Japanese Stock Market Outlook

SMAM monthly comments & views - December 2017 -

Japanese Economy SMAM slightly upgraded GDP growth forecast for FY2018 from 1.1% to 1.2 % considering stronger than expected economic growth going on in Japan. Current economic reform, stimulative public spending as well as extra easy monetary policy will continue. Additional budgetary spending such as on education is expected. • Approval rating for Abe cabinet rose to 46% and disapproval rating fell to 35% in November, as PM Abe carefully avoided

sounding complacency after the landslide victory in the last general election in October. Diplomatic activities PM Abe might also have appealed positively.

• SMAM revised CPI forecast upward a little due to higher energy prices.

Japanese Stock Markets Japanese stock market is recovering to the level, which was seen decades ago. It might take some breather after a strong rally continuing since the latter half of September, however, robust earnings growth is expected to drive the stock market further upward. Apr-Sep interim results are beating consensus estimates. • Jul-Sep quarter earnings for Japanese companies were robust, especially for manufacturing companies, and much better

than the preceding forecasts. Analysts are currently revising earnings forecasts upwards. Both historical EPS and 12M forward EPS are already higher than the last peak in late 2015 and advancing further.

• Risk factors are such as North Korea situation, possible slowdown in Chinese economy, US budget debate and effects of monetary policy change in EU and US.

Executive summary

1

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

Outlook for Japanese Economy

2

3

SMAM slightly upgraded GDP forecast for FY2018 from 1.1 to 1.2 %.

CPI is expected to rise just mildly.

Notes: E=SMAM forecasts. SMAM views are as of Nov. 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 FY17-18

( YoY %)

Real GDP growth 2.6% -0.5% 1.3% 1.3% 1.5% 1.2% Private Consumption Expenditure 2.7% -2.6% 0.6% 0.7% 1.1% 0.8% Private Housing Investment 8.3% -9.9% 2.8% 6.6% 2.0% 2.2% Private Capital Investment 7.0% 2.4% 0.6% 2.4% 2.5% 2.6% Public Consumption Expenditure 1.7% 0.4% 2.0% 0.4% 0.8% 0.7% Public Capital Investment 8.6% -2.1% -1.9% -3.2% 2.1% -0.5%Net Exports (contrib. to GDP growth) -0.5% 0.6% 0.1% 0.7% 0.4% 0.2% Exports 4.4% 8.8% 0.7% 3.2% 5.0% 2.9% Imports 7.1% 4.3% 0.2% -1.3% 2.6% 1.7%Nominal GDP 2.6% 2.0% 2.7% 1.1% 1.6% 1.9%GDP Deflator 0.0% 2.5% 1.5% -0.2% 0.1% 0.7%Industrial Production 3.0% -0.4% -1.4% 1.5% 4.5% 2.5%CPI (excl. fresh food) 0.8% 0.9% -0.1% -0.2% 0.7% 0.8%

FY16 FY18EFY13 FY14 FY15 FY17E

4

Approval rating for Abe cabinet recovered in November

Approval rating for Abe cabinet rose to 46% and disapproval rating fell to 35% in November, as PM Abe carefully avoided sounding complacency after the landslide victory in the last general election in October. Diplomatic activities PM Abe also might have appealed positively.

In the survey in October, disapproval rating was higher than approval rating, which indicated that Japanese people were not as satisfied with PM Abe’s leadership as the election results showed.

Current economic reform, stimulative public spending as well as extra easy monetary policy will continue. Additional budgetary spending such as on education is expected.

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Obuchi Mori Koizumi Abe 1 Fukuda Aso Hatoyama Kan Noda Abe 2 Abe 2 disapproval

Approval ratings of Japanese cabinets by Prime Ministers(%)

Note: Data is from Aug 1998 to Nov. 2017(Source) NHK (Japan Broadcasting Corporation)

Nov.apporove

46%

disapporove35%

Current Abe

(Month/Year)

5

CPI is expected to stay just mildly positive SMAM revised CPI forecast upward a little due to higher energy prices.

Core CPI, which excludes fresh food, is going to stay mildly positive for the foreseeable future.

Extra-easy monetary policy is going to continue in Japan despite expected tapering in Europe and US.

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-1.4

-1.2

-1.0

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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

2014 2015 2016 2017 2018 2019

Food (excl. fresh food)

Energy

Baseline CPI (excl. food &energy)Core CPI (excl. fresh food)

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.

(Month/Year)

Note: Data is from Jan. 2011 to Sep. 2017(Source) Bank of Japan

Consumption Activity Index (total)(2010=100, seasonally adjusted, foreign visitors consumption adjusted)

93959799

101103105107109

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52.2

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Economy Watchers DI

Notes: Diffusion indices of "Economy Watchers Survey". DI above 50 means condition is improving. Data period is from Jan. 2006 to Oct 2017.(Source) Cabinet Office

Private consumption growth remains moderate meanwhile consumer sentiment is improving After a robust growth in 2Q 2017, private consumption has lost some momentum lately. Extremely rainy August

was partly blamed for this slow down.

However, consumer sentiment actually improved in recent months as Economy Watchers DI showed. Job security in a tight labor condition is one of the positive factors behind.

6

(Year)

7

Labor market gets tighter and tighter Number of unfilled job vacancy keeps climbing in the face of decreasing number of job seekers.

Note: Data is from Jan 2012 to Sep 2017. (Source) Ministry of Health, Labour and Welfare

(Year) (Year)

Job vacancy/ seekers ratio (seasonally adjusted)

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1.0

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(times)Number of job vacancy and job seekers (seasonally adjusted)

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2012 2013 2014 2015 2016 2017

Job vacancyJob seekers

(0000's)

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Wage increase has been at a mild pace, less than 1% YoY Nominal wage has been increasing very mildly by less than 1% YoY.

