- Japanese equities remain supported by the Bank of Japan’s accommodative stance, while the aggressive policy stance in western DMs will act as a headwind for the region’s equities.
- Relative to the US and Europe, Japanese equities face milder inflation headwinds. Japanese companies also have stronger pricing power, which helps profit margins weather the inflation pressure.
- Unlike western DMs, Japan has yet to fully re-open. We expect an uplift in its economy when the re-opening gains traction, likely in late-22 and 2023. This will be significant at a time when growth in DM peers are cooling.
- Japanese equities now boast a larger upside potential as compared to US and European equities. We see a maximum upside potential of 27% by March-2024 for Japanese equities.
1. Diverging policy direction. Bank of Japan maintains an accommodative stance
Chart 1: Policy rates for Japan remain negative while major central banks have hiked rates expeditiously
2. Inflation headwinds are milder and companies have strong pricing power
3. Positive re-opening impact in late-22 and 2023
Chart 2: Consensus expects Japan to deliver relatively stronger growth, after lagging in 1Q – 2Q 22
4. Stronger upside potential
Chart 3: Earnings forecast and price performance of Nikkei 225 Index
Table 1: Projections for the Nikkei 225 Index
|
Japan (Nikkei 225 Index) |
FY2022 |
FY2023 |
FY2024 |
FY2025 |
|
PE ratio (X) |
16.6 |
15.4 |
14.5 |
13.4 |
|
Projected earnings growth (YoY %) |
20.7% |
7.6% |
6.6% |
7.6% |
|
Projected Earnings Per Share (EPS) |
1,667 |
1,795 |
1,913 |
2,058 |
|
Target fair price (Based on 18.0X Fair PE ratio) |
- |
- |
- |
37,000 |
|
Potential upside (%) |
- |
- |
- |
33.8% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 2 Sep 2022. *Fiscal year from April 1 to March 31 |
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Multiple reasons but one conclusion
Chart 4: Why Japan is our top equity pick over US and Europe
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