice Source: Cabinet Office, Bank of Japan, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts

(%, YoY except Net Exports)

SMAM economic outlook for FY15-16

Real GDP growth 1.0% 2.1% -0.9% 0.8% 1.0%

Private Consumption Expenditure 1.8% 2.5% -3.1% 0.6% 1.9%

Private Housing Investment 5.7% 9.3% -11.6% 3.9% 4.1%

Private Capital Investment 1.2% 4.0% 0.5% -0.2% 1.7%

Public Consumption Expenditure 1.5% 1.6% 0.4% 1.3% 0.2%

Public Capital Investment 1.0% 10.3% 2.0% 1.1% -0.2%

Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% 0.0% -0.2%

Exports -1.4% 4.4% 7.9% 1.2% 3.1%

Imports 3.6% 6.7% 3.6% 1.2% 4.6%

Nominal GDP 0.1% 1.8% 1.6% 1.9% 2.0%

GDP Deflator -0.9% -0.3% 2.5% 1.2% 0.9%

FY15E FY16EFY12 FY13 FY14

4

3Q (Jul-Sep) GDP was -0.8% QoQ annualized, for which cut down in inventory and weak private capital

investment were main cause.

Private consumption has recovered in 3Q and it is expected to lead the GDP growth going forward. GDP is

forecast to start growing again from 4Q.

SMAM economic outlook for FY15-16

-20

-15

-10

-5

0

5

10

FY13Q1 Q2 Q3 Q4 FY14Q1 Q2 Q3 Q4 FY15Q1 Q2 Q3 Q4 FY16Q1 Q2 Q3 Q4 FY17Q1

Private Consumption

Private Housing Investment

Private Capital Investment

Public Investment

Others

Net Export

Real GDP

Forecast by SMAM

(QoQ % annualized) Real GDP and contribution by components

Notes: E=SMAM forecasts. SMAM views are as of Nov.16th, 2015 and subject to updates thereafter without notice Source: Cabinet Office, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts .

Negative effects from global economic deceleration on Japanese exports might be easing

After a sharp fall in exports in 2Q, total exports from Japan recovered to positive in 3Q, though exports to China

was still deteriorating.

5

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q

10 11 12 13 14 15

China

Asia excl. China

U.S.

EU

Others

Total Exports

Total Exports and contribution by destinations (QoQ%)(QoQ %)

(Source) Ministry of Finance and Bank of Japan, compiled by SMAM

6

Manufacturing Global PMI ticked up in October after 7 consecutive month of decline. Keep watchful eyes for

whether this recovery continues.

42.0

44.0

46.0

48.0

50.0

52.0

54.0

56.0

58.0

60.0

Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15

Markit Manufacturing PMI

Global USA JAPAN EU China

(Points)

(Source) DataStream

Data period from Dec. 2012 to Oct. 2015

The latest PMI indicates recovery in the global manufacturing sector

Japan is in a solid inflationary environment when fresh food and energy were excluded

Underlying CPI trend is solidly rising when fresh food and energy were excluded, which is watched by BOJ.

Lower energy prices are helping companies, however, the benefit has not yet reached consumers who are

feeling higher cost of living.

7

-1.60%

-1.40%

-1.20%

-1.00%

-0.80%

-0.60%

-0.40%

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

1 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3 4 5 6 7 8 91011121 2 3

11 12 13 14 15 16 17

CPI and key components (YoY %)

Forecast by SMAM

Note: Excluding direct impact from consumption tax hike in April 2014.

(Source) Ministry of Internal Affairs & Communications, forecast by SMAM.

Core CPI( excl. fresh food)

EnergyFood

CPI watched by BOJ( excl. fresh food & energy)

8

Increase in regular wage has been positive for consumers

Regular wage payment has been increasing YOY since January 2015, which has been positive for consumers.

Whether this increasing trend in wage can be sustained in and after FY2016 is quite important for the Japanese

economy, and underlying strength in corporate earnings requires close attention.

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9

12 13 14 15

Overtime etc

Bonus

Regular wage

Tot cash wage paymentYOY%

Cash wage payment and contribution by components（YOY %）

(Source) Ministry of Health, Labor and Welfare

Outlook for Japanese Stock Markets

9

Stock market outlook: The stock market is waiting for further stimulus measures

SMAM short-term view Risk-off mode has moderated, which made global markets to rebound. The Japanese stock market will be in a

range bound move as US interest rate hike is forecast in Dec. The market will find a more spring in its steps in early next year when fiscal and monetary measures are brought in as expected.

