Untitled

Boj policy rate at 0.5% after hikes

raised inflation outlook
real  interest rate negative

implied policy rates are forward looking.
environment appears to remain conducive 

Moreover, partly because stocks that benefit from a weaker 
yen have not outperformed during recent periods of yen depreciation, we think that even if 
the yen stops weakening somewhat, the negative impact is likely to be limited.

What will Impact Nikkei?
mild inflation after decades of deflation


1. BOJ Interest rate policy obv - The BOJ is expected to lift its policy rate, currently 0.50%, to at least 0.75% this year

2. Trump tarriffs - so who do tarriffs affect? automakers - Global manufacturers, mainly automakers, will be hit and the economy will deteriorate.
Following the seven major tariff-related events during the first Trump administration, the 
TOPIX fell 2.5%
 Japanese market participants tend to be seen as causing a 
lag with US and global equities to the extent that they are overly concerned about such 
factors.
equities in Japan have not made up for all the ground lost, and 
for the moment it looks as though the market has all at once gone through the downward 
adjustment that previously took weeks (Figure 4). While we expect a repeating pattern of 
tariffs being imposed and then relaxed,
During President Trump’s first term, Japan stood out as an island of stability amid tumultuous U.S. foreign relations.
Trump is focused on reciprocity and Japan runs a large bilateral trade surplus with the U.S., 
even as the absolute size has moderately declined over the past two decades, and is relatively small compared to the China and Europe deficit.
The U.S. trade relationship is also important for Japan – exports make up over 20% percent of GDP and exports to the U.S. make up 20% of total exports.


Earnings have continued to be promising. FY24 Q3 results have been solid, with the main trend being for companies to upwardly revise full-year guidance and analyst consensus forecasts also heading upwards. 
The markets have also continued to take a positive view of shareholder returns, with high levels of share buybacks and outperformance by companies that have announced buybacks.
Recurring profits 
and net profits were also better than expected in many cases at exporters, many of which 
booked forex translation losses in Q2 but forex translation gains in Q3. Operating profits 
fell only in the likes of the automobiles & transportation equipment, pharmaceuticals, and 
retailing sectors, and rose in many sectors
3. Economic Grwoth?
Wages are rising - private consumption shows signs of growth - . The scope for Japan’s tourism industry to continue improving relative to 2019 levels is also notable. 
Wage hikes in the spring negotiations picked up for the third straight year, to a 33-year high. 


Japanese Investors can potentially shift cash into equities – Japanese Individuals still hold high levels of cash and deposits, the susceptibility of which to inflation is likely to prompt a shift into Japanese and foreign risk assets via NISAs and other investment vehicles. 


JAPAN INFLATION
Renewed momentum for wage hikes in Japan - We expect wage growth to continue and supported by 2025 wage negotiations. Wage hikes tend to lead to sustained improvement in domestic demand. 

BOJ Monetary Policy - The BOJ is in the middle of a rate hike cycle, with a gradual approach to further hiking if needed. The hike would come to buoy the potential JPY weaknesses and stave off further depreciation, which we believe would be good for the stable economy. 

Greater political stability than in other countries - Economic policy uncertainty indices are high globally, especially in the US (with Trump 2.0), Europe, China, but are stable in Japan. We think Japan could draw attention for the predictability of government policy within a trade system based on freedom and the rule of law
We also expect support from Japan-specific microeconomic factors such as 

1. Ongoing corporate governance reforms, 
2. Pressure on low-P/B stocks from the TSE to improve corporate value, 
3. Unwinding of cross-shareholdings and discipline stemming from the increased presence of activist investors.
We think Japanese corporate earnings are capable of achieving profit growth in the high single digits in FY25. We expect equities to rise in line with EPS growth as price hikes plus volume effects contribute to a macro environment in which profit growth will be easier to generate. If the share buybacks remain buoyant, the equity markets will remain further supported. Furthermore, the market remains attractively valued relative to history and global peers. All these listed factors together give us a positive outlook in Japan Equities over the long term. 


Fed Rate cuts improve dollar-based returns - We expect nonresident investors to become less underweight 
Japanese equities as the strength of dollar-based returns on 
Japanese equities becomes more starkly apparent, predicated on rate cuts by the Fed and a soft landing for the US economy.

