Japanese Stock Market Outlook
SMAM monthly comments & views - June 2016 -
Japanese Economy
Real GDP for Jan-Mar 2016 was +0.4% QoQ, +1.7% when annualized, which was better than forecast. Private consumption was +0.5% QoQ though it was inflated by leap year effects.
• Capital investments, especially from non-manufacturing industries show strength and also manufacturing industries
show some resilience when interpreted by recent machinery orders statistics. Government has set nominal GDP target
of yen 600 trillion in FY2021. Productivity improvement in the service sector is expected to play a key roll with an
ambitious target of 2% per annum improvement.
• Despite recent weakness in consumer spending, fundamentals surrounding households are still solid. Tight labor
market should provide job security and aggregated real wage continues to grow where all three factors, nominal wage,
number of employees and low inflation contributed in March.
Japanese Stock Markets
Negative news on corporate earnings has been completed. There are many events waiting ahead such as next US interest rate hike, possible monetary & fiscal stimulus in Japan, Upper House election in July. High volatility is expected to stay, however, expectation for further stimulus could lift the stock market for the short term.
• Majority of the Japanese companies set 110 yen/dollar rate for the earnings forecast for FY2016. If yen stabilizes
around the current level, further negative currency impact can be avoided, and conservative earnings estimates by
companies can be gradually revised upward.
• Sluggish Chinese economy is likely to continue. US economy shows some strength, however, it makes FED rate hike
more possible. Overseas economy is going to stay patchy. The key for the Japanese economy and stock market will be
what kind and amount of stimulus measures are taken and how effective they turn out.
Executive summary
1
Notes: Macro and market views are as of May 18th and 20th, 2016 respectively, and subject to updates thereafter without notice
Outlook for Japanese Economy
2
3
SMAM’s Real GDP forecast for FY2016 and 2017 are unchanged from the previous month. Recently
announced Jan-Mar GDP of annualized 1.7% was better than preceding forecasts even though inflated by leap
year effects.
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 +0.5% for FY2016 and +0.9% for
FY2017.
Notes: E=SMAM forecasts. SMAM views are as of May 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% -0.9% 0.8% 0.8% 0.2%
Private Consumption Expenditure 1.7% 2.3% -2.9% -0.3% 0.9% -0.3%
Private Housing Investment 5.7% 8.8% -11.7% 2.4% 2.4% -3.9%
Private Capital Investment 0.9% 3.0% 0.1% 1.6% 1.0% -1.3%
Public Consumption Expenditure 1.5% 1.6% 0.1% 1.6% 1.4% 0.8%
Public Capital Investment 1.0% 10.3% -2.6% -2.2% 1.9% 4.0%
Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% 0.1% 0.0% 0.2%
Exports -1.4% 4.4% 7.9% 0.4% 2.0% 2.9%
Imports 3.6% 6.8% 3.4% -0.1% 2.0% 1.8%
Nominal GDP 0.0% 1.7% 1.5% 2.2% 0.3% 1.3%
GDP Deflator -0.9% -0.3% 2.4% 1.4% -0.6% 1.1%
FY15 FY17EFY12 FY13 FY14 FY16E
4
Real GDP for Jan-Mar 2016 was +0.4% QoQ, +1.7% when annualized, which was better than forecast. Private
consumption was +0.5% QoQ though it was inflated by leap year effects.
Private consumption is forecast to decline in Apr-Jun quarter due to the earthquake in Kumamoto and then
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 May 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 .
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2
2013 2014 2015 2016 2017
Private Consumption
Private Housing Investment
Private Capital Investment
Public consumption expenditure
Public Investment
Net Export
Real GDP
Forecast by SMAM
(QoQ %) Real GDP and contribution by components
Manufacturing side of the Japanese economy requires time for recovery
Industrial production has been declining since 2015, though it made recovery in March from the exceptionally
sharp fall in the previous month due to cuts in Toyota’s production caused by a trouble in a factory of one of its
major suppliers.
Earthquake in Kumamoto is expected to distort manufacturing indicators for Apr-Jun quarter.
