Japanese Stock Market Outlook

SMAM monthly comments & views - April 2017 -

Japanese Economy

Japanese GDP growth is forecast to be faster than estimated potential growth rate around 0.7%. Recovering both private & public capital investments are going to be main drivers. Despite increasing uncertainties, SMAM assumes Trump policies in US to stimulate US economy and spread positive effects to global economies including Japan.

• Abe government is taking initiative of changing working practice in Japan. Limiting monthly overtime to be less than 60 hours

is one of the main targets. It has potentially both positive and negative implications for Japanese economy.

• Core CPI returned to a positive territory in January rising by 0.1% YOY. BOJ is holding its extra-easy monetary policies and

expected to do so during 2017, however, tapering could gradually come in sight. Purchasing pace of Japanese Government

Bonds is expected to decline due to a shortage of circulating issues.

Japanese Stock Markets

Japanese equities will be supported by improving fundamentals in the long-term. Double digit profit growth expected for FY2017 will make the valuation of Japanese stock market attractive. Focal points are such as fate of Trump policies, major elections in Europe and how working practice reform in Japan could affect the sentiment and activities of companies and people in Japan. .

• After examining 3QFY2016 results announced by companies, SMAM revised earnings forecasts upwards in March.

Compared to the forecast in December, recurring profit forecast was raised from previous +1.8% to +2.2% for FY2016, and

from +13.2% to +16.4% for FY2017. Presumption for foreign exchange rates were increased by 5 yen each for US$ and

EUR.

Executive summary

1

Notes: Macro and market views are as of Mar. 15th and 17th , 2017 respectively, and subject to updates thereafter without notice

Outlook for Japanese Economy

2

3

SMAM’s GDP growth forecast was unchanged from the last month.

Japanese GDP growth is forecast to be faster than estimated potential growth rate around 0.7%. Recovering

both private & public capital investments are going to be main drivers.

Despite increasing uncertainties, SMAM assumes Trump policies in US to stimulate US economy and spread

positive effects to global economies including Japan.

Notes: E=SMAM forecasts. SMAM views are as of Mar. 15th , 2017 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 FY16-18

( YoY %)

Real GDP growth 2.6% -0.4% 1.3% 1.2% 1.1% 0.9%

Private Consumption Expenditure 2.7% -2.7% 0.5% 0.6% 0.5% 0.6%

Private Housing Investment 8.3% -9.9% 2.7% 6.1% 0.5% 1.0%

Private Capital Investment 7.0% 2.4% 0.6% 2.5% 2.4% 2.1%

Public Consumption Expenditure 1.7% 0.4% 2.0% 0.8% 1.1% 0.8%

Public Capital Investment 8.6% -2.1% -2.0% -2.1% 3.7% 0.2%

Net Exports (contrib. to GDP growth) -0.5% 0.6% 0.2% 0.6% 0.3% 0.2%

Exports 4.4% 8.8% 0.8% 2.6% 3.7% 2.4%

Imports 7.1% 4.2% -0.2% -1.0% 1.6% 1.4%

Nominal GDP 2.6% 2.1% 2.8% 1.3% 1.7% 1.6%

GDP Deflator 0.0% 2.5% 1.4% 0.1% 0.6% 0.7%

Industrial Production 3.0% -0.4% -1.4% 1.4% 3.4% 2.5%

CPI (excl. fresh food) 0.8% 0.9% -0.1% -0.2% 0.7% 0.7%

FY16E FY18EFY13 FY14 FY15 FY17E

4

Baseline CPI is forecast to climb to 1% level in late 2017

Core CPI returned to a positive territory in January rising by 0.1% YOY.

BOJ is holding its extra-easy monetary policies and expected to do so during 2017, however, tapering could

gradually come in sight. Purchasing pace of Japanese Government Bonds is expected to decline due to a

shortage of circulating issues.

(month/year)

0.10

-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 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

2014 2015 2016 2017 2018

Food (excl. fresh food)

Energy

Baseline CPI (excl. food &energy)

Nationwide CPI and contribution of components(YoY %)

(Source) Ministry of Internal Affairs & Communications

Forecast by SMAM

Note: Effect of consumption tax hike in April 2014 is excluded.

Already severe labor shortage might be getting even more serious

Companies have increased part time workers responding to improving business demands.

Part time workers ratio snapped down recently. This might be indicating that reservoir of labor supply is

gradually drying out.

Significant wage increase might be imminent, which could substantially lift the inflation in Japan.