Longer-term outlook (6-months and beyond) Chinese economy is expected to gradually stabilize as policy measures buildup further and start to take effect. The Japanese stock market will get firmer as fiscal measures and additional monetary stimulus are expected in

early next year and further economic policies and initiatives can be announced running up to the upper house election expected in July 2016.

Note: SMAM’s Projection is as of November 18st 2015 and subject to updates without notice

10

700

900

1,100

1,300

1,500

1,700

1,900

2,100

Ju

l-1

2

Au

g-1

2

Se

p-1

2O

ct-

12

No

v-1

2D

ec-1

2

Ja

n-1

3

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-1

3

Ju

n-1

3Ju

l-1

3

Au

g-1

3

Se

p-1

3O

ct-

13

No

v-1

3D

ec-1

3

Ja

n-1

4

Fe

b-1

4M

ar-

14

Ap

r-1

4M

ay-1

4

Ju

n-1

4Ju

l-1

4

Au

g-1

4

Se

p-1

4O

ct-

14

No

v-1

4D

ec-1

4

Ja

n-1

5

Fe

b-1

5M

ar-

15

Ap

r-1

5M

ay-1

5

Ju

n-1

5Ju

l-1

5

Au

g-1

5

Se

p-1

5O

ct-

15

No

v-1

5D

ec-1

5

Ja

n-1

6

Fe

b-1

6M

ar-

16

Ap

r-1

6M

ay-1

6

Ju

n-1

6Ju

l-1

6

Au

g-1

6

Se

p-1

6O

ct-

16

No

v-1

6D

ec-1

6

TOPIX

Forecast range upside

Forecast range downside

TOPIX index forecast range by SMAM

(Source) TOPIX: Tokyo stock exchange, Forecast by SMAM

(Points)

Base scenario & Upside / Downside risks for our forecasts

Our Base Scenario is assuming the following views:

• Global economic recovery to be sustained led by strong US economy

• Japan’s private consumption to grow though mildly supported by higher real wages growth

• Growing expectation for positive corporate earnings revisions due to weaker JPY

• Reflationary policy to be continued toward the next consumption tax hike

Upside Risks include:

• Stronger-than-expected global growth

• Stronger-than-expected measures by Abe government

Downside Risks include:

• Unexpectedly large impact from the process of US monetary policy normalization

• Concern over emerging economies including China

• Increasing geopolitical concerns

11

12

Corporate earnings are expected to keep growing despite increasing pressure on top-line sales. Lower

costs such as energy and materials have been supportive so far.

Some caution is required as analysts are revising earnings forecasts more often downward than

upward recently.

Earnings growth is expected to continue for Japan with a caution for down-revisions

(10)

10

30

50

70

90

110

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2003/12 2005/06 2006/12 2008/06 2009/12 2011/06 2012/12 2014/06 2015/12 2017/06E

PS

(Ye

n)

TO

PIX

ＴＯＰＩＸ and EPS

Source : Bloomberg, DataStream

IBES Consensus EPS

TOPIX

12M FWD EPS

18M FWD EPS

Historical EPSConsensus Estimate

As of Oct. 2015

-40%

-30%

-20%

-10%

0%

10%

20%

30%

10/09 11/09 12/09 13/09 14/09 15/09

TOPIX Earnings Forecast Revision Index

Notes : Revision index = %of Analyst upgrades out of total Topix firms - %of downgrades. Calender year, weeklySource : IBES,SMAMUp to Nov. 4th

13

Huge potential for improving total shareholder returns

13

Total

shareholder

return ratio

a) + b)

Dividend

payout ratio

a)

Share

buyback/

Shareholder

earnings

b)

Japan 36.2% 25.9% 10.3%

USA 85.7% 34.7% 51.0%

Europe 84.1% 62.6% 21.4%

Notes: Data is for 2013. TOPIX for Japan, S&P500 for USA and STOXX Europe 600 for Europe.

(Source) FactSet, compiled by SMAM.

Comparison of shareholder returns among major stock markets

There is a huge potential if shareholder returns from Japanese companies improve to catch up peers in the US

and Europe.

If such improvements can be achieved, it would make a strong tailwind for Japanese stocks for the long term.

PER has fallen globally and relative attractiveness for Japan still holds

PER has fallen globally on decelerating economic growth and concern for further deterioration.

Markets rebounded from the trough on additional policy measures and confirmation of continuing economic

growth in the US. PER for Japan stays low and attractive compared to US and Europe.

