Japanese Stock Market Outlook

SMAM monthly comments & views - November 2015 -

Japanese Economy

Japanese economy is likely to stay under pressure from sluggish external demand for a while. Policy measures taken in China and their effectiveness hold a key. Fiscal and monetary measures can be expected in Japan early next year, which should lift Japanese economy to be back on a recovery path again.

• GDP forecast for FY2015 was downgraded from +0.7% to +0.6% due mainly to weaker exports and private capital

investment. Forecast for FY2016 was also downgraded from +1.1% to +0.9%.

• For FY2016, private sector is expected to show a reasonable growth, consumption at +1.8%, housing investment at

+4.3% and capital investment at +2.1%. Contraction in the public capital investment is the main drag, for which “special

spending program of reconstruction from the earthquake and tsunami in 2011” comes to an end.

Japanese Stock Markets

Risk-off mode has moderated somehow, which made global markets to rebound lately. The Japanese stock market will be in a range bound move for the short term until expected fiscal and monetary measures are brought in early next year though downside risk seems limited with low valuation for the stock market.

• Corporate earnings are expected to keep growing despite increasing pressure on top-line sales. Lower costs

such as energy and materials have been supportive so far. Some caution is required as analysts are revising

earnings forecasts more often downward than upward recently.

• Since Abenomics started, PER for Japanese stock market, in TOPIX index, has been in a range between 13x

and 16x. Current PER below 14x is in a lower side of this range and downside for the stock market seems

limited.

Executive summary

1

Notes: Macro and market views are as of October16th and 21st 2015 respectively, and subject to updates thereafter without notice

Outlook for Japanese Economy

2

3

GDP forecast for FY2015 was downgraded from +0.7% to +0.6% due mainly to weaker exports and private

capital investment. Forecast for FY2016 was also downgraded from +1.1% to +0.9%.

For FY2016, private sector is expected to show a reasonable growth, consumption at +1.8%, housing

investment at +4.3% and capital investment at +2.1%. Contraction in the public capital investment is the main

drag, for which “special spending program of reconstruction from the earthquake and tsunami in 2011” comes

to an end.

Notes: E=SMAM forecasts. SMAM views are as of Oct16th, 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% -0.9% 0.6% 0.9%

Private Consumption Expenditure 1.8% 2.5% -3.1% 0.2% 1.8%

Private Housing Investment 5.7% 9.3% -11.7% 2.9% 4.3%

Private Capital Investment 1.2% 4.0% 0.5% 1.1% 2.1%

Public Consumption Expenditure 1.5% 1.6% 0.4% 1.1% 0.2%

Public Capital Investment 1.0% 10.3% 2.0% 1.0% -0.1%

Net Exports (contrib. to GDP growth) -0.8% -0.5% 0.6% -0.4% -0.4%

Exports -1.4% 4.4% 7.9% -1.7% 1.7%

Imports 3.6% 6.7% 3.6% 0.5% 4.4%

Nominal GDP 0.1% 1.8% 1.6% 1.3% 1.7%

GDP Deflator -0.9% -0.3% 2.5% 0.7% 0.7%

FY15E FY16EFY12 FY13 FY14

510

515

520

525

530

535

540

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

13 14 15 16

（Yen trillion） GDP

4

GDP is likely to stay under pressure from sluggish external demand for a while. Policy measures

taken in China and their effectiveness hold a key.

Fiscal and monetary measures can be expected in Japan early next year, which should lift

Japanese economy to be back on a recovery path again.

SMAM quarterly GDP forecast for FY15-16

(Source) Cabinet Office, forecast by SMAM

Q

SMAM forecast

Deteriorating exports to China and other Asian countries are causing negative effects

Continuing slowdown in Chinese economy is spilling over to other Asian countries, which is causing negative

growth in exports from Japan. Declining exports lead to lower industrial production and causes a concern for

the private capital investment.

5

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

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

10 11 12 13 14 15

China

Asia excl. China

U.S.

EU

Others

Total Exports

Total Exports and contribution by destinations (QoQ%)(QoQ %)

(Source) Ministry of Finance and Bank of Japan, compiled by SMAM

Note: Data for 3Q2015 is the average of monthly data already announced.

