Outlook for Japanese Stock Market & Economy - Sumitomo Mitsui DS Asset Management
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Outlook for Japanese Stock Market & Economy Sumitomo Mitsui DS Asset Management -November 2021-
Outlook for
Japanese Stock Market
1
Market Outlook
• We are bullish on Japanese equity market thanks to strong earnings growth and
accelerating economic recovery towards FY 2022.
• Our TOPIX target is unchanged at 2,180 for FY 2021 and 2,200 for CY 2022.
• We forecast TOPIX EPS could reach 131 points, an historical high, in FY 2021 and 141
in FY 2022.
• Though investors are concerned about bottle-neck driven inflation and Chinese economy,
including real estate problem, electricity shortage, and slowing economic growth, in the
short term, we expect market will be back to a bullish trend after confirming sound
fundamentals of global economy and strong corporate earnings towards next year.
2TOPIX Index and Forecast
(Points)
2,600
2,400 TOPIX - Price
Forecast range upside
Forecast range downside
2,200
2,000
1,800
1,600
1,400
1,200
1,000
2016/1 2016/7 2017/1 2017/7 2018/1 2018/7 2019/1 2019/7 2020/1 2020/7 2021/1 2021/7 2022/1 2022/7
Note: TOPIX data is from Jan. 1st 2016 to Oct. 22nd 2021 (Year/Month)
(Source) TOPIX: Tokyo Stock Exchange, forecast by SMDAM
3Upside / Downside Risk
Upside Risks
• Rapid normalization of global economy thanks to the development of effective
therapy/treatment for COVID-19 patients
• Steep increase in approval rate of new Prime Minister Kishida and his cabinet
Downside Risks
• Uncertainty over domestic politics
• Delay of normalization of domestic economy due to COVID-19 new variant
• Additional bottle neck in global supply chain
• Concern about stagflation
4Global Comparison of Key Valuations: PER
5Global Comparison of Key Valuations: Earnings Growth
6Global Comparison of Key Valuations: ROE
7Revision of Earnings Forecasts
(Year/Month)
8Top Down Approach, Model Implied Fair Value
(Yen)
Model Estimate of TOPIX EPS
200
180 12MF Consensus EPS
Model Estimate EPS
160
±2S.E.
140
120
100
80
60
40
20
0
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Consensus data is from Jan. 2006 to Sep. 2021, Model data is from Jan. 2006 to Dec. 2022. （Year）
（Source）SMDAM
9Top Down Approach, Model Implied Fair Value
(Times)
Macro Implied TOPIX PER
24
22 PER
Macro Implied PER
20
+/-1σ
18
16
14
12
10
8
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Consensus data is from Jan. 2006 to Sep. 2021, Model data is from Jan. 2006 to Dec. 2022. （Year）
（Source）SMDAM
10Top Down Approach, Model Implied Fair Value
(Points)
Model Estimate of TOPIX Fair Value
2,500
Model Estimate TOPIX Fair Value (PER x15.5)
2,000 TOPIX
1,500
1,000
500
0
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
TOPIX data is from Jan. 2006 to Sep. 2021, Model data is from Jan. 2006 to Dec. 2022. （Year）
（Source）SMDAM
11Bottom Up Estimate, Corporate Earnings Growth
Note: Data is as of Oct. 8th 2021, SMDAM Core Universe consists of 450 major Japanese companies covered by SMDAM in-house analysts.
(Source) SMDAM
12Bottom Up Estimate, Corporate Earnings
(Source) SMDAM
13Corporate Governance Code and Stewardship Code
Investors that have signed up to the Principles for
Responsible Institutional Investors
Trust banks 6
Investment managers 202
Insurance companies 24
Pension funds 72
Others 12
Total 316
note: As of Sep. 30th 2021
(Source) FSA, SMDAM
The Stewardship Code (SC) was set in February 2014. Investors are taking a more pro-active approach in talking to the companies and exercising proxy voting
rights. The Financial Services Agency discloses the name of institutional investors which have publicly accepted the SC.
