Japanese Stock Market Outlook

SMAM monthly comments & views - June 2015 -

Japanese Economy

Japan’s economic recovery is under way, as robust Exports and Industrial Production lead the moderate growth. Meantime, faltering Consumption Expenditures are expected to recover due to higher real wages led by nominal wages gain and subdued inflation rate.

• SMAM maintained real GDP forecast at +1.5% in FY2015 and +1.9% in FY2016 respectively.

• Consumption Expenditures are likely to recover from middle of this year on expectations for the increase in

nominal wages and wealth effect boosted by higher stock prices.

• Core-CPI is highly likely to stay far below from the inflation forecast by BOJ, but the bank is less likely to move

to additional easing.

Japanese Stock Markets

Current stocks are fairly valued on upbeat corporate earnings. There would be still some room for upward revision in profit forecast and enhancement in shareholder return by the companies.

• FY2015 corporate profits are expected to be revised upward due to weak JPY and low crude oil price.

• Further improving shareholder return would lift the share prices, while shareholder return remains still low.

• Overseas investors are still increasing net long position in April.

• Downside risk is associated with foreign factors such as geopolitical concerns, unclear monetary policy by Fed

and ECB, and possibly negative effects by crude oil price slump.

Executive summary

1

Notes: Macro and market views are as of May15 and 18, 2015 respectively, and subject to updates thereafter without notice

Outlook for Japanese Economy

2

3

SMAM maintained real GDP forecast of +1.5% for FY2015 and +1.9% for FY2016.

Solid economic recovery is on track as Exports and Production are expanding modestly along with US led

global growth. Private Consumption is likely to recover from mid 2015 as higher nominal wages and subdued

inflation should support the consumer sentiment.

Notes: E=SMAM forecasts. SMAM views are as of May15, 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% -1.0% 1.5% 1.9%

Private Consumption Expenditure 1.8% 2.5% -3.0% 1.7% 2.0%

Private Housing Investment 5.7% 9.3% -11.8% 0.2% 4.4%

Private Capital Investment 1.2% 4.0% 0.1% 2.7% 3.2%

Public Consumption Expenditure 1.5% 1.6% 0.5% 0.9% 0.5%

Public Capital Investment 1.0% 10.3% 3.1% -1.6% -1.6%

Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.7% 0.3% 0.1%

Exports -1.3% 4.7% 7.2% 5.3% 5.0%

Imports 3.6% 6.7% 3.0% 4.0% 5.2%

Nominal GDP 0.1% 1.8% 1.3% 2.0% 2.4%

GDP Deflator -0.9% -0.3% 2.3% 0.6% 0.5%

FY12 FY13 FY14E FY16EFY15E

Quarterly GDP: SMAM expects moderate growth

January-March real GDP released on May 20th rising annualized +2.4% QoQ led by the increase in inventory.

SMAM maintained quarterly real GDP forecast of +1.6% annualized in April-June, +1.7% in July-September and

+1.8% in October-December in FY2015.

Bank of Japan put off the timing for achieving 2% inflation to “around the first half of FY2016” from “in or around

FY2015.” SMAM expects that the bank revises its forecast further downward, however the bank keeps on hold

its current monetary policy during this year.

4

Notes: E=SMAM forecasts. SMAM views are as of May15, 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 The above data is as of May 15, 2015. .

-20

-15

-10

-5

0

5

10

15

Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar

14 15 16 17

Private Consumption Expenditures

Private Housing Investment

Private capital Investment

Others

Net Exports

Real GDP

Real GDP growth and Contribution by components(QoQ % annualized)

(Source) Cabinet Office, SMAM forecast

Forecast by SMAM

5

SMAM forecasts current recovery process in order from Exports to Production and Consumption. The ongoing

recovery process is between Confidence and Consumption.

Stable recovery is highly expected underpinned by robust Exports and Industrial Production, while

Consumption is eventually picking up.

SMAM expect Private Consumption Expenditures to recover from April-June quarter although current

consumption data remain weak. Wealth effect by rising stock prices and real wages growth lift up the

Consumption.

Recovery Process: Exports⇒Production⇒Employment, Confidence⇒Consumption

90

92

94

96

98

100

102

104

106

108

110

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

12 13 14 15

Exports

Industrial Production

Consumption Expenditures

Exports, Industrial Production and Consumer Expenditures(YR2010=100)

(Source) Ministry of Economy, Trade and Industry, BOJ, Cabinet Office, SMAM seasonally adjusted*1: Industrial Production for 2Q 2015 i s estimated based on the data of Industrial Production Forecast Index.