Negative impact of China’s slowdown on Industrial Production has been larger than expected

6

Recently released Industrial Production (IP) data were worse than previously forecast. SMAM revised forecast

for 3Q2015 from previous -0.3% to -1.5% (QoQ % change).

Due to continuing slowdown in China, recovery in IP from 4Q2015 is currently estimated as moderate.

70

75

80

85

90

95

100

105

110

115

120

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

2

Q

3

Q

4

Q

1

Q

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

SMAM's forecast for Industrial Production

SMAM Forecast

(Source) Ministry of Economy, Trade and Industry, Forecast by SMAM

Note: Shaded period means recession.

(2010=100)

7

Private Consumption is recovering from a temporal dip in Apr-Jun quarter

Private Consumption is recovering in July-Sep quarter from the dip in the quarter before, for which miserable

weather and rising prices for essential items were partly blamed.

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

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

10 11 12 13 14 15

Private Consumption Integrated Estimates

Household Survey (Consumption)

Retail Sales (inflation adjusted)

GDP Private Consumption

(Source) Cabinet Office, Ministry of Economy, Trade and Industry

Various Statistics for Private Consumption(QoQ %)

Note: Data for 3Q2015 is the average of monthly data already announced.

8

Increase in regular wage has been positive for consumers

Regular wage payment has been increasing YOY since January 2015, which has been positive for consumers.

Whether this increasing trend in wage can be sustained in and after FY2016 is quite important for the Japanese

economy, and underlying strength in corporate earnings requires close attention.

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

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 4 5 6 7 8

12 13 14 15

Overtime etc

Bonus

Regular wage

Tot cash wage paymentYOY%

Cash wage payment and contribution by components（YOY %）

(Source) Ministry of Health, Labor and Welfare

Outlook for Japanese Stock Markets

9

Stock market outlook: The stock market is waiting for further stimulus measures

SMAM short-term view

Risk-off mode has moderated somehow, which made global markets to rebound lately. The Japanese stock

market will be in a range bound move for the short term until expected fiscal and monetary measures are

brought in early next year though downside risk seems limited with low valuation for the stock market.

Longer-term outlook (6-months and beyond) Chinese economy is expected to gradually stabilize as policy measures buildup further and start to take effect. Atmosphere around the stock market would get brighter as fiscal measures and additional monetary stimulus

are expected in early next year and further economic policies and initiatives can be announced running up to the upper house election expected in July 2016.

Note: SMAM’s Projection is as of October 21st 2015 and subject to updates without notice

10

700

900

1,100

1,300

1,500

1,700

1,900

Ju

l-1

2

Au

g-1

2

Se

p-1

2O

ct-

12

No

v-1

2D

ec-1

2

Ja

n-1

3

Fe

b-1

3M

ar-

13

Ap

r-1

3M

ay-1

3

Ju

n-1

3Ju

l-1

3

Au

g-1

3

Se

p-1

3O

ct-

13

No

v-1

3D

ec-1

3

Ja

n-1

4

Fe

b-1

4M

ar-

14

Ap

r-1

4M

ay-1

4

Ju

n-1

4Ju

l-1

4

Au

g-1

4

Se

p-1

4O

ct-

14

No

v-1

4D

ec-1

4

Ja

n-1

5

Fe

b-1

5M

ar-

15

Ap

r-1

5M

ay-1

5

Ju

n-1

5Ju

l-1

5

Au

g-1

5

Se

p-1

5O

ct-

15

No

v-1

5D

ec-1

5

Ja

n-1

6

Fe

b-1

6M

ar-

16

Ap

r-1

6M

ay-1

6

Ju

n-1

6Ju

l-1

6

Au

g-1

6

Se

p-1

6O

ct-

16

No

v-1

6D

ec-1

6

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 economic recovery to be sustained led by strong US economy

• Japan’s private consumption to grow though mildly supported by higher real wages growth

• 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:

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

• Concern over emerging economies including China

• Increasing geopolitical concerns

11

12

Corporate earnings are expected to keep growing despite increasing pressure on top-line sales. Lower

costs such as energy and materials have been supportive so far.

Some caution is required as analysts are revising earnings forecasts more often downward than

upward recently.