Earnings have historically outperformed the economy. 
A relatively slower growing Japanese economy has not hampered equity returns. 
Over the medium and long-term, earnings drive share prices and equity indices. 
Earnings-per-share growth has been a clear driver of long-term U.S. equity outperformance. What is less discussed is that Japanese corporate earnings have largely matched that of the U.S. since 2010, even though Japan’s GDP only grew modestly. This highlights that Japanese-listed corporates are exposed to global growth opportunities and over time have grown earnings at an impressive rate, 
even amidst a slow-growing domestic economy. 

As such, our neutral view on USDJPY remains unchanged. While we acknowledge the positive economic developments in Japan, the strength of the USD and the prospect of sustained elevated U.S. interest rates may limit the downside potential for USDJPY. As an export-oriented economy, Japan may still encounter growth challenges due to potential trade disruptions within Asian value chains, with the uncertainty possibly keeping the BoJ on the sidelines until the second half of the year.
Monetary policy in Japan is directed towards normalization, which should support the yen. The Bank of Japan (BoJ) has taken steps to adjust Yield Curve Control and has raised rates multiple times since March 2024. While the yen initially weakened after these efforts, the long-term outlook is towards policy normalization, which supports the yen in the long term.
Japan's global leaders in sectors like healthcare, IT hardware, renewable energy, and robotics tend to perform well when the yen strengthens, showing their resilience. These companies offer a combination of earnings per share uplift, carry, and large swings in asset flows.

The Japanese equity market is not solely reliant on cheap exports and a weak yen. While value stocks have driven the recent rally, higher-quality stocks have underperformed. This presents an opportunity for quality-focused investors as the market broadens and focuses on sustainable earnings.
That said, in light of escalating geopolitical risks, defensive low-yielding currencies such as the JPY and CHF can be strategically positioned as long positions on crosses (against EUR, CNH) or as a means of portfolio diversification. We are increasingly comfortable with investing in Japanese equities without an FX hedge, thereby maintaining a natural hedge against weaker global risk sentiment.
 FY24 Q3 results solid despite four mini headwinds
 Substantial uncertainty, but we expect sense of reassurement as 
Japanese equities avoid the worst
 Four headwinds: BOJ rate hikes, yen appreciation, tariff risk, Chinese AI shock
 Japanese equities have been facing up to the four mini headwinds of BOJ rate hikes, yen 
appreciation, tariff risk, and the Chinese AI shock since the second half of January. The 
BOJ is on a rate hike trajectory but is currently trying to avoid taking an overly hawkish 
stance, making for an environment conducive to a combination of rising share prices and 
rising interest rates. Moreover, share prices have been relatively calm in the wake of 
recent yen appreciation, and it appears that sensitivity has returned to being in line with 
fundamentals (¥1 appreciation dents profits by 0.2-0.3%). Tariff-related risks have also 
been affecting Japanese equities, but we think they have been priced in to some extent, 
as evidenced by the underperformance of Mexico-related companies in Japan since the 
second half of January. Concerns about Chinese AI and its impact on semiconductor 
demand could persist for the time being, but so long as demand remains solid, we think 
AI-related stocks are likely to continue to attract attention as the rotation process unfolds.
 Recent results and key events in Mar-May: Evidence of earnings improvement and 
high level of share buybacks
 FY24 Q3 results have been solid, with the main trend being for companies to upwardly 
revise full-year guidance and analyst consensus forecasts also heading upwards. The 
markets have also continued to take a positive view of shareholder returns, with high 
levels of share buybacks and outperformance by companies that have announced 
buybacks. Key events for Mar-May include the March FOMC meeting, tariff negotiations, 
spring wage negotiations, additional BOJ rate hikes, changes to the GPIF's basic portfolio, 
and initial guidance and share buybacks when full-year results are released. While 
somewhat tough external conditions are being priced in, we expect a sense of 
reassurement as Japanese equities avoid the worst effects of such factors.

