Japanese Stock Market Outlook

SMAM monthly comments & views - February 2017 -

Japanese Economy

SMAM’s GDP growth forecast was unchanged from the last month. Japanese economy historically has a high sensitivity to global economic growth, which is recently gathering steam. Export volume has been in an upward trend since the middle of 2015 and industrial production since mid 2016, however, recent hard comments on US-Japan car trade from US president Trump brought some clouds over exports from Japan. Fiscal plan of Trump Whitehouse is going to be revealed in February.

• SMAM forecasts US$/yen range between 112 and 122 for 2017 with a risk for the downside to 105 if US moves to cap and

reverse the dollar strength considering its negative effects on US industries.

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

Japanese Stock Markets

Japanese stock market is anxiously waiting for the actual Trump policies to be confirmed. Current PER around 15x seems a little stretched and the stock market would require some consolidation period waiting for the estimated earnings growth to be actually achieved. Nevertheless strong earnings growth expected in Jan-Mar quarter in Japan and higher US stock prices could lift Japanese stock markets.

• Japanese equities will be supported by improving fundamentals in the long-term. Double digit earnings growth is expected

for FY2017. Further fiscal stimulus can be expected in Japan meanwhile BOJ would keep its extra-easy monetary policy.

Risks are how protectionist Trump’s trade policy could become and possible heightening in geo-political tensions in East

Asia due to more confrontational US-China relations.

• After falling for 2 consecutive years in FY2014 and 15, ROE is forecast to recover to 9.2% in FY2016 and to reach 10%

mark in FY2017. ( for SMAM 221 companies excluding financials)

Executive summary

1 Notes: Macro and market views are as of Jan.18th and 20th , 2017 respectively, and subject to updates thereafter without notice

Outlook for Japanese Economy

2

3

Where “America First” policies would lead the world?

<Six top issues>

• America First Energy Plan: Embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans.

Green light was given to Canada-Texas oil pipeline project turning over the rejection made by former president Barak Obama.

• America First Foreign Policy: Committed to a foreign policy focused on American interests and American national security.

• Bringing Back Jobs And Growth: Create 25 million new American jobs in the next decade and return to 4 percent annual economic growth.

Practical tax reduction and fiscal spending plan still need to be negotiated with republican led congress.

• Making Our Military Strong Again: End the defense sequester and submit a new budget to Congress outlining a plan to rebuild our military.

• Standing Up For Our Law Enforcement Community: Fight for the safety of every American. Building a border wall to stop illegal immigration.

• Trade Deals Working For All Americans: Tough and fair trade agreements.

Signed to exit TPP. Announced re-negotiating NAFTA. Hard comments on US-Japan car trades. Hard comments against China.

In less than a week after the inauguration as US president, Trump Whitehouse has put forward key policy issues.

President Trump has signed various Executive Orders such as exiting TPP, allowing Canada-Texas oil pipeline,

and stopping Obama care, and also made hard comments against international trade partners of US.

Trump policies started to take shape, however, it is still uncertain how strong the protectionism could become

and how much stimulative fiscal policies could be negotiated with the congress.

(Source) US Whitehouse and various publications, compiled by SMAM

Political events should gather attention in 2017

Fiscal plan of Trump Whitehouse is going to be revealed in February.

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

countries.

4

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

Japan First estimate of 4Q 2016 GDP

State of the Union Address

The Budget Message of The President Fiscal plan of the Trump whitehouse is going to be revealed.

Convention of the Liberal Democratic Party Extend maximum party leadership from 2 terms running?

Spring wage negotiations

Budget for FY2017 to be approved

Action plan for changing working practice

Netherlands General election

UK Notification of exiting EU? Supreme Court ruling require the government to gain approval of the Parliament.

BOJ Tankan business report

BOJ perspective report

Apr or 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

March

April

June

Japan

Japan

USFebruary

5

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

CPI is forecast to move up to 0.7% both for FY2017 and 2018.

