While the TOPIX declined following the Brexit vote, largely as a result of the strengthening of the Yen, the market has since recovered. We now believe the negative impact of the stronger Yen will be gradually diminished towards the end of the current Japanese fiscal year (ending March 2017) as companies cut costs in order to support earnings. Such a response by companies will also likely be reinforced by macro-economic policy measures, such as further monetary policy easing and government measures to stimulate growth.

Key macro-economic factors as we approach October 2016:

EPS Growth: Poised to bottom out

• Current year (FY ending 3/17) earnings guidance released in March appears conservative and implies potential upside
• Negative impact from Yen strength to be gradually diminished towards the end of FY ending 3/17

Attractive Valuation: P/E expansion to be driven by BOJ’s ETF purchases and share buybacks

• The market’s price-to-earnings (P/E) multiple is now close to its post-Abenomics low and is lagging that of other developed markets: P/E multiples continue to remain at around 13.5x on a 12-month forward basis (compared to post-Abenomics highs of around 16x in 2015)
• The Bank of Japan’s (BOJ) doubling of its annual ETF purchases to JPY 6 trillion combined with an estimated JPY 6 trillion of share buybacks by firms will limit downside risk and set the stage for further expansion of P/E multiples

Corporate Governance Code: Shareholder returns to gain momentum

Top-down enhancements of corporate governance standards continue to drive increases in return on equity (ROE). Most listed Japanese companies have already submitted their Corporate Governance reports for the year, including measures to improve ROE. The market’s shareholder return ratio (which takes into account dividends and share buybacks) had exceeded 50% by the end of 2015 and is likely to increase even further this year. Share buybacks are forecast to reach an all-time high of JPY 6 trillion in FY ending 3/17 (JPY 4.4 trillion in share buybacks have already been announced this fiscal year, which is higher than at the same point the previous year).

BOJ’s New Commitment: No turning back (2% inflation target not only intact but enhanced with a new “inflation overshooting commitment”)

• On 21 September, the BOJ released the results of a “comprehensive assessment” of the policy effects of its monetary easing policy
• At the same time, it announced its new “inflation overshooting commitment” through which it pledges to continue expanding the monetary base until the target inflation of 2% is achieved and it remains above this level in a stable manner; this may end up being a more lasting and powerful commitment than the market currently anticipates
• The BOJ will also start controlling the yield curve of Japanese Government Bonds with the aim of steepening its slope; specifically, it aims for 10-year JGB yields to remain around 0%; this measure is expected to mitigate the side effects of the bank’s negative interest rate policy (which remained steady at -10bps interest rate on excess reserves); at the same time, it will continue to aim to lower the yield on shorter duration JGBs in order to reduce the real interest rate, which in turn will likely increase expectations for inflation

Japan’s political environment the most stable among developed nations: PM’s political capital to support necessary economic reform

The Japanese government was scheduled to deliberate economic policies at an extraordinary session of the Diet (Japan’s national legislature) at the same time the BOJ held its comprehensive assessment.

The administration of Prime Minister Shinzo Abe continues to enjoy strong approval ratings (in excess of 50%) and the ruling coalition currently holds close to two-thirds majorities in both the upper and lower houses of the Diet. It therefore has a clear mandate to achieve its policy goal of reviving the economy. Hence, there is a general expectation that further growth initiatives will be introduced next year, and this will be bolstered by increased monetary policy easing by the BOJ.

According to a survey conducted by the Nikkei Shimbun from 26-28 August, 59% of respondents are in favour of extending Abe’s term in office at least until the 2020 Olympics in Tokyo, with only 29% opposed (Abe’s term is set to expire in September 2018 in accordance with the ruling Liberal Democratic Party’s bylaws). As it appears that a large majority of Japanese are in favor of Abe continuing as prime minister, support for the continued implementation of his Abenomics economic policies will also likely extend to 2020 and beyond.