Better fundamentals in Japan, such as faster earnings growth and improving corporate governance should be

favorable for Japanese equities.

14

8.0

10.0

12.0

14.0

16.0

18.0

20.0

PER of MSCI country indices

Date period from Jan.2012 to Oct.2015

17.0 US

14.3 Japan

15.0 Europe

Note: PER is based on 12 month forward EPS forecast as of the end of each month.(Source) MSCI , IBES , FactSet

USA 8.0%

Europe 6.6%

Japan 11.7%As of 15-Oct-2015

12Month EPS

Growth forecast

PER for Japanese stock market seems attractive in historical comparison

Since Abenomics started, PER for Japanese stock market, in TOPIX index, has been in a range between 13x

and 16x.

Current PER around 14x is in a lower side of this range and downside for the stock market seems limited.

15

300

500

700

900

1,100

1,300

1,500

1,700

1,900

Oct

-05

Dec

-05

Feb-

06A

pr-0

6Ju

n-06

Aug

-06

Oct

-06

Dec

-06

Feb-

07A

pr-0

7Ju

n-07

Aug

-07

Oct

-07

Dec

-07

Feb-

08A

pr-0

8Ju

n-08

Aug

-08

Oct

-08

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Feb-

10A

pr-1

0Ju

n-10

Aug

-10

Oct

-10

Dec

-10

Feb-

11A

pr-1

1Ju

n-11

Aug

-11

Oct

-11

Dec

-11

Feb-

12A

pr-1

2Ju

n-12

Aug

-12

Oct

-12

Dec

-12

Feb-

13A

pr-1

3Ju

n-13

Aug

-13

Oct

-13

Dec

-13

Feb-

14A

pr-1

4Ju

n-14

Aug

-14

Oct

-14

Dec

-14

Feb-

15A

pr-1

5Ju

n-15

Aug

-15

TOPIX TOPIX and PER based on 12month forward EPS

16x

15x

14x

13x

12x

Date is up to October 30th 2015

PM Abe's 2nd term started

Notes: TOPIX: calender year and week-end, P/E ratio is based on 12-month forward EPS of IBESSource: TOPIX: Tokyo Stock Exchange, 12-month forward EPS of IBES: SMAM

Supply-Demand balance: Foreign investors turned to purchasing Japanese equities

Since late October, foreign investors stopped selling and turned to purchasing Japanese equities.

Listing of three Japan Post companies on November 4th was a success. A lot of Japanese private investors

participated shifting money mainly from deposits and made a handsome profit on rising share prices.

16

0

5,000

10,000

15,000

20,000

0

100

200

300

400

500

600

700

2010 2011 2012 2013 2014 2015

Foreign Investor Net-Buys & Nikkei 225

Foreigners' net buy accumlated (LHS)

Nikkei 225 end week(RHS)

Notes: Calendar year, weekly. Foreign investors' net purchase of TSE listed stocksSource: Tokyo Stock Exchage, SMAM

(JPY)(JPY '00bn)

Up to Nov. 6th

17

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Please read this disclaimer carefully. = This material is for non-Japanese institutional investors only. = The research and analysis included in this report, and those opinions or judgments as outcomes thereof, are intended to introduce or

demonstrate capabilities and expertise of Sumitomo Mitsui Asset Management Company, Ltd. (hereinafter “SMAM”), or to provide information on

investment strategies and opportunities. Therefore this material is not intended to offer or solicit investments, provide investment advice or service, or to be considered as disclosure documents under the Financial Instruments and Exchange Law of Japan.

= The expected returns or risks in this report are calculated based upon historical data and/or estimated upon the economic outlook at present,

and should be construed no warrant of future returns and risks. = Past performance is not necessarily indicative of future results. = The simulated data or returns in this report besides the fund historical returns do not include/reflect any investment management fees,

transaction costs, or re-balancing costs, etc. = The investment products or strategies do not guarantee future results nor guarantee the principal of investments. The investments may suffer

losses and the results of investments, including such losses, belong to the client. = The recipient of this report must make its own independent decisions regarding investments. = The opinions, outlooks and estimates in this report do not guarantee future trends or results. They constitute SMAM’s judgment as of the date of

this material and are subject to change without notice. = The awards included in this report are based on past achievements and do not guarantee future results. = The intellectual property and all rights of the benchmarks/indices belong to the publisher and the authorized entities/individuals. = This material has been prepared by obtaining data from sources which are believed to be reliable but SMAM can not and does not guarantee its

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