Inventory stays at high level despite declining production, which is expected to weigh on the recovery of
manufacturing side of the economy.
5
80
85
90
95
100
105
2010
2011
2012
2013
2014
2015
2016
Industrial production (2010=100)
Note: red line is quarterly numbers.(Source) Ministry of Economy, Trade and Industory
80
85
90
95
100
105
110
115
120
125
2010
2011
2012
2013
2014
2015
2016
Inventory/Shipment ratio (2010=100)
Note: red line is quarterly numbers.(Source) Ministry of Economy, Trade and Industory
6
Machinery orders indicate continuing appetite for CAPEX, especially from non-manufacturing side
Capital investments, especially from non-manufacturing industries show strength and also manufacturing
industries show some resilience when interpreted by recent machinery orders statistics.
Government has set nominal GDP target of yen 600 trillion in FY2021. Productivity improvement in the service
sector is expected to play a key roll with an ambitious target of 2% per annum improvement.
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3
12 13 14 15 16
(00' million yen)
Machinery orders from Non-manufacturing and Manufacturing industries
(Source) Cabinet Office
Note: *Green lines are 3 month moving average for each data.Non-manufactuing excludes orders from shipping & electric power.
Non-manufacturing
Manufacturing
7
Consumers’ sentiment should be supported by real income growth and job security
Despite recent weakness in consumer spending, fundamentals surrounding households are still solid.
Tight labor market should provide job security and aggregated real wage continues to grow where all three
factors, nominal wage, number of employees and low inflation contributed in March.
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
2012 2013 2014 2015 2016
Job vacancies/ seekers ratio (times)
(Source) Ministry of Health, Labor and welfare
-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 fell in negative YoY change in March
Core CPI fell -0.3% YoY in March. It is expected to stay negative for about a year.
Inflation expectation is falling and CPI watched by BOJ is also declining for the last 3 months. SMAM expect
BOJ to make additional easing in June or in July together with the fiscal stimulus measures from the
government.
-0.30
-0.99
0.44
1.0
-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 Negative news on corporate earnings has been completed. There are many events waiting ahead such as next
US interest rate hike, possible monetary & fiscal stimulus in Japan, Upper House election in July. High volatility is expected to stay, however, expectation for further stimulus could lift the stock market for the short term.
Longer-term outlook (6-months and beyond) Sluggish Chinese economy is likely to continue. US economy shows some strength, however, it makes FED
rate hike more possible. Overseas economy is going to stay patchy. The key for the Japanese economy and stock market will be a)what kind and amount of stimulus measures are
taken and b)how effective they turn out.
Note: SMAM’s projection is as of May 20th 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 growth to gradually recover from the negative shock of higher yen.
• Fiscal stimulus and further monetary easing will be made to sustain economic growth in Japan.
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
Earnings announcement for FY 2015 has almost finished. According to Mitsubishi UFJ Morgan Stanley
Securities, YoY recurring profits growth was +2.1% and shareholder earnings growth was -2.2% for all
companies listed on Tokyo Stock Exchange 1st section and ending fiscal year in March. For FY2016,
companies forecast +0.3% recurring profit growth and +10.6% shareholder earnings growth.
Majority of the Japanese companies set 110 yen/dollar rate as a proposition for the earnings forecast
for FY2016, which is about the middle of SMAM’s current forecast range for yen/dollar, between 102
and 115 for FY2016.
If yen stabilizes around the current level, further negative currency impact can be avoided, and
conservative earnings estimates by companies can be gradually revised upward.
Strong yen and sluggish overseas demand has been negative for the corporate earnings in FY2015
89
104
16.9%
0%
10%
20%
30%
40%
50%
60%
70%
0
20
40
60
80
100
120
11/04 12/04 13/04 14/04 15/04 16/04
IBES EPS consensus forecast for TOPIX
Historical EPS (left) 12M Forward EPS forecast (left) 12M forward forecast growth (right)
Up to May 18th, 2016(Source) Datastream, IBES
(Points)
-40%
-30%
-20%
-10%
+0%
+10%
+20%
+30%
2011 2012 2013 2014 2015 2016
TOPIX Earnings Forecast Revision Index
Notes: Revision index= % of Analyst upgrades out of total Topix firms - % of downgrades. Calender year, weeklySource: IBES, SMAM Up to May 18th 2016
13
Despite declining earnings growth for FY2015, many companies have announced large share buy-back
programs for FY2016, which is an encouraging sign that they keep positive attitude for enhancing
shareholder returns.