Notes: E=SMAM forecasts. SMAM views are as of Jan 18th , 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% 0.7% 0.6% 0.6%

Private Housing Investment 8.3% -9.9% 2.7% 5.7% -0.0% 1.0%

Private Capital Investment 7.0% 2.5% 0.6% 1.4% 1.5% 2.1%

Public Consumption Expenditure 1.7% 0.4% 2.0% 0.7% 1.1% 0.9%

Public Capital Investment 8.6% -2.1% -2.0% 0.1% 5.7% 0.2%

Net Exports (contrib. to GDP growth) -0.5% 0.6% 0.2% 0.4% 0.2% 0.1%

Exports 4.4% 8.7% 0.8% 1.1% 2.4% 1.7%

Imports 7.1% 4.1% -0.2% -1.5% 1.2% 1.0%

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

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

Industrial Production 3.0% -0.4% -1.4% 1.2% 3.5% 2.5%

CPI (excl. fresh food) 0.8% 0.9% -0.0% -0.3% 0.7% 0.7%

FY16E FY18EFY13 FY14 FY15 FY17E

6

Recovery in global economy has supported exports from and industrial production in Japan

Japanese economy historically has a high sensitivity to global economic growth, which is recently gathering

steam.

Export volume has been in an upward trend since the middle of 2015 and industrial production since mid 2016.

Recent hard comments on US-Japan car trade from US president Trump brought some clouds over exports

from Japan.

4800

5000

5200

5400

5600

5800

6000

6200

(yen billion)Export volume from Japan

Note: Blue lines are for monthly and red lines are for quartrerly data.Data is monthly from Jan 2010 to Nov 2016.(Source) Ministry of Finance, Bank of Japan

(Year)

80

90

100

110

120

130

140

Indexed (2010=100)

Estimated index

General Machinery

Auto

Total

Electronic components &devices

Industrial Production (seasonally adjusted)

(Source) Ministry of Economy, Trade and Industry

Note: Data is monthly from Jan 2013 to Jan 2017 where Dec 2016 & Jan 2017 data is estimated index as of Nov 2016.

(Year)

Note:Data is monthly Mar.2012 to Nov 2016

(Source) Ministrry of Health, Labour & Welfare

Nominal wage payment　YoY % change

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0Contribution ofemployee number

Contribution of wage

Total wage

(%)

(Year)

Japanese consumption is mildly recovering partly helped by expansion of female workers

Japanese private consumption is mildly recovering.

In this backgrounds are probably mildly increasing number of employees lead by expanding female workers.

7

Note: Data is monthly from Jan 2010 to Nov 2016. Seasonally adjusted.

(Source) Ministry of Internal Affair & Communications, compiled by SMAM

47.0

47.5

48.0

48.5

49.0

49.5

50.0

50.5

51.0

69.0

69.5

70.0

70.5

71.0

71.5

72.0

72.5

73.0Labour participation ratio（％）

(Year)

（％）

Male (left) Female (right)

Expected stimulative Trump policies in US should make US$ fundamentally strong

Rally in US$ halted responding to protectionist sounding comments from US president Trump.

US government may not be in favor of strong US$, however, expected stimulative policies would make

US$ strong.

8

0

0.5

1

1.5

2

2.5

3

US

Germany

Japan

Government Bond Yield Spread (10Y-2Y)(%)

Note: Weekly data from Jan. 10th, 2014 to Dec. 30th, 2016

(Source) Datastream

(Month/Year)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

70

80

90

100

110

120

130

140US$/Yen (left)

2Y US-JP (right)

Note: Weekly data from Jan. 12th, 2001 to Dec. 30th, 2016

(Source) Datastream

(Month/Year)

(%)(yen) US$/yen rate and US-JP 2Y government bond yield gap

Outlook for Japanese Stock Markets

9

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

SMAM short-term view Japanese stock market is anxiously waiting for the actual Trump policies to be confirmed. Current PER around

15x seems a little stretched and the stock market would require some consolidation period waiting for the estimated earnings growth to be actually achieved. Nevertheless strong earnings growth expected in Jan-Mar quarter in Japan and higher US stock prices could lift Japanese stock markets.

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

is expected for FY2017. Further fiscal stimulus can be expected in Japan meanwhile BOJ would keep its extra-easy monetary policy. Risks are how protectionist Trump’s trade policy could become and possible heightening in geo-political tensions in East Asia due to more confrontational US-China relations.

Note: SMAM’s projection is as of Jan. 18th,, 2017 and subject to updates without notice

10

700

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1,100

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1,900

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n-1

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15

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6

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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

Sep-1

6

Oct-

16

No

v-1

6

De

c-1

6

Ja

n-1

7

Fe

b-1

7

Ma

r-1

7

Ap

r-1

7

Ma

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7

Ju

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7

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l-1

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Au

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Sep-1

7

Oct-

17

No

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7

De

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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)

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 keep 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 and deepen geo-political

tensions.