5

Note: Data is monthly from Jan. 2008 to Jan. 2017. (Year)

(Source) Ministry of Health, Labour & Welfare, compiled by SMAM.

Part time workers ratio (seasonally adjusted %)

30.6

26.0

26.5

27.0

27.5

28.0

28.5

29.0

29.5

30.0

30.5

31.0

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Note: Data is monthly from Jan. 2012 to Jan. 2017. (Year)

(Source) Ministry of Health, Labour & Welfare, compiled by SMAM.

Part time workers, regular wage (YOY %)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012

2013

2014

2015

2016

2017

Hourly regular wage

6 months moving average

6

Rising wage pressure will be beneficial for the Japanese economy

Rising wage could be negative for the profitability of Japanese companies.

However, workers have not been rewarded enough despite the profit recovery to the historical record level.

Labor share ratio stays very low, which is one of the major reasons behind the lackluster private consumption.

The benefit of stimulating private consumption is expected to be larger than the negative impact on companies

when considering overall Japanese economy.

(Source) Ministry of Finance, corporate statistics

Note: Quarterly data from 1Q1985 to 4Q2016. Seasonally adjusted.

200

250

300

350

400

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0

5

10

15

20

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

63.7

60

65

70

75

80

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Recurring profit (trillion yen)

Sales (trillion yen)

Labor share ratio (%)

(Year)

7

Working practice reform in Japan

Abe government is taking initiative of changing working practice in Japan. Limiting monthly overtime to be less

than 60 hours is one of the main targets.

It has potentially both positive and negative implications for Japanese economy.

Positive implications are; a) increase in efficiency and productivity of labor and b) stimulating private

consumption with increased leisure time. Negative implications are; 1) cut in business hours, 2) reduction of

household overtime income and 3) increase in labor cost of employers.

Industries

% of workers

experiencing

over 60h/month

overtiime in 2016

Agriculture&Forestry 15.3

Construction 15.3

Manufacturing 10.6

Electricity,Gas&Water 6.9

Information&Communication 11.6

Transportation&Postal service 24.0

Retail& Wholesale 12.2

Financials 8.7

Property&Leasing 9.7

Academic research & service 12.7

Hotel, Restaurants 15.1

Entertainment 15.0

Education 14.7

Medical&Welfare service 5.8

Public 10.9

All industries 11.9

Hard overtime working practice is

found in labor intensive industries.

Especially, Transportation & Postal

service is in a severe labor shortage

in the face of a huge increase in

deliveries due to shriving e-

commerce sales.

As much as 11.9% of the total

workers experienced more than 60

hours/ month of overtime work in

2016.

(Source) Ministry of Internal Affaires & Communications

Current National Diet session is hampered by a minor looking “Moritomo scandal”

Much of the current National Diet session has been wasted on debates over “Moritomo scandal”, an allegation

for PM Abe and his wife to have influenced a selling of a nationally owned land to Moritomo School, with which

they seem to have some private relationship.

At the moment, it is unlikely that this scandal would make a fatal blow to Abe government . The approval rating

for Abe cabinet retreated a little down to 51%.

8

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

Fe

b-0

4

Aug-0

4

Feb

-05

Aug-0

5

Fe

b-0

6

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

Aug-1

6

Feb

-17

Obuchi

Mori

Koizumi

Abe 1

Fukuda

Aso

Hatoyama

Kan

Noda

Abe 2

Approval ratings of Japanese cabinets by Prime Ministers(%)

(Source) NHK (Japan Broadcasting Corporation)

Mar.51%

Current Abe

(Month/Year)

Political events should gather attention in 2017

In the US, Obama Care reform bill was withdrawn before the lower house voting in the face of opposition among

republicans. Clouds have darkened on Trump fiscal policies.

Europe is going to face important events such as notification of Brexit, elections in France, Germany and other

countries.

9

Schedule of key events in 2017Month Region/Country Events Notes

US The Budget Message of The President Only the outline was released. Obama care reform was withdrawn.

Convention of the Liberal Democratic Party Maximum consecutive party leadership was extended to 3 terms.

Spring wage negotiations Base pay rise is going to be lower than in 2016.

Budget for FY2017 to be approved

Action plan for changing working practice Limit the monthly overtime. Encourage people to leave office early and spend.

Netherlands General election Feared surge of right wing was avoided.

UK Notification of exiting EU What kind of a deal UK can extract from EU?