After the inception of the Corporate Governance Code (CGC) in June 2015, pressure has been increasing on companies to improve its governance, efficiency
and shareholder returns.
These two codes have been progressively reviewed and enhanced, and are making visible impact on corporate behavior and investors’ attitudes as shareholders.
In the recent amendment of the CGC, companies are required to explain the rationale of “cross holdings” or “strategic holdings” of other companies’ shares,
which implicitly provide protection against takeovers and hostile shareholder actions, and is often negative for achieving shareholder value.
The SC was reinforced in March 2020 to require investors to evaluate ESG factors.
14Shareholder Returns, Buybacks and Dividends
Shareholder Return Ratio, Div. Payout Ratio, Dividend Payment, & Share Buyback
(tr, ¥) (％)
Forecast
(Fiscal Year)
Note: Data is from FY1995 to FY2022, FY2021 and FY2022 are forecast of Toyo-Keizai in dividend and of
Daiwa Securities in share buybacks.
Source: Toyo Keizai, Quick , and INDB compiled by Daiwa Securities
15Winners and Losers
Performance Comparison of Russell/Nomura Style Indices
Returns(%)
Index
3 Month 6 Month YTD 1 Year 2 year 3 Year 5 Year
RN Japan Equity 0.67 0.91 9.79 20.44 24.96 17.50 49.05
Total Value 2.35 3.04 17.53 26.03 15.05 4.00 33.23
Top Cap Value 2.94 6.34 21.43 31.94 22.63 13.60 42.83
Large Cap Value 2.68 3.79 18.98 28.38 15.70 5.41 34.62
Mid Cap Value 2.37 0.75 16.04 24.07 6.23 -5.74 23.33
Small Cap Value 0.76 -0.42 11.00 15.80 12.01 -2.34 26.37
Micro Cap Value 0.22 -0.15 8.55 12.23 9.30 -3.11 29.66
Total Growth 0.31 -1.04 2.03 15.12 33.06 30.21 64.30
Top Cap Growth 0.52 -1.13 2.48 20.93 36.76 36.03 69.95
Large Cap Growth 0.35 -1.21 1.72 16.23 34.63 32.38 65.45
Mid Cap Growth 0.05 -1.34 0.47 9.22 31.14 26.71 58.33
Small Cap Growth -0.06 0.66 5.25 6.33 20.76 14.09 54.23
Micro Cap Growth -0.24 -0.96 6.37 6.90 24.96 16.28 64.52
Top Cap Total 1.67 2.34 10.82 26.09 30.23 25.11 56.42
Large Cap Total 1.53 1.29 9.90 22.29 26.49 19.84 50.96
Mid Cap Total 1.33 -0.18 8.58 16.90 21.22 12.40 43.32
Small Cap Total -0.39 -0.46 9.14 12.34 16.06 4.53 37.23
Micro Cap Total 0.08 -0.39 7.90 10.28 14.99 3.86 42.36
Note : As of Oct. 11th 2021
(Source) Bloomberg
16Outlook for
Japanese Economy
17Summary of Japanese economy
Current Status and Prospects of the Japanese Economy
[Current Status]
• The economy is in a stable condition. Despite negative factors such as global supply-chain problems, an overseas economic
slowdown, and soaring raw material prices, the economy is supported by consistent capital expenditure and recovery of domestic
demand thanks to the progress of vaccinations and lifting coronavirus restrictions.
[Outlook]
① We have revised down our real GDP growth forecast to +3.3% from +3.5% for FY 2021 and +2.9% from +3.1% for
FY2022. Major reasons for the downward revision are the global supply chain bottleneck and slowing global economy. In the
third quarter of 2021, Japanese economy is in a soft patch. In the fourth quarter of 2021 and the first quarter of 2022, however,
the growth rate is expected to accelerate thanks to the progress of vaccinations and lifting behavioral restrictions. The
supplementary budget for FY 2021 is expected to be launched by the end of 2021, and further fiscal stimulus is expected to be
effective from FY 2022.
