Japanese Stock Market Outlook
SMAM monthly comments & views - May 2016 -
Japanese Economy
Large fiscal spending is now expected for FY 2016 and 2017. Forecast for Public Capital Investment was raised from -2.9% to +1.4% for FY 2016 and from +0.3% to +4.0% for FY2017. GDP forecast for FY2017 was lifted from -0.2% to +0.2%.
• Recent earthquake in Kumamoto, Kyushu will pull down private consumption for Apr-Jun to some extent. A series of
earthquake has not completely stopped yet and some factories were hit, however, the damage to the Japanese
economy is not going to be as large as the case in the past such as Hanshin-awaji in 1995 and East Japan in 2011.
• Important political events are scheduled in the first half of this year. A G7 meeting is held in May in Ise-Shima Japan.
PM Abe is keen to make it successful running up to an Upper House election in July. Fiscal stimulus is going to be a
major issue.
Japanese Stock Markets
As well as the large fiscal spending now expected, BOJ is likely to make further easing by June in our main scenario. Such stimulus measures are expected to gradually lift Japanese economy and investors sentiments.
• Conservative earnings guidance by Japanese companies are expected for FY2016 when they announce FY2015
results in May, which could cap the upside for the stock market for the short term.
• Chinese economy seems reviving some and US economy seems gathering strength. If this recovering trend continues,
hard hit external demand related stocks have a chance for revival, which could lead the Japanese stock market into a
upward path again.
Executive summary
1
Notes: Macro and market views are as of Apr.14th and 18th 2016 respectively, and subject to updates thereafter without notice
Outlook for Japanese Economy
2
3
Large fiscal spending is now expected for FY 2016 and 2017. Forecast for Public Capital Investment was
raised from -2.9% to +1.4% for FY 2016 and from +0.3% to +4.0% for FY2017. GDP forecast for FY2017 was
lifted from -0.2% to +0.2%.
Current forecast assumes consumption tax to rise from 8% to 10% in April 2017 as scheduled. Odds for
postponing this tax hike is rising and if it is postponed GDP forecast will be +0.6% for FY2016 and +0.8% for
FY2017.
Notes: E=SMAM forecasts. SMAM views are as of Apr. 14thand 18th , 2016 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 FY15-17
Real GDP growth 0.9% 2.0% -1.0% 0.7% 0.8% 0.2%
Private Consumption Expenditure 1.7% 2.3% -2.9% -0.5% 0.8% -0.3%
Private Housing Investment 5.7% 8.8% -11.7% 2.3% 2.7% -3.9%
Private Capital Investment 0.9% 3.0% 0.1% 2.2% 2.2% -1.3%
Public Consumption Expenditure 1.5% 1.6% 0.1% 1.4% 1.0% 0.8%
Public Capital Investment 1.0% 10.3% -2.6% -1.8% 1.4% 4.0%
Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% 0.1% 0.0% 0.3%
Exports -1.4% 4.4% 7.8% 0.6% 2.6% 3.0%
Imports 3.6% 6.7% 3.3% 0.1% 3.0% 1.8%
Nominal GDP 0.0% 1.7% 1.5% 2.0% 0.4% 1.4%
GDP Deflator -0.9% -0.3% 2.5% 1.3% -0.4% 1.2%
FY15E FY17EFY12 FY13 FY14 FY16E
4
Recent earthquake in Kumamoto, Kyushu will pull down private consumption for Apr-Jun to some extent. A
series of earthquake has not completely stopped yet and some factories were hit, however, the damage to the
Japanese economy is not going to be as large as the case in the past such as Hanshin-awaji in 1995 and East
Japan in 2011.
Private consumption is forecast to make recovery from Jul-Sep quarter. A rush demand before consumption tax
hike and its reversal contraction are currently included in our forecast for 2017.
SMAM quarterly economic outlook
Notes: SMAM views are as of Apr.14th,and 18th ,2016 and subject to updates thereafter without notice. Source: Cabinet Office, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts .
-20
-15
-10
-5
0
5
10
13Q1 Q2 Q3 Q4 14Q1 Q2 Q3 Q4 15Q1 Q2 Q3 Q4 16Q1 Q2 Q3 Q4 17Q1 Q2
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
Total export volume is not deteriorating despite sluggishness to China and Asia
Export volume from Japan is not deteriorating despite weakness to China and Asia.
Latest strength in export to EU might be exceptional, however, exports to EU and USA has been rather solid so
far.
5
Note: Blue lines are for monthly and red lines are for quartrerly data.
(Source) Ministry of Finance, Bank of Japan
600
700
800
900
1000
1100
1200
2010
2011
2012
2013
2014
2015
2016
(yen billion) USA
400
450
500
550
600
650
700
750
2010
2011
2012
2013
2014
2015
2016
(yen billion) EU
700
800
900
1000
1100
1200
1300
1400
2010
2011
2012
2013
2014
2015
2016
China(yen billion)
4800
5000
5200
5400
5600
5800
6000
6200
2010
2011
2012
2013
2014
2015
2016
(yen billion) All destinations
Export volume
6
Trade balance is recovering as Japanese economy feels full benefit from low energy cost
Trade balance is recovering and expected to stay in positive territory. Current balance is also recovering to the
historically high level.
This is a double edged sword for the economy and stock market. This positive balance shows relative strength
of the Japanese industries and national finance ,however, it could also mean the fundamental economic force
for weaker yen is receding, though flow of capital is also important for the direction of currencies.
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Trade balance
Current balance
Forecast by SMAM
Trade balance & Current balance as % of GDP
(Source) Ministry of Finance, Bank of Japan
7
Increase in number of employees is driving the growth in aggregated real income
The spring wage negotiation “Shunto” this year was a little disappointing due to a growing cautiousness on
corporate profits, which could weigh on the private consumption.
If you look at it from a different angle, however, aggregated real income has been increasing rather solidly
driven by increase in number of employees.
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
2012 2013 2014 2015 2016
Nominal wage Number of employees Inflation Aggregated employees real income
(Source) Ministry of Health, Labor and Welfare
(%)
Aggregated employees' real income and contribution by components (YoY%)
8
Core CPI is forecast to dip into negative territory in mid 2016
Core CPI, which excludes fresh food, is forecast to fall into negative numbers in the mid 2016.
CPI watched by BOJ, which excludes fresh food & energy, was unchanged at 1.1% in February, however, the
momentum seems declining and further easing from BOJ is expected this year.
0.00
-0.91
1.1
-1.4
-1.2
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11
2013 2014 2015 2016 2017
CPI and contribution by main components(YoY %)
(Source) Ministry of Internal Affairs & Communications, forecast by SMAM.
Forecast by SMAM
Core CPI(excl. fresh food)
Food(excl. fresh food)
Energy
CPI watched by BOJ(excl. fresh food & energy)
Note: Excluding direct impact from consumption tax hike in April 2014.
Outlook for Japanese Stock Markets
9
Stock market outlook: waiting for fiscal stimulus measures and global economic recovery
SMAM short-term view Conservative earnings guidance by Japanese companies are expected for FY2016 when they announce
FY2015 results in May, which could cap the upside for the stock market for the short term.
Longer-term outlook (6-months and beyond) Large fiscal spending is now forecast in Japan. BOJ is expected to make further easing by June in our main
scenario. Such stimulus measures are expected to gradually lift Japanese economy and investors sentiments. Chinese economy seems reviving some and US economy seems gathering strength. If this recovering trend
continues, hardly hit external demand related stocks have a chance for revival, which could lead the Japanese stock market into a upward path again.