BOJ Tankan business report

BOJ perspective report

US (28th) Temporaly budget for 2017 needs renewal Can President trump & US congress work together?

Apr & May France Presidential election

Japan Ordinary Session of National Diet ends

Japan Election for the Tokyo Metropolitan Assembly

France Lower house election

July Global G20 meeting

August Germany General election

(Source) Various publications, assembled by SMAM

June

Japan

Japan

March

April

Outlook for Japanese Stock Markets

10

Stock market outlook: Waiting for the real Trump policies to take shape

SMAM short-term view Chinese economy is getting firmer and US is growing solidly. Global economy is growing at a stronger pace

than forecast, which should support the stock market to gradually move up. Expected tough negotiation of fiscal policies between Trump White House and US congress will be a source of volatility for the stock market.

Longer-term outlook (6-months and beyond) Japanese equities will be supported by improving fundamentals in the long-term. Double digit profit growth

expected for FY2017 will make the valuation of Japanese stock market attractive. Focal points are such as fate of Trump policies, major elections in Europe and how working practice reform in Japan could affect the sentiment and activities of companies and people in Japan.

Note: SMAM’s projection is as of Mar. 17th,, 2017 and subject to updates without notice.

11

700

900

1,100

1,300

1,500

1,700

1,900

Jan-1

4

Feb

-14

Ma

r-1

4

Apr-

14

Ma

y-1

4

Jun-1

4

Jul-1

4

Aug-1

4

Se

p-1

4

Oct-

14

No

v-1

4

De

c-1

4

Jan-1

5

Fe

b-1

5

Ma

r-1

5

Apr-

15

Ma

y-1

5

Jun-1

5

Jul-1

5

Aug-1

5

Sep-1

5

Oct-

15

No

v-1

5

De

c-1

5

Jan-1

6

Feb

-16

Ma

r-1

6

Apr-

16

Ma

y-1

6

Jun-1

6

Jul-1

6

Aug-1

6

Sep-1

6

Oct-

16

No

v-1

6

De

c-1

6

Jan-1

7

Feb

-17

Ma

r-1

7

Apr-

17

Ma

y-1

7

Jun-1

7

Jul-1

7

Aug-1

7

Sep-1

7

Oct-

17

No

v-1

7

De

c-1

7

TOPIX

Forecast range upside

Forecast range downside

TOPIX index forecast range by SMAM

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

(Points)

(Month/Year)Note: Topix data is from Jan. 6th 2014 to Mar. 27th 2017.

Base scenario & Upside / Downside risks for our forecasts

Our Base Scenario is assuming the following views:

• Practical Trump trade policies are made and serious trade disputes can be avoided.

• Expansionary policies in US keep global economies on a growth path.

• Japan’s private consumption to grow mildly supported by wage growth.

• Japanese yen does not get extremely stronger beyond 100 yen against US$.

• Further fiscal stimulus will be made and extra easy monetary policy should sustain economic growth in

Japan.

Upside Risks include:

• Stronger-than-expected global growth.

• Stronger-than-expected measures by the Abe government.

Downside Risks include:

• Confrontational foreign policies taken by Trump presidency shake global trades.

• Trump policies for stimulating US economy fail to pass US congress.

• Populism gains in Europe further destabilizing EU.

• Heightening geo-political tensions in Middle East & East Asia.

• Rekindled concern over emerging economies including China.

• “Moritomo scandal” makes a fatal blow to PM Abe.

12

Note: SMAM’s projection is as of Mar. 17th,, 2017 and subject to updates without notice.

13

Emerging stock markets continue to rise supported by recovering Chinese economy

13

US stock market retreated a little in March on uncertainties surrounding US fiscal policies.

Emerging market showed a solid performance, Japan and Europe also gained in March.

70

80

90

100

110

120

130

De

c-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-1

6

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

7

Ma

r-1

7

MSCIEM/US$

S&P500

TOPIX/US$

MSCIEurope/US$

TOPIX/Yen

US$ based performance of stock markets (Dec 2015 =100)

(Source) Datastream, MSCI and Tokyo Stock Exchange, compiled by SMAM.

Notes: Data is up tp Mar. 24th 2017.

(Month/Year)

SMAM raised earnings forecast for FY 2016 and FY2017

After examining 3QFY2016 results announced by companies, SMAM revised forecasts upwards in March.

Compared to the forecast in December, recurring profit forecast was raised from previous +1.8% to +2.2% for

FY2016, and from +13.2% to +16.4% for FY2017. Presumption for foreign exchange rates were increased by 5

yen each for US$ and EUR.