② We have raised our core CPI forecast to +0.1% from 0.0% for FY 2021, and +1.1% from +0.7% for FY 2022. The major
reasons for revision are rising crude oil and other energy prices. However, the pricing pressure from the supply-demand balance
is moderate, and underlying inflationary pressure is likely to be limited.
③ Current accommodative monetary policy of the BOJ will be maintained for the foreseeable future due to low inflation and
negative impact to the economy caused by the COVID-19 pandemic. Further monetary easing could be implemented only in case
of emergency, such as excessive currency appreciation.
④ We expect new PM Kishida and his cabinet to maintain existing policy mix, accommodative fiscal and monetary policy.
Supplementary budget for FY 2021 could be increased by as much as 30 trillion yen due to relatively low approval rate
of the new cabinet and negative impact to the economy caused by 5th wave of the pandemic.
18Japan Economy Forecast
Forecast of Annual Real GDP Growth
Fiscal Year FY16 FY17 FY18 FY19 FY20 FY21 Est FY22 Est
Real GDP 0.8% 1.8% 0.2% -0.5% -4.4% 3.3% 2.9%
Private final consumption expenditure -0.3% 1.0% 0.1% -1.0% -5.8% 2.9% 2.5%
Private housing investment 4.3% -1.8% -4.9% 2.5% -7.2% 2.6% 1.6%
Private-sector capital investment 0.8% 2.8% 1.0% -0.6% -6.8% 3.6% 4.9%
Public fixed capital formation 0.5% 0.6% 0.8% 1.5% 4.2% -0.1% 2.0%
Net export contribution 0.7% 0.4% -0.2% -0.4% -0.6% 0.8% 0.2%
Exports of goods and services 3.4% 6.3% 2.0% -2.2% -10.4% 12.6% 4.6%
Imports of goods and services -0.5% 3.8% 3.0% 0.2% -6.8% 7.7% 3.6%
Nominal GDP 0.8% 2.0% 0.1% 0.3% -3.9% 2.7% 3.2%
GDP deflator 0.0% 0.2% -0.1% 0.9% 0.6% -0.6% 0.3%
Industrial Production Index 0.8% 2.9% 0.3% -3.7% -9.9% 8.0% 4.8%
Consumer Price Index (Core) -0.2% 0.7% 0.8% 0.4% -0.6% 0.1% 1.1%
Domestic corporate goods price index -2.4% 2.7% 2.2% 0.1% -1.4% 5.3% 0.6%
Employee compensation 2.4% 2.0% 3.2% 2.0% -2.0% 0.9% 1.7%
Unemployment rate 3.0% 2.7% 2.4% 2.4% 2.9% 2.8% 2.7%
Call Rate (End value) -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%
(Note) Rate of increase over the previous year. Net exports are based on the degree of contribution, and the consumer price index (Core) excludes the effects of the
consumption tax and free education. The forecast is for Sumitomo Mitsui DS Asset Management.
(Source) Creation of Sumitomo Mitsui DS Asset Management based on data from the Cabinet Office, the Ministry of Internal Affairs and Communications, and the Ministry of
Economy, Trade and Industry
19Consumer Price Index
(Data) Jan. 2005 to Sep. 2021
(Source) MIAC, Bloomberg, SMDAM
20Break Even Inflation & Real Interest rate
JGB Yield, BEI, and Real Interest rate
(％)
1.5
10 Year JGB Rate
Break Even Inflation Rate
1.0 10 Year Real Interest Rate
0.5
0.0
▲ 0.5
▲ 1.0
14 15 16 17 18 19 20 21
(Year)
(Data) From Jan. 1st 2014 to Oct. 15th 2021
(Source) Bloomberg, SMDAM
21COVID-19 New Cases & Confirmed Deaths
COVID-19 New patients and confirmed deaths
Daily deaths
140
June 2021-
120
April 2021 to May 2021
Jan. 2021 to Mar 2021
100
Sep. 2020 to Dec. 2020
80 Jan. 2020 to June 2020
60
40
20
0
0 5,000 10,000 15,000 20,000 25,000
Daily new cases
(Data) 7 days moving average, From Jan. 1st 2020 to Oct. 13th 2021
(Source) Bloomberg, SMDAM
22COVID-19 New Cases & Hospitalizations, Nationwide
New Cases and Hospitalizations New Cases and Patients in ICU Beds
（Case） （Case） （Case） （Case）
250,000 25,000 2,500 25,000
Patient in ICU（LHS）
Hospitalization（LHS）
200,000 20,000 2,000 New Case（RHS） 20,000
New Case （RHS）
150,000 15,000 1,500 15,000
100,000 10,000 1,000 10,000
50,000 5,000 500 5,000
0 0 0 0
20/2 20/6 20/10 21/2 21/6 21/10 20/2 20/6 20/10 21/2 21/6 21/10
(Year/Month) (Year/Month)
（Data）7 days moving average. From Feb. 1st 2020 to Oct. 16th 2021.