Note: SMAM’s Projection is as of Apr. 18th 2016 and subject to updates without notice
10
700
900
1,100
1,300
1,500
1,700
1,900
Ja
n-1
3
Fe
b-1
3M
ar-
13
Ap
r-1
3
Ma
y-1
3
Ju
n-1
3
Ju
l-1
3
Au
g-1
3
Se
p-1
3
Oct-
13
No
v-1
3
De
c-1
3
Ja
n-1
4
Fe
b-1
4M
ar-
14
Ap
r-1
4
Ma
y-1
4
Ju
n-1
4
Ju
l-1
4
Au
g-1
4
Se
p-1
4
Oct-
14
No
v-1
4
De
c-1
4
Ja
n-1
5
Fe
b-1
5M
ar-
15
Ap
r-1
5
Ma
y-1
5
Ju
n-1
5
Ju
l-1
5
Au
g-1
5
Se
p-1
5
Oct-
15
No
v-1
5
De
c-1
5
Ja
n-1
6
Fe
b-1
6M
ar-
16
Ap
r-1
6
Ma
y-1
6
Ju
n-1
6
Ju
l-1
6
Au
g-1
6
Se
p-1
6
Oct-
16
No
v-1
6
De
c-1
6
Ja
n-1
7
Fe
b-1
7M
ar-
17
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 economy does not enter into a recession.
• Japan’s private consumption to grow mildly supported by wage growth.
• Japanese corporate earnings keep growing at higher pace than in peer countries.
• 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.
• Falling oil price causes disastrous problem for oil producing countries.
• Increasing geopolitical concerns.
11
12
The chart below tracks the earnings planning by large enterprises released in BOJ Tankan quarterly
business survey. YoY negative growth of -2.0% was planned for FY2016 in March survey.
As a usual practice, Japanese companies started planning conservatively and revised it upward except
in FY2008 and 2009 affected by financial crisis and FY 2011 hit by East Japan Earthquake and
Tsunami.
Earnings planning for the fiscal year 2016 started conservatively just as a usual practice
-2.0
(50)
(40)
(30)
(20)
(10)
0
10
20
30
40
50
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Change in earnings forecasts by companies for each fiscal year,BOJ TANKAN Business survey , large enterprises
(YoY %)
Survey in March 2016
(Source) Bank of Japan
Note: For each year, data is survey in March, June, September ,December followed bythe last estimate and actual result.
13
According to IBES consensus estimate, historical earnings have been revised downward recently and
1Y forward earnings forecast by analysts is likely to follow downward for a while.
SMAM covers 216 companies excluding financials for regular researches and forecasts recurring
profits to grow 7.6% for FY 2015 ending in March and 5.6% for FY 2016 assuming 115 yen/$ rate.
Companies will announce own forecasts for FY 2016 around in May. If yen/$ stays around current level
below 110, companies’ earnings guidance for FY 2016 could be conservative.
Historical earnings are revised downward and forward earnings forecast to follow
92.1
106.1
15.2%
0%
10%
20%
30%
40%
50%
60%
70%
0
20
40
60
80
100
120
11/03 12/03 13/03 14/03 15/03 16/03
IBES EPS consensus forecast for TOPIX
Historical EPS (left) 12M Forward EPS forecast (left) 12M forward forecast growth (right)
Up to Apr. 14th, 2016(Source) Datastream, IBES
(Points)
PER is in the lower half of the range for the current PM Abe’s tenure
Since Abenomics started, PER for Japanese stock market, in TOPIX index, has been in a range between 12x
and 16x except for temporary overshooting.
Even considering further down-revision in earnings, current PER doesn't look expensive.