By Hiroki Tsujimura, Chief Investment Officer, Japan

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Disclaimer: This material was prepared and issued by Nikko AM Limited ABN 99 003 376 252 AFSL No: 237563 (Nikko AM Australia). Nikko AM Australia is part of the Nikko AM Group. The information contained in this material is of a general nature only and does not constitute personal advice, nor does it constitute an offer of any financial product. It is for the use of researchers, licensed financial advisers and their authorised representatives, and does not take into account the objectives, financial situation or needs of any individual. The information in this material has been prepared from what is considered to be reliable information, but the accuracy and integrity of the information is not guaranteed. Figures, charts, opinions and other data, including statistics, in this material are current as at the date of publication, unless stated otherwise. The graphs, figures, etc., contained in this material include either past or backdated data, and make no promise of future investment returns, etc. Past performance is not an indicator of future performance. Any references to particular securities or sectors are for illustrative purposes only and are as at the date of publication of this material. This is not a recommendation in relation to any named securities or sectors and no warranty or guarantee is provided.

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Hiroki Tsujimura, currently Head of Active Investments at Nikko AM, has been promoted to Chief Investment Officer – Japan. Both appointments will be effective from 7 January 2013.

Mr Wang’s appointment is the most recent in a series of senior level hires as Nikko AM continues its expansion plans. He will be responsible for growing Nikko AM’s international investment capabilities and developing innovative new strategies in areas such as Asian alternative fixed income and bank loans, to reinforce Nikko AM’s position as Asia’s leading asset manager. He joins from Manulife Asset Management (Hong Kong) Ltd, where he was Head of Fixed Income Asia. Under his leadership, the team won a number of prestigious awards in the Asian fixed income space and became known for their strong performance in pan-Asian bonds and RMB bonds.

A veteran with unparalleled expertise in the fixed income markets, Mr Wang graduated from the Massachusetts Institute of Technology with a Bachelor degree in Engineering. He went on to earn his MBA at the New York University and moved to the buy-side in 1994, managing fixed income portfolios on behalf of insurance companies and asset managers. In 1998, he co-founded his own investment advisory firm, Structured Credit Partners LLC, which was later sold and became a wholly owned subsidiary of Wachovia Corporation with more than US$4.5 billion under management.

As Managing Director, Mr Wang created a specialist unit in the Fixed Income Division and rapidly grew the unit from five employees to more than 120 fixed income professionals in six years. He was then appointed Head of Global Markets and Investment Banking Asia and relocated from New York to Hong Kong to spearhead a number of prominent fund management projects in China, Hong Kong, Singapore and Taiwan to expand the firm’s footprint in the Asian region. He also orchestrated the successful launches of the first pan-Asian bond fund, the first RMB bond fund and the first global REIT fund in Taiwan.

Commenting on the appointment, Bill Wilder, President and Chief Investment Officer of Nikko AM said: “Yu-Ming has an impressive range of experiences in global fixed income, a core component of our business, and we are very pleased to have attracted someone of his calibre to join us. As Nikko AM continues its expansion plans, Yu-Ming, with his proven track record, his in-depth knowledge of the region and his experience of building out an award-winning investment team in Asia, will be instrumental in growing our expertise particularly in Asian fixed income and equities, strengthening Nikko AM’s position as Asia’s leading asset manager.”

Hiroki Tsujimura, currently Head of Active Investments at Nikko AM, has been promoted to Chief Investment Officer – Japan. Mr Tsujimura, who has over 20 years of experience in the investment and financial industry, joined Nikko AM in December 2004 as Global Head of Alternative Investments and Chief Investment Officer of Nikko Asset Management Americas, Inc, in the New York office, responsible for overseeing the management of various alternative asset classes, including the highly successful global macro strategy.

Prior to joining Nikko AM, Mr Tsujimura was Executive Vice President at Nikko Securities Co. International, having served in a number of senior level roles in New York and Japan. In New York, he was responsible for heading the equity trading division and established the proprietary trading desk. Back in Japan, Mr Tsujimura then took the lead in forming a joint venture company with one of the largest brokerage houses in the United States. In his new role at Nikko AM, Mr Tsujimura will be responsible for overseeing all investment management activities in the Tokyo office.

Mr Wilder commented: “Hiroki Tsujimura’s knowledge of active and alternative investments in Japan is second to none. His promotion to Chief Investment Officer – Japan is in recognition of the leadership qualities and innovation that he has brought to Nikko AM’s business in Japan and overseas.”

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