Bonus in 2018 is likely to see a sizable increase if ongoing strong business performance to continue, which will support the private consumer spending.

-3.0

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Bonus

Overtime payment

Regular oayment

Total wage

(%)

Note: Data is from Jan. 2012 to Sep. 2017(Source) Ministry of Health, Labour and Welfare

(Year)

Attribution of wage increase (YoY %)

Outlook for Japanese Stock Markets

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2028.82Apr 17, 1991

1712.73Jun 13, 1994 1722.13

Jun 26, 19961754.78

Feb 7, 2002

1816.97Feb 26, 2007

1813.29Nov 7, 2017

600800

100012001400160018002000220024002600280030003200

TOPIX

(Source) TOPIX: Tokyo stock exchange

(Points)

(Month/Year)Note: Topix data is from Jan. 5th 1988 to Nov. 7th 2017.

Stock market outlook: Solid footage on good fundamentals with remaining North Korean risk SMAM short-term view Japanese stock market is recovering to the level, which was seen decades ago. It might take some breather

after a strong rally continuing since the latter half of September, however, robust earnings growth is expected to drive the stock market further upward. Apr-Sep interim results are beating consensus estimates, especially, for manufacturing companies.

Longer-term outlook (6-months and beyond) Upward revision of earnings growth forecasts will continue to underpin the strong performance of the stock

prices. Pro-growth economic policy is going to continue under re-strengthened political backing of PM Abe and his government, which is also positive for the Japanese economy and stock market. Major risk factors will be such as unexpected slowdown in global economy, unexpected hawkish shift in monetary policy by central banks and geopolitical risk especially surrounding North Korea.

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2013 2014 2015 2016 2017

TOPIX Earnings Forecast Revision Index

Notes: Revision index= % of Analyst upgrades out of total Topix firms - % of downgrades.Data is weekly from Jan. 7th 2013 to Nov. 13th 2017.(Source): IBES, SMAM

(Year)

Upward revisions of EPS forecasts are currently going on for Japanese companies

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Jul-Sep quarter earnings for Japanese companies were robust and much better than the preceding forecasts.

Analysts are currently revising earnings forecasts upwards as shown in the revision index chart.

Both historical EPS and 12M forward EPS are already higher than the last peak in late 2015 and advancing further.

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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 EPS growth(right)

Note: Weekly data from Jan. 3th 2011 to Nov. 13th 2017.

(Source) Datastream, IBES

(Points)

(Month/Year)

12

Japanese stock market made a catch-up move lately meanwhile emerging market leads the league

12

Emerging market continued to rise strongly.

Japanese stock prices in US dollars rose to make a catch-up move to US peers.

708090

100110120130140150 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: Data is up to Nov. 17th 2017.(Month/Year)

Comparing EPS growth and PER, US looks expensive

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PER rose in October due to rise in share price, meanwhile 12M forward EPS forecast declined after robust EPS growth in 2Q 2017 went behind.

Asia looks attractive with the highest EPS growth and the lowest PER among 4 indices, though risk needs to be put into consideration as well.

US looks expensive in PER, but EPS growth forecast was upgraded. Japan looks more attractive than Europe with higher EPS growth and lower PER, though the difference is not large.

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PER of MSCI country indices

MSCI Europe MSCI AC Asia ex JP USA Japan

Note: PER is based on 12M forward EPS forecast.Data is up to 31st Oct 2017.

(Source) MSCI

(times)

(DD/MM/YYYY)

9.46

13.2111.85

9.73

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EPS growth of MSCI country indices

MSCI Europe MSCI AC Asia ex JP USA Japan

Note: Growth is for 12M forward EPS forecast.Data is up to 31st Oct 2017.

(Source) MSCI

(DD/MM/YYYY)

(%)

Increasing shareholder returns lifted ROE to 9.9% in FY 2016

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ROE rose to 9.9% in FY2016 from 8.5% recorded in FY2015. EPS rose by 18.3%.

After hitting the previous high of 9.5% in FY2013, ROE actually declined due to rapidly accumulating capital despite EPS growth. However, growth of shareholder capital in FY 2016 was controlled at 5.7% owing partly to increasing dividend and share buybacks. Profit margin improvement was also positive for ROE.

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ROE for SMAM research coverage 224 companies

Total 224 (excl. financials)Manufacturing 134Non-manufacturing 90

SMAM forecast

(Fiscal year)Note: Forecast is as of 5th Sep 2017. Displayed numbers are for total companies.(Source) SMAM Corporate Research Group

15

Japanese companies are increasing dividends and share buybacks

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(%)(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 subsidiariesSource : Toyo Keizai, Quick, I-N Information Systems, Daiwa Securities forecasts

(FY)

Forecast

Total of dividend and share buyback amount renewed a historical record in FY2016 and expected to rise further. Total shareholder return, which is the percentage of shareholder earnings returned to shareholders by way of

dividend & share buyback, was 43.5% in FY2016, which is expected to increase just marginally in FY2017 and FY2018.

Foreign investors bought back Japanese shares in October Foreign investors turned to purchasing Japanese shares in October meanwhile individuals were the largest

sellers. BOJ’s ETF purchasing slowed lately in a strong performance of stock prices.

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Net purchasing of Japanese equities by investor types

Foreign Trust bank Individual Inv. Trust Fund Business corp BOJ ETF TOPIX

TOPIX (points)

Bar charts (Yen billion)

(Source) Japan Exchange Group, Bank of Japan

Note: Data is for Tokyo stock exchange and Nagoya stock exchange up to Nov.10th 2017.BOJ ETF figure is officially released data from BOJ.

2016(Month/Year)

2017

17

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.

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