Earnings growth is expected to continue for Japan with a caution for down-revisions

(10)

10

30

50

70

90

110

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2003/12 2005/06 2006/12 2008/06 2009/12 2011/06 2012/12 2014/06 2015/12 2017/06

EP

S(Y

en

)

TO

PIX

ＴＯＰＩＸ and EPS

Source : Bloomberg, DataStream

IBES Consensus EPS

TOPIX

12M FWD EPS

18M FWD EPS

Historical EPSConsensus Estimate

As of Sep. 2015

-40%

-30%

-20%

-10%

+0%

+10%

+20%

+30%

2011 2012 2013 2014 2015

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 Oct. 15th

8.0

10.0

12.0

14.0

16.0

18.0

20.0

PER of MSCI country indices

Date period from Jan.2012 to Sep.2015

PER has fallen globally and relative attractiveness for Japan still holds

PER has fallen globally on decelerating economic growth and concern for further deterioration.

If these concerns can be lightened by policy measures by governments and some evidence of stabilizing

economies, PER could be lifted again.

Better fundamentals in Japan, such as faster earnings growth and improving corporate governance should be

favorable for Japanese equities.

13

USA 8.0%

Europe 6.6%

Japan 11.7%As of 15-Oct-2015

12Month EPS

Growth forecast

15.6 US

13.8 Europe

12.9 Japan

Note: PER is based on 12 month forward EPS forecast as of the end of each month.

(Source) MSCI , IBES , FactSet

PER for Japanese stock market seems attractive in historical comparison

Since Abenomics started, PER for Japanese stock market, in TOPIX index, has been in a range between 13x

and 16x.

Current PER below 14x is in a lower side of this range and downside for the stock market seems limited.

14

300

500

700

900

1,100

1,300

1,500

1,700

1,900

Jan

-07

Ma

r-07

Ma

y-0

7

Jul-0

7

Se

p-0

7

Nov-0

7

Jan

-08

Ma

r-08

Ma

y-0

8

Jul-0

8

Se

p-0

8

Nov-0

8

Jan

-09

Ma

r-09

Ma

y-0

9

Jul-0

9

Se

p-0

9

Nov-0

9

Jan

-10

Ma

r-10

Ma

y-1

0

Jul-1

0

Se

p-1

0

Nov-1

0

Jan

-11

Ma

r-11

Ma

y-1

1

Jul-1

1

Se

p-1

1

Nov-1

1

Jan

-12

Ma

r-12

Ma

y-1

2

Jul-1

2

Se

p-1

2

Nov-1

2

Jan

-13

Ma

r-13

Ma

y-1

3

Jul-1

3

Se

p-1

3

Nov-1

3

Jan

-14

Ma

r-14

Ma

y-1

4

Jul-1

4

Se

p-1

4

Nov-1

4

Jan

-15

Ma

r-15

Ma

y-1

5

Jul-1

5

Se

p-1

5

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 October 15th 2015

TOPIX and PER based on 12-month forward EPS

16x

12x

13x

14x

15xPM Abe's 2nd term started

Supply-Demand balance: Foreign investors’ risk-off seems receding

Between August 10th and October 2nd, foreign investors sold as much as 7 trillion yens in Japanese stock

markets when trades of individual stock and futures are combined. For the week between October 5th and 9th

they bought back some and selling pressure has receded.

Japan Post is going to be listed on the stock exchange on November 4th, for which good appetite from

individual investors is expected on high dividend yield and low PBR.

15

0

5,000

10,000

15,000

20,000

0

100

200

300

400

500

600

700

2010 2011 2012 2013 2014 2015

Foreign Investor Net-Buys & Nikkei 225

Foreigners' net buy accumlated (LHS)

Nikkei 225 end week(RHS)

Notes: Calendar year, weekly. Foreign investors' net purchase of TSE listed stocksSource: Tokyo Stock Exchage, SMAM

(JPY)(JPY '00bn)

Up to Oct 16th

16

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

completeness or accuracy. = All rights, titles and interests in this material and any content contained herein are the exclusive properties of SMAM, except as otherwise stated.

It is strictly prohibited from using this material for investments, reproducing/copying this material without SMAM’s authorization, or from

disclosing this material to a third party.

Registered Number: Kanto Local Finance Bureau (KINSHO) No.399

Member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type Ⅱ Financial Instruments Firms Association

© Sumitomo Mitsui Asset Management Company, Limited