Total shareholder return ratio is expected to rise to 46.4% in FY2015 and forecast to rise further to
49.1% in FY2016 in just 4 years from the latest trough of 32.6% recorded in FY2013.
Japanese companies continue large share buy-back programs
E F
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 TOPIX level doesn't look expensive.
14
300
500
700
900
1,100
1,300
1,500
1,700
1,900
Jan-0
7M
ar-
07
Ma
y-0
7Jul-0
7S
ep-0
7N
ov-0
7Jan-0
8M
ar-
08
Ma
y-0
8Jul-0
8S
ep-0
8N
ov-0
8Jan-0
9M
ar-
09
Ma
y-0
9Jul-0
9S
ep-0
9N
ov-0
9Jan-1
0M
ar-
10
Ma
y-1
0Jul-1
0S
ep-1
0N
ov-1
0Jan-1
1M
ar-
11
Ma
y-1
1Jul-1
1S
ep-1
1N
ov-1
1Jan-1
2M
ar-
12
Ma
y-1
2Jul-1
2S
ep-1
2N
ov-1
2Jan-1
3M
ar-
13
Ma
y-1
3Jul-1
3S
ep-1
3N
ov-1
3Jan-1
4M
ar-
14
Ma
y-1
4Jul-1
4S
ep-1
4N
ov-1
4Jan-1
5M
ar-
15
Ma
y-1
5Jul-1
5S
ep-1
5N
ov-1
5Jan-1
6M
ar-
16
Ma
y-1
6
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 May 13th 2016 when TOPIX was 1320.19
TOPIX and PER based on 12-month forward EPS
16x
12x
13x
14x
15xPM Abe's 2nd term started
Abe cabinet has so far survived challenging issues such as earthquake and foreign affairs
Approval rating of Abe cabinet improved to 45% in May surviving challenging issues such as management of
Kumamoto earthquake disaster and various diplomatic issues, which are US president Obama’s planned visit to
Hiroshima and other top level negotiations preparing for the G7 meeting in Japan.
Declaring coordinated fiscal stimulus at G7, which PM Abe has been targeting, is not likely to be made, however,
large fiscal spending plan can be expected from Japanese government.
15
0
10
20
30
40
50
60
70
80
90
Au
g-9
8
Fe
b-9
9
Au
g-9
9
Fe
b-0
0
Au
g-0
0
Fe
b-0
1
Au
g-0
1
Fe
b-0
2
Au
g-0
2
Fe
b-0
3
Au
g-0
3
Fe
b-0
4
Au
g-0
4
Fe
b-0
5
Aug-0
5
Fe
b-0
6
Au
g-0
6
Fe
b-0
7
Au
g-0
7
Fe
b-0
8
Au
g-0
8
Fe
b-0
9
Au
g-0
9
Fe
b-1
0
Au
g-1
0
Fe
b-1
1
Au
g-1
1
Fe
b-1
2
Au
g-1
2
Fe
b-1
3
Au
g-1
3
Fe
b-1
4
Au
g-1
4
Fe
b-1
5
Aug-1
5
Fe
b-1
6
Obuchi
Mori
Koizumi
Abe 1
Fukuda
Aso
Hatoyama
Kan
Noda
Abe 2
Approval ratings of Japanese cabinets by Prime Ministers(%)
(Source) NHK
May 45%
Aug. 37%
Current Abe
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 May
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 May 2016 is from May 2nd to May 13th. Up to May 13th 2016
2016
Selling pressure from overseas subsided
Selling by foreign investors peaked out in March.
Business corporations are expected to be a constant buyer going forward due to a record making share buy-
back programs announced by companies.
16
17
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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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