We see advantages in economic and trade structure based on rule of law, post-deflation opportunities, governance reforms, M&A activity

In our 13 December 2024 report Japanese equities investment strategy (December), we took the basic view that equities would remain on a modest uptrend thanks to EPS growth grounded in corporate governance reforms and the move out of deflation, and that share prices were more likely to rise in line with expected returns (6-7% annualized including dividends). New year's addresses by the presidents of Japanese companies have been notable for their focus on margins, and many also mentioned share prices and capital structures (see our 9 January 2025 report Japan equity weekly (9 January 2025)). In the first half of January, markets turned risk-off at times because of: (1) waning Fed rate cut expectations on better-than-expected US employment data; (2) rising US economic policy uncertainty; and (3) concerns about BOJ rate hikes. However, with economic conditions solid both in Japan and overseas, we see a limited negative impact. 

Points to watch in Jan-Mar: US politics and fluctuations in rate cut expectations; spring wage negotiations in Japan and BOJ rate hikes

Overseas, market factors from the first half of January have included the incoming Trump administration and a rise in policy uncertainty, the solid US economy, and a decline in Fed rate cut expectations. Even if momentum were to turn risk-off on increased uncertainty, we think risk assets would nonetheless benefit from the solid economy and corporate earnings. During tariff events, EM equities tend to be weak, while Japanese and other DM equities fall relatively little and tend to pick up relatively quickly. In China, fiscal policy expectations are deep-rooted ahead of the National People's Congress, but it is important to be aware of the risk that results here could disappoint. In Japan, we will be focusing on spring wage negotiations, BOJ rate hikes, debates about the budget, and political risks. We see only a limited negative impact if the BOJ hikes rates at a moderate pace commensurate with improvements in the economy, wages, and prices. 

Points to watch in Japan: Economic and trade system based on freedom and rule of law, corporate governance reforms and invigoration of M&A

We see a number of differentiating factors versus the US and other countries, including the predictability of government policy within an economic and trade system based on the rule of law, and continued accommodative financial conditions. Other Japan-specific factors include expectations for improvements in ROE and governance reforms prompted by the growing presence of activist investors and the TSE's demands, the sustainability of share buybacks, the unwinding of cross-shareholdings, and invigoration in M&A activity.

Economy, earnings, supply-demand: Profits likely to grow on price/volume effects

We think that price hikes and volume effects due to the normalization of industrial production are likely to contribute to profit growth in FY25. Japan's revision index has been recovering since end-2024 and has been rising. In supply-demand terms, we expect nonfinancial corporations to remain net purchasers, and look for a continuation of the  contrarian pattern of individual investors and trust banks being net sellers when share prices are high and net buyers when they are weak.

Share price indices: We forecast TOPIX at 3,000 at end-2025

We forecast the TOPIX at 3,000 and the Nikkei 225 at 42,000 at end-2025, mainly from EPS growth. We advise striking a good balance between domestic and external demand. Among external demand sectors, we favor electric appliances & precision instruments and machinery on the prospect of sustained double-digit profit growth in FY25, while we steer clear of autos due to a lack of growth appeal. Among domestic demand sectors, we favor banks, IT & services, and construction, where we see good prospects for profit growth in FY25, but steer clear of food and retailing.

Table of contents
1. Market outlook: Addresses by company presidents at start of 2025 focus 

I have to make 5 slides worth content on why should we invest in japan right now? 

I want to explain everything very clearly because its a pitch to clients. SO I need to first tell about how JApan macro economic factors are supporting

then my view on the US - Japan & Trump Tarrifs effect on JApan

then FDI activity etc in Japanese Equity and finally make a case for Japan Equities strategy that I have. Dont quote forecasts as much. straight facts. what's the situation now. 

I want everything with an interesting heading which sort of summarises the point and then description.
something like "Macro-Economic Factprs such as CPI favour the outlook" and then how does it stats and figures. 

I want at least 10-12 points like this. Nothing iun bad english. Bothing made up. It should not sound like it is AI generated. you also need to be on point about everything. 
All our points should paint a picture with a very natural flow. Like obviously I will talk about macro first and then what affectss macro, historical performance, relations with USA, then the market itself. 

so have a very natural flow fro, one point to another. Sound very convincing.