Forecast by SMAM

6

Exports: Solid growth to Asia, US and EU

March Export volume slightly gained +0.2% MoM. On 3 month basis, January-March Export volume grew for

three consecutive quarters despite at a slower pace of +1.0% QoQ than +3.8% QoQ in October-December

2014.

Exports are expected to keep moderate growth at 1% from April-June quarter on steady growth to US and EU

as well as to upbeat Asian countries (ex. China). Exports to China is likely to grow spurred by China’s easing

monetary policy going forward.

85.0

90.0

95.0

100.0

105.0

110.0

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

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

12 13 14 15

QoQ change (LHS)

Exports Monthly basis (RHS)

Exports Quarterly basis (RHS)

(Source) Bank of Japan, SMAM

Export Volume (YR2010=100)(%, QoQ)

Industrial Production: Keeping moderate growth

January-March Industrial Production grew +1.7% QoQ. The IP is likely to keep growing at a moderate speed.

Production for Materials and IT expanded in April, while that for Transportation Equipment contracted.

7

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

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

12 13 14 15

OthersMaterials (Steels, Non-Ferr Metals, Metals, Paper, Chemical)Transportation EquipmentGeneral use machinery, ex. SPEIT (Communication, Electric devices, SPE)All Manufacturing Industry

Industrial Production and Growth rate by sector(%, QoQ)

(Source) Ministry of Economy, Trade and Industry, , SMAM seasonally adjusted*1: Industrial Production for 2Q 2015 is estimated based on the data of Industrial Production Forecast Index.

Wages: Rising nominal wages

March Unemployment rate declined to 3.4%, reaching a nearly full employment. A tight job market will help

nominal wages to rise.

Nominal wages are expected to accelerate to +1.2% YoY in FY2015 and +1.3% in FY2016 from +0.5% in

FY2014 as nominal wages such as pay scale, bonus and other unscheduled wages are rising. The pay scale

accelerated to +0.75% in FY2015 from +0.52% in FY2014. Scheduled wage (Basic wage) is expected to grow

steadily to +0.7% in FY2015 and +0.8% in FY2016.

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-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

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

07 08 09 10 11 12 13 14 15

Employer, between 5 and 30 employees

Employer, more than 30 employees

Basic Wage growth(%, YoY)

(Source) Ministry of Health, Labour and Welfare, SMAM

Private Consumption: Likely to recover in April-June

January-March consumption data remain still subdued, whereas SMAM expects the recovery starts from April-

June quarter. On a monthly basis, latest data show some improving signs. In addition, upbeat nominal wages

and wealth effect on higher stock prices should support the consumption.

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-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

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

10 11 12 13 14 15

Synthetic Consumption Index

Household Survey Consunption （the number of household adjusted）

Retail Sales (CPI adjusted)

ＧＤＰ Private Consumption (CPI adjusted)

Private Consumption Expenditures

(Source) Cabinet Office, Ministry of Economy, Trade and Industry, , SMAM seasonally adjusted*1: Data 1Q 2015 is estimated based on the data avaraged in latest months.

Outlook for Japanese Stock Markets

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Stock market outlook: Earnings growth prospects should help the stock market

SMAM short-term view

In addition to moderate growth in Production and Exports, Consumption recovery would lift the macro

economy. Corporate earnings are expected to continue growing in FY2015.

The stock market is expected to keep advancing as Japan's reflation policy is very likely to continue until next

consumption tax hike in 2017. Increasing expectation for dovish US rate hike should also support the market.

Longer-term outlook (6-month and beyond) For longer-term, we continue to expect the market to track on a modest uptrend, underpinned by US-led global

growth, solid corporate earnings and strengthened reflationary policies in Japan. More focusing on shareholder return such as dividend increase and share buyback are another positive aspect.

