- An improving domestic consumption and a tourism spending boost should drive a consumption-led growth this year, keeping the Japanese economy resilient.
- Balance sheets of corporate Japan are in a strong position entering a global growth slowdown. Corporate earnings have also remained resilient.
- Valuations remain cheap even after the rally. Relative to global peers, Japanese equities continue to trade at attractive valuations.
- We expect the yen to strengthen relative to major currencies this year and see more positive spillovers.
- Mounting momentum for corporate reforms and a potential take-off in Japan’s semiconductor industry provides reason to cheer for beyond the near-term.
Japanese equity indices hit record highs after decades
1. Strong re-opening tailwinds driving a relatively rosier economic outlook
Chart 1: Consumption has rebounded after Japan relaxed measures and is now at 91% of its pre-covid trend
Chart 2: Our expectations remains aligned with consensus - Japan to deliver relatively stronger growth in 2023
2. Solid corporate balance sheets, complemented with resilient earnings outlook
Chart 3: Aggregate cash and cash equivalent for Japanese equities have risen substantially over the past decade
Table 1: Forecasted earnings growth rates (FY23 – FY25) across major equity markets
3. Valuations continue to trade at a discount
Chart 4: Japanese equities are still cheap relative to history, even after the recent rally
4. Currency tailwind from a yen reversal
Chart 5: Markets are pricing in an eventual abandonment of the BOJ's YCC and higher policy rates
5. A brighter longer-term picture
Chart 6: With the recent push for better corporate governance, more foreign investors are entering the Japanese equity market
Further upside for Japanese equities
Chart 7: Earnings forecast for Nikkei 225 Index
Table 2: Projections for the Nikkei 225 Index
|
Japan (Nikkei 225 Index) |
FY2022 |
FY2023 |
FY2024 |
FY2025 |
|
PE ratio (X) |
23.5 |
18.3 |
15.8 |
14.4 |
|
Projected earnings growth (YoY %) |
-24.3% |
28.7% |
15.4% |
9.9% |
|
Projected Earnings Per Share (EPS) |
1,316 |
1,694 |
1,955 |
2,149 |
|
Target fair price (Based on 18.0X Fair PE ratio) |
- |
- |
- |
38,700 |
|
Potential upside (%) |
- |
- |
- |
24.9% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as of 22 May 2023. *Fiscal year from April 1 to March 31 |
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