• Populism gains in Europe further unstabilizing EU.

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

• Concern over emerging economies including China.

11

SMAM’s forecasts as of January 2017.

12

Rally in global stock markets continued before the inauguration of US president Trump

12

Emerging market stabilized in December and made recovery in January.

Global stock markets continued to rally running up to the inauguration of 45th US president Donald Trump.

707580859095

100105110115120 MSCI

EM/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: Month-end data from Dec 2015 to Jan 2017. Jan. 2017 data is as of 20th.

(Month/Year)

PER (Price Earnings Ratio) is hovering around 15 times level

Since Abenomics started, PER for Japanese stock market, TOPIX index-wise, has been in a range between 12x

and 16x except for temporary overshooting.

As of January 13th, PER for TOPIX was 14.73x based on 12M forward. Stock market is expected to consolidate

for a while waiting for the EPS to catch up to justify further upward move.

13

300

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1,100

1,300

1,500

1,700

1,900

Oct-

07

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-08

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6

Note: Data is weekly from Oct. 26th 2007 to Jan. 13th 2017. TOPIX was 1544.89 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

13x14x

15x

PM Abe's 2nd term started

14

12M forward EPS forecast provided by IBES shows continuing expansion, which lately forecasts 11.9%

growth.

EPS forecasts by analysts continue to expand

94

105

11.9%

0%

10%

20%

30%

40%

50%

60%

70%

0

20

40

60

80

100

120

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

IBES EPS consensus forecast for TOPIX

Historical EPS (left) 12M Forward EPS forecast (left) 12M forward forecast growth (right)

Note: Weekly data from Jan. 4th 2011 to Jan. 17th 2017.

(Source) Datastream, IBES

(Points)

(Month/Year)

15

SMAM forecasts consecutive years of profit growth since FY2013 can be maintained for FY2016 and

17. For FY 2016, profit of Non-manufacturing sector is forecast to grow by 9.3% to offset the decline in

Manufacturing sector of -4.1%.

After falling for 2 consecutive years in FY2014 and 15, ROE is forecast to recover to 9.2% in FY2016

and to reach 10% mark in FY2017.

(Note: *Numbers are for 221 companies in SMAM research coverage excluding financials.)

ROE is on a recovering path to 10% mark expected in 2017

27,547

29,073

29,357 33,107

17,996

17,251

20,105

11,07712,107

13,002

0

5,000

10,000

15,000

20,000

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30,000

35,000

200

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201

2/A

201

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201

4/A

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5/A

201

6/E

201

7/E

(yen bil.)

SMAM 221 companies recurring profits (excl. financials)

Total industries

Manufacturing

Non-manufacturing

(Source) announcement by companies, forecast by SMAM.(Fiscal year)

10.9%

1.7%

4.5%

6.8%

5.0%

6.2%

9.5%

8.9%

8.2%

9.2%

10.0%

0%

2%

4%

6%

8%

10%

12%

200

1A

200

2A

200

3A

200

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201

7E

SMAM 221 companies ROE (excl. financials)

Forecast

(Source) announcement by companies, forecast by SMAM.

(Fiscal year)Note: Data label is for the all industries.

Foreign investors purchasing continues to lift stock prices

Foreign investors continue purchasing Japanese stocks.

Japanese individual investors were selling Japanese stocks as stock prices recovered.

16

(month/ year)

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

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 Jan.13th 2017.

2016

(Month/Year)

2017

17

Overheat in Japanese stock market calmed down to a normal level

17

Gainers/Losers ratio is regarded as an indicator for the temperature of stock markets. Over 120% typically

shows the market is overheated. The ratio went up above 160% on 15th December 2016 first time since June

2014.

Japanese stock market shifted to a consolidation mode afterwards and overheat calmed down to a normal level

in mid January.

0

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40

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Gainers/Losers ratio(left axis) and TOPIX(right axis)

Notes Gainers/Losers ratio = No. of stocks with rising share price / No. of stocks with falling share price (%)Source: Tokyo Stock Exchange, SMAM

(Year/Month)

Up to Jan. 18th 2017

(%)

Points

18

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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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