Olympic boost still indicated amidst moderate Japanese growth

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Entering 2020, we expect the Japanese economy to maintain a moderate growth of +0.1% for 2020 (YoY, annualised). The Tokyo Olympics and Paralympics will have a significant economic impact of around ¥32trn (approx. $29bn) - much bigger than the 2019 Rugby World Cup - boosting inbound and domestic tourist consumption.

Among the sectors which are due to benefit from this global sporting event are manufacturing, in particular companies producing electrical equipment such as TVs, as well as the leisure sector with companies in the fitness business (i.e. gyms), dining services and hotels expected to reap great rewards. Specifically, we like Sony, which has a large share of the 4K TV market; NEC, whose facial recognition system will be used at the Olympic games as part of the security measures; Konami, which operates fitness clubs; and HUB, one of the most popular chains of British pubs in Japan.

Easing tensions between the US and China should bring recovery to external demand while domestic demand should be supported by personal consumption, capital expenditures and public investments. There will also be tailwinds from Prime Minister Abe's economic policies, including natural disaster relief measures and counter measures against the October consumption tax hike (ie, an exemption for foods which remains at 8%, free pre-school education and reward points for cashless payment).

As for risk factors, sudden changes in the external environment possibly caused by global political events could have a negative impact on the Japanese economy. With so much uncertainty in the political arena, international affairs may take an even bigger center stage in 2020.

No change in monetary policy and USD/JPY to trade in 105-115 range

The Bank of Japan (BoJ)'s accommodative policies are expected to continue for some time. The central bank has not ruled out deeper cuts to the already negative interest rates. However, the hurdles are high. Unless the yen drops below ¥100/$1, we believe the BoJ will maintain its current policy. This is because this limit is the breakeven point for manufacturers (the largest sector in Japan), and it was also the last high recorded in the summer of 2016 (99.89 on 18 August 2016).

Any rate hike by either the BoJ or the US Fed would require higher inflation which seems unlikely at the moment. With the upcoming US presidential election, any rise in the dollar would be muted. We forecast $/¥ trading in a range of 105-115, within Japanese companies' expected FX rate for FY2019 which is a comfortable range for them, for the time being.

Increase in the equity market backed by solid corporate earnings

We believe that valuations in the Japanese equity market will increase in 2020 backed by solid corporate earnings. We also could see the Nikkei 225 reach 27,000 and TOPIX achieve 1,900 as at the end of 2020, up 10% from late-November 2019. And this rise might be higher if the US-China trade dispute eases.

The stock market will also benefit from the Olympic games as historic data shows that markets of countries hosting the games tend to rise and that any risk factors are already priced in as well as governments' countermeasures. In fact, since the 1984 Los Angeles Olympics, every host nation has seen higher share prices at the end of the year following the games compared to the year preceding. Japan should be no exception.

The New Year should see a positive turnaround in Japanese corporate earnings and we forecast +10.7% earnings growth for FY 2020 ending March 2021 (compared to -7.9% for FY2019 ending in March 2020). FY 2020 should see increased demand in external sectors such as materials, energy and transportation equipment, and stable growth in the retail and telecommunications sectors. Moreover, the Japanese equity market remains attractive on a price-to-earnings ratio basis, with the current market valuation around 13x earnings. This is still below the highest valuation of 2012 when Abenomics started, and as such, there is room for valuation to expand further.


Naoya Oshikubo is senior economist at Sumitomo Mitsui Trust Asset Management (SMTAM)

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