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PORTFOLIO DISCUSSION

The market has rewarded the Prime Minister of Japan, Shinzo Abe,

Q2 2013

ASIA VERSION

for his plan to revive the economy. Further upside could be on the

cards depending on the execution of monetary, fiscal and reform

policies in the quarters ahead. Abes rising public popularity is a

positive sign, particularly if it translates into growing business and

consumer confidence towards the economy.

Valuations remain attractive for Japanese equities

Japanese equities were an outperformer globally in 1Q13 due to rising

expectations for Prime Minister Shinzo Abes economic revival plan.

The rise in stock prices is mainly coming from upward revisions to corporate

earnings estimates. Meanwhile, Japanese equity market valuations (forward

SLIDE COMBO > 44 20 21

P/E ratio and trailing P/B ratio) remain attractive.

Further monetary accommodation to support the economy

The newly-appointed BoJ governor, Haruhiko Kuroda, has been emphasizing

the importance of market and public expectations. Therefore, the new Bank of

Japan monetary policy board will take the measures to match such anticipation.

of Japan, in turn leading to further weakness in the Japanese yen. Further yen

depreciation should boost corporate profits and lead to more upgrades to

corporate earnings forecasts.

Growth strategy implementation an important key

The government has pledged to increase fiscal spending to support the

Ja anese econom . However this could be constrained b hi h overnment

debt, with Japan having one of the highest debt-to-GDP ratios in the world. The

high debt level and planned consumption tax hikes could act to undermine the

effectiveness of any fiscal spending boost.

Japan needs to raise its economic potential and therefore Abe will need to

implement economic reform policies to liberate domestic markets, induce

more competition and enhance productivity.

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PORTFOLIO DISCUSSION: Japan

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Conclusion and investment implications

Japanese equity valuations remain attractive despite the recent stock marketrally. Upward revisions to corporate earnings forecasts are also supportive.

The new Bank of Japan monetary policy board will expand their monetary base

further to meet market expectations. Further monetary accommodation should

help to prevent the Japanese yen from reversing course and appreciating.

Japan must rely more on economic reforms to raise its economic potential, such

as opening up domestic markets to greater competition, since the high level of

public debt constrains fiscal spending from playing a more significant role.

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