14
300
500
700
900
1,100
1,300
1,500
1,700
1,900
Ja
n-0
7M
ar-
07
Ma
y-0
7Jul-0
7S
ep-0
7N
ov-0
7Ja
n-0
8M
ar-
08
Ma
y-0
8Ju
l-0
8S
ep-0
8N
ov-0
8Ja
n-0
9M
ar-
09
Ma
y-0
9Ju
l-0
9S
ep-0
9N
ov-0
9Ja
n-1
0M
ar-
10
Ma
y-1
0Ju
l-1
0S
ep-1
0N
ov-1
0Ja
n-1
1M
ar-
11
Ma
y-1
1Jul-1
1S
ep-1
1N
ov-1
1Ja
n-1
2M
ar-
12
Ma
y-1
2Ju
l-1
2S
ep-1
2N
ov-1
2Ja
n-1
3M
ar-
13
Ma
y-1
3Jul-1
3S
ep-1
3N
ov-1
3Ja
n-1
4M
ar-
14
Ma
y-1
4Ju
l-1
4S
ep-1
4N
ov-1
4Ja
n-1
5M
ar-
15
Ma
y-1
5Ju
l-1
5S
ep-1
5N
ov-1
5Ja
n-1
6M
ar-
16
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
TOPIX
Data is up to Apr.15th 2016 when TOPIX was 1361.40
TOPIX and PER based on 12-month forward EPS
16x
12x
13x
14x
15xPM Abe's 2nd term started
Foreign investors are selling and pension funds are buying
Foreign investors continue to sell Japanese equities whereas trust banks, mostly representing pension funds,
are the largest purchaser.
Foreign investors’ selling eased in April, however, they sold 176 billion yen of exchange traded futures in the
week between April 4th and 8th.
15
500
700
900
1100
1300
1500
1700
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr
Net purchasing of Japanese equities by investor type
Foreign Trust bank Individual Inv. Trust Fund Business corp TOPIX
2015
TOPIX (points)
Bar charts (Yen billion)
(Source) Japan Exchange Group
Note: Data is for Tokyo stock exchange and Nagoya stock exchangeData for Apr. 2016 is from Apr. 4th to Apr. 8th. Up to Apr. 8th 2016
2016
Political events hold the key for the outlook of Japanese economy and stock markets
Important political events are scheduled in the first half of this year.
A G7 meeting is held in May in Ise-Shima Japan. PM Abe is keen to make it successful running up to an Upper
House election in July.
Fiscal stimulus is going to be a major issue.
16
0
10
20
30
40
50
60
70
80
90
Aug-9
8
Feb
-99
Aug-9
9
Feb
-00
Aug-0
0
Feb
-01
Aug-0
1
Feb
-02
Aug-0
2
Feb
-03
Aug-0
3
Feb
-04
Aug-0
4
Feb
-05
Aug-0
5
Feb
-06
Aug-0
6
Feb
-07
Aug-0
7
Feb
-08
Aug-0
8
Feb
-09
Aug-0
9
Feb
-10
Aug-1
0
Feb
-11
Aug-1
1
Feb
-12
Aug-1
2
Feb
-13
Aug-1
3
Feb
-14
Aug-1
4
Feb
-15
Aug-1
5
Feb
-16
Obuchi
Mori
Koizumi
Abe 1
Fukuda
Aso
Hatoyama
Kan
Noda
Abe 2
Approval ratings of Japanese cabinets by Prime Ministers(%)
(Source) NHK
Apr. 43%
Aug. 37%
Current Abe
Could negative interest rate cause shift in huge household assets in Japan?
In Japan, as much as 53% of huge household assets are held in cash and deposits with minimal yields.
Interest rate for individuals would not become negative yet due to the guidance by the government to financial
institutions, however, individuals might start looking for more yield for their assets.
On the other hand, if negative interest rate confuses financial systems and uncertainty deepens, individuals
could be discouraged to take risks for their savings.
17
53%
14%
34%
2%
5%
4%
5%
13%
9%
10%
34%
17%
26%
32%
33%
4%
3%
3%
0% 20% 40% 60% 80% 100%
Japan
Unites States
Euro area
Currrency & deposites Bonds Investment trusts
Shares & equities Insurance & pension reserves Others
Household financial assets breakdown
Note: Data for Japan & US is Sep. 2015 and for Euro area, Jun. 2015.(Source) Bank of Japan
Total1,684 trillion yen
Total68.9 trillion dollars
Total21.7 trillion euro
18
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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.
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