14

SMAM Corporate Earnings forecasts (221 Companies research coverage excl. financials)

Fiscal year FY 2014 FY 2015

Date of forecast Actual Actual as of 15th Mar 2017 as of 15th Mar 2017

Revenue (YoY %) 3.9% 0.1% -3.1% 5.3%

Operating Profits (YoY %) 3.1% 9.1% -2.4% 15.7%

Recurring Profits (YoY %) 4.5% 2.5% 2.2% 16.4%

Net Profits (YoY %) 5.4% -3.2% 12.6% 17.2%

Recurring profits (YoY %)

Manufacturing 137 companies 4.1% 0.2% 2.3% 21.7%

Non-manufacturing 84 companies 5.2% 6.5% 6.7% 9.0%

Note:Key assumptions for the forecasts, Yen/US$ 115, Yen/EUR 120, Crude oil $55/barrel

(Source) SMAM

FY 2016E FY 2017E

15

Latest 12M forward EPS forecast is over 109, and it is less than 1 point from the highest level reached

in December 2015.

13.6% EPS growth is forecast in the coming 12 months.

EPS forecasts by analysts continue to expand

96

109

13.6%

0%

10%

20%

30%

40%

50%

60%

70%

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

IBES EPS consensus forecast for TOPIX

Historical EPS 12M forward EPS Forecast EPS growth

Note: Weekly data from Jan. 5th 2011 to Mar. 13th 2017.

(Source) Datastream, IBES

(Points)

(Month/Year)

PER (Price Earnings Ratio) at14x looks not too expensive

Based on 12M forward EPS of 109, TOPIX level corresponding to 14x is 1526, 15x is 1635 and 16x is 1744.

Japanese stock market valuation in TOPIX is at the middle of the range between 12x and 16x after PM Abe’s

second term began.

16

300

500

700

900

1,100

1,300

1,500

1,700

1,900

Oct-

07

De

c-0

7F

eb

-08

Ap

r-0

8Ju

n-0

8A

ug-0

8O

ct-

08

De

c-0

8F

eb

-09

Ap

r-0

9Jun-0

9A

ug-0

9O

ct-

09

De

c-0

9F

eb

-10

Ap

r-1

0Ju

n-1

0A

ug-1

0O

ct-

10

De

c-1

0F

eb

-11

Ap

r-1

1Ju

n-1

1A

ug-1

1O

ct-

11

De

c-1

1F

eb

-12

Ap

r-1

2Ju

n-1

2A

ug-1

2O

ct-

12

De

c-1

2F

eb

-13

Ap

r-1

3Ju

n-1

3A

ug-1

3O

ct-

13

De

c-1

3F

eb

-14

Ap

r-1

4Ju

n-1

4A

ug-1

4O

ct-

14

De

c-1

4F

eb

-15

Ap

r-1

5Ju

n-1

5A

ug-1

5O

ct-

15

De

c-1

5F

eb

-16

Ap

r-1

6Ju

n-1

6A

ug-1

6O

ct-

16

De

c-1

6F

eb

-17

Note: Data is weekly from Oct. 26th 2007 to Mar. 10th 2017. TOPIX was 1574.01 at the end of the period. (Source) Tokyo Stock Exchange, Datastream and IBES, compiled by SMAM

TOPIX

(Month/Year)

TOPIX and PER based on 12-month forward EPS

16x

12x

13x

14x

15x

PM Abe's 2nd term started

Corporate governance & shareholder returns are making a solid gain

Total shareholder return ratio is forecast to rise above 50% in FY 2016.

17

0

10

20

30

40

50

60

70

80

90

100

0

5

10

15

20

25

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

(%)(JPY tn) Dividend payments & Share buyback by listed firms

Share Buyback Total（LHS）

Aggregate Dividends（LHS）

Total Shareholders Return（RHS）

Notes : For ordinary shares of listed firms excluding lossmakers or subsidiaries, as of Mar. 15th 2017.Source : Toyo Keizai, Quick, I-N Information Systems, Daiwa Securities forecasts

(Fiscal year)

Forecast

Foreign investors turned to sellers in February and March.

After the Trump rally, investors are waiting for how the real Trump policies can be negotiated in US congress.

18

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 Jun July Aug Sep Oct Nov Dec Jan Feb Mar

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 exchange up to Mar.17th 2017.

2016

(Month/Year)

2017

19

Disclaimer

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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