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

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900

1,100

1,300

1,500

1,700

1,900

2,100

Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16

Topix

Upside Range

Downside Range

TOPIX index range expectation by SMAM's Projection

(Source) TOPIX: Tokyo stock exchange, Upside and Downside range: forecasted by SMAM

(Points)

Upto June 2016

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 mild recovery from tax-hit weak demand buoyed by reschedule of next tax hike until 2017

• 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:

• Slowdown in global economy

• Concern over global deflation

• Increasing geopolitical concerns

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TOPIX / EPS forecast: fairly valued on upbeat forward EPS

IBES consensus EPS continues rising supported by solid growth prospects. IBES 12 month and 18 month

forward EPS are 103.9 and 108.6 respectively, while TOPIX EPS is currently 90.00 as of May 15th.

TOPIX of 1,607.11 as of May 15th seems fairly valued as the current P/Es are 14.8x and 15.5x based on the

IBES 18 month and 12 month forward EPS forecasts.

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2003/12 2004/12 2005/12 2006/12 2007/12 2008/12 2009/12 2010/12 2011/12 2012/12 2013/12 2014/12 2015/12 2016/12

(TOPIX, point)TOPIX and Forward EPS Forecast

TOPIX (LHS)

IBES Consensus EPS (RHS)

(Source) Bloomberg, DataStream, SMAM

Consensus EstimateHistorical EPS

(EPS, JPY)

12M FWD EPS=103.9

18M FWD EPS=108.6

as of April 30th

Upto DEcember 2016

Shareholder return: Still room to enhance payout and buyback

Total cash dividends are expected to continue expanding led by upbeat earnings, whereas dividend payout is

growing at slower pace, remaining low dividend payout ratio at about 30%. Total shareholder return (share

repurchase + cash dividends) should be raised from current 40% as many companies have set a ROE target as

one of management goal. Further enhancement in shareholder return should lift the stock prices.

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JPY7.6 trillion

JPY8.2 trillion

27.9

40.8%

0

20

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60

80

100

0

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4

6

8

10

12

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

(JPY tri l lion) Cash Dividends and Share Buyback

Total Cash Dividend (LHS) Total Share Buyback (LHS)

Average Payout Ratio (RHS) Total Return Ratio (RHS)

Forecast

FY

(%)

*All common shares listed on Tokyo Stock Exchange , excluding money -losing companies. **Exclude received dividends from subsidiaries***FY2015 is forecasted by Daiwa Securities(Source) Toyo Keizai, Q UICK, IN Information Center, Daiwa Securities

ROE and TOPIX : TOPIX will be priced higher as ROE rises from current 9%

The following chart shows the relationship between Return on Equity (ROE) and Price to Book (P/B) for TOPIX.

ROE and P/B of TOPIX as of April 30th were 8.99% and 1.38x.

On this regression analysis, TOPIX would rise to 1,880 based on TOPIX’s Book Value of 1,155.27 as of April

30th if ROE were raised to 10%.

*PBR = 380.55 x 10%^2 - 44.79 x 10% +2.3012 = 1.63, TOPIX = 1.63 x 1,155.27

15

y = 380.55x2 - 44.79x + 2.3012

0.5

1.0

1.5

2.0

2.5

2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

(P/B multiple)

(ROE based on 12 m FWD EPS, %)

TOPIX ROE and P/B

Apri l 30th, 2015

(Source) Bloomberg, Datastream, SMAM) Upto Apri l 2015

Supply-Demand balance: Continuing net-long by overseas investors

Overseas investors maintain net long position. On a futures transaction, the investors turned to be a net long

position of JPY99 billion in April from a net short of JPY520 billion in March. On a cash equities transaction, they

also increased net long position to JPY1,995 billion in April from JPY530 billion in March.

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(3,500)

(3,000)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

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04/1205/0605/1206/0606/1207/0607/1208/0608/1209/0609/1210/0610/1211/0611/1212/0612/1213/0613/1214/0614/12

Foreign Investors Net Purchase of Futures (cumulative)

Nikkei 225 (LHS) Forein Investors Net Purchase (RHS)

Upto May 8th 2015(Source) Tokyo Stock Exchange, SMAM

(JPY bi l lion)

(Yen)

0

5,000

10,000

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25,000

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04/12 05/06 05/12 06/06 06/12 07/06 07/12 08/06 08/12 09/06 09/12 10/06 10/12 11/06 11/12 12/06 12/12 13/06 13/12 14/06 14/12

Foreign Investors Net Purchase of Cash Equities (cumulative)

Nikkei 225 (LHS) Net Purchase of Cash Equities (RHS)

Upto May 8th 2015(Source) Tokyo Stock Exchange, SMAM

(Yen) (JPY bi l lion)

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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