（Source）MHLW, NHK, SMDAM
23COVID-19 New Cases & Hospitalizations, Tokyo
New Cases and Hospitalizations in Tokyo New Cases and Patients in ICU Beds in Tokyo
（Case） （Case） （Case） （Case）
50,000 6,000 350 6,000
45,000 Patient in ICU（LHS）
Hospitalization（LHS）
300
New Case （RHS） 5,000 New Case （RHS） 5,000
40,000
35,000 250
4,000 4,000
30,000
200
25,000 3,000 3,000
150
20,000
2,000 2,000
15,000 100
10,000
1,000 1,000
50
5,000
0 0 0 0
20/2 20/6 20/10 21/2 21/6 21/10 20/2 20/6 20/10 21/2 21/6 21/10
(Year/Month) (Year/Month)
（Data）7 days moving average. From Feb. 1st 2020 to Oct. 16th 2021.
（Source）MHLW, NHK, SMDAM
24Progress of COVID-19 Vaccinations
(10,000) Daily number of vaccinations (%) Total vaccination/ population ratio
120 90
110 First Dose
First Dose 80
100
Second Dose 70 Second Dose
90
80 60
70
50
60
40
50
40 30
30 20
20
10
10
0 0
2/17 4/17 6/17 8/17 2/17 4/17 6/17 8/17
(Month/Day) (Month/Day)
(Data) From Feb. 17th 2021 to Oct. 14th 2021
(Source) MHLW, SMDAM
25Mobility Data
Google Community Mobility Report, Japan
(Data) 7 Days moving average, From Mar. 1st 2020 to Oct. 5th 2021
(Source) Google, SMDAM
26Purchasing Manager Index
Japanese PMI, Manufacturer and Non-manufacturer
(Data) Jan. 2020 to Sep. 2021
(Source) Bloomberg, SMDAM
27Sensitivity to Chinese Economy
Elasticity Coefficient to Chinese Industrial Production
(Data) Estimate period is from Jan. 2015 to July 2021
(Source) Centraal Bureau voor de Statistiek, SMDAM
28Cabinet approval rate
Cabinet approval rate
(%) Suga Kishida
Abe Cabinet
Cabinet Cabinet
80
70
60
50
40
30
20
10 Approval Disapproval
0
13 14 15 16 17 18 19 20 21 22
(Year)
(Data) From Jan. 2013 to Oct. 2021
(Source) NHK, Asahi, Kyodo, Nikkei, Yomiuri, Sankei, Mainichi, Jiji, and SMDAM
29Political party approval rate
Approval rates of political parties
(%)
50.0
45.0
Jun-21 Jul-21 Aug-21 Sep-21 Oct-21
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
LDP Komei CDP JCP JRP NDP N.A.
(Source) NHK, Asahi, Kyodo, Nikkei, Yomiuri, Sankei, Jiji, and SMDAM
30New Prime Minister and Economic Policy
New Leader of Ruling LDP Party and his Economic Policy
Name Fumio Kishida
Former Political Chairman of LDP
Former Chairman of the Diet Affairs Committee of LDP
Key Biographies
Former Minister of Defense
Former Minister for Foreign Affairs
Faction Kishida
■ New Japanese-style capitalism based on the virtuous cycle of
growth and distribution
Slogan
■ Transformation from Neoliberalism
Orientation of ■ Rectifying Economic Disparities
Economic Policy
■ "Growth Strategy with Four Tactics"
■ Science & Technology Nation
■ Economical National Security
■ Digital Rural City-State Vision
Economic Policy
■ Support for Aging Society
■ Income Doubling & Distribution-Oriented Policy
（Source）SMDAM
31Exports and Manufacturing Activities
Real exports and manufacturing PMI new export orders
（DI）
（y-y,％）
40 70
Real exports (lhs)
Manufacturing PMI new export orders (rhs) 65
30
60
20 55
50
10
45
0
40
▲ 10 35
30
▲ 20
25
▲ 30 20
12 13 14 15 16 17 18 19 20 21
（CY）
(Data) Real export is from Jan. 2012 to Aug. 2021, MFG PMI new export is from Dec. 2011 to Sep. 2021
(Source) BOJ, Cabinet Office, Markit and SMDAM
32Industrial Production
Industrial Production（Monthly）
（Dec. 2019 = 100）
140
Forecast
130
120
110
100
90
80 Total
Materials
70
General Machinery
60 Technology
Transportation Equipment
50
40
19 20 21 （Year）
(Data) From Jan. 2019 to Oct. 2021
(Source) METI, SMDAM
33CAPEX
Plan of CAPEX, Inc. Software, Ex. Land and R&D
（YOY、％）
15
10
5
0
▲5
▲ 10
FY18 FY19 FY20 FY21
▲ 15
March June Sep. Dec. Mar. Est. of June Actual
Actual
(Source) The Bank of Japan, SMDAM
34Consumer Spending
Consumer Activity Index（Dec. 2019 = 100） Retail Sales（Dec. 2019 = 100）
140 160
130 140
120 120
110 100
100 80
Total
90 Total 60
Various goods
Durable Goods Clothes
80 Non-durable goods 40
Food & Beverage
Services
Automobiles
70 20
Machinery
60 0
18 19 20 21 18 19 20 21
(Year) (Year)
(Data) From Jan. 2018 to Aug. 2021
(Source) BOJ, METI, and SMDAM
35Schedule of Major Events
Schedule of Major Domestic Events
2021 November 15 Release of CY 2021 Q3 GDP
December 8 Revision of CY 2021 Q3 GDP
16-17 Monetary Policy Meeting
Outline of Tax Reform of FY 2022
Cabinet Decision on the Budget of FY 2022
2022 January 17-18 Monetary Policy Meeting
Start of Ordinary Diet Session
February 15 Release of CY 2021 Q4 GDP
March 9 Revision of CY 2021 Q4 GDP
17-18 Monetary Policy Meeting
April 27-28 Monetary Policy Meeting
May
June 16-17 Monetary Policy Meeting
End of Ordinary Diet Session
Cabinet Decision on Bold Policy and Growth Strategy
G7 Summit
July 20-21 Monetary Policy Meeting
23 End of the Term of two members of the BOJ Monetary Policy Committee
25 End of the Term of House of Councilors
August
September 21-22 Monetary Policy Meeting
Change of Top Party Officials of LDP
October 27-28 Monetary Policy Meeting
November
December 19-20 Monetary Policy Meeting
Outline of Tax Reform of FY 2023
Cabinet Decision on the Budget of FY 2023
(Source) Compiled by Sumitomo Mitsui DS Asset Management Co., Ltd.
36Disclaimer 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 DS Asset Management Company, Limited (hereinafter “SMDAM”), 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 SMDAM’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 SMDAM 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 SMDAM, except as otherwise stated. It is strictly prohibited from using this material for investments, reproducing/copying this material without SMDAM’s authorization, or from disclosing this material to a third party. Registration Number: The Director of 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 DS Asset Management Company, Limited
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