Japanese Stock Market OutlookSMAM monthly comments & views- August 2017 -

Japanese EconomySMAM’s headline GDP forecasts are unchanged from the previous month. Increase in Public Capital Investmentand Private Capital Investment as well as steady growth of Private Consumption will drive the Japanese economy.CPI is forecast to rise at the pace less than 1%. BOJ conceded the timing to achieve 2% target from 2018 to2019. Extra-easy monetary policy is going to continue in Japan despite possible tapering in Europe and US.• Real disposable income is forecast to grow mildly assuming low inflation less than 1%. Wage growth needs to outpace the

scheduled increase in social insurance costs and inflation so that positive growth in real disposable income continues.• Approval rating for the Abe cabinet fell sharply from 48% to 35% in July. Disapproval rating is now Jumped from 36% to 48%.

However, approval of the leading opposition party has not picked up at all, which makes the toppling over of PM Abe’scabinet still unlikely.

Japanese Stock MarketsSMAM expects upbeat earnings for Apr-Jun quarter to be announced between late July and August, which shouldlift the Japanese stock markets. PER (Price Earnings Ratio) for TOPIX index based on 12M forward earnings isjust above 14x, which seems attractive compared to near 18x for US and around 15x for Europe.• Continuing expansion of global economy and corporate earnings would support the Japanese stock market in the long term.

Expected capital investment by companies to improve productivity is also a long-term positive.• Major risks are such as historically high stock valuation for US markets, deterioration of PM Abe’s political power, deepening

confusion in US politics and geo-political risk in East Asia.

Executive summary

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Notes: Macro and market views are  as of Jul. 14th and 19th 2017 respectively, and subject to updates thereafter without notice.

Outlook for Japanese Economy

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SMAM’s headline GDP forecasts are unchanged from the previous month. Increase in Public CapitalInvestment and Private Capital Investment as well as steady growth of Private Consumption will drive theJapanese economy.

CPI is forecast to rise at the pace less than 1%. BOJ conceded the timing to achieve 2% target from 2018 to2019. Extra-easy monetary policy is going to continue in Japan despite possible tapering in Europe and US.

Notes: E=SMAM forecasts. SMAM views are as of  Jul. 14th , 2017 and subject to updates thereafter without notice(Source) Cabinet Office, Bank of Japan, Ministry of Economy, Trade and Industry, Ministry of Internal Affairs and Communications, SMAM forecasts

(%, YoY except Net Exports)

SMAM economic outlook for FY17-18

( YoY %)

Real GDP growth 2.6% -0.5% 1.2% 1.2% 1.4% 0.9% Private Consumption Expenditure 2.7% -2.7% 0.5% 0.6% 1.0% 0.6% Private Housing Investment 8.3% -9.9% 2.8% 6.3% 1.0% 0.8% Private Capital Investment 7.0% 2.4% 0.6% 2.5% 2.9% 2.0% Public Consumption Expenditure 1.7% 0.4% 2.1% 0.4% 0.6% 0.7% Public Capital Investment 8.6% -2.1% -1.9% -3.2% 4.3% 0.3%Net Exports (contrib. to GDP growth) -0.5% 0.6% 0.1% 0.7% 0.2% 0.2% Exports 4.4% 8.8% 0.7% 3.1% 5.2% 2.3% Imports 7.1% 4.3% 0.2% -1.3% 3.6% 1.4%Nominal GDP 2.6% 2.0% 2.7% 1.0% 1.3% 1.6%GDP Deflator 0.0% 2.5% 1.5% -0.2% -0.0% 0.7%Industrial Production 3.0% -0.4% -1.4% 1.5% 3.8% 2.1%CPI (excl. fresh food) 0.8% 0.9% -0.1% -0.2% 0.6% 0.7%

FY16 FY18EFY13 FY14 FY15 FY17E

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Public construction spending increased in April as expected In the below chart the latest statistics for Total Construction Spending in April showed sizable increase as

expected by preceding increase in order takings.

The latest data for order taking is for May 2017 and it has been rising after hitting bottom in October 2016.Further increase in the actual construction spending is expected.

Public construction spending statistics(Monthly, seasonally adjusted, yen trillion)

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Order takingOrder taking 6M moving averageTotal construction spending (public)

(Source) Cabinet Office, Ministry of Land, Infrastructure, Transport and Tourism,EAST JAPAN CONSTRUCTION SURETY CO., LTD, and compile by SMAM.

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Inventory / shipment cycle is progressingThe chart is supposed to show anticlockwise movement. When it crosses the 45 degree line from left to right,

the cycle shifts from adjustment phase to expansion phase.

The cycle has been in an expansion phase for 11 months as of May 2017.

It seems the cycle has run a half way through the current expansion phase. Momentum of positive contributionfrom the inventory buildup might gradually slow down .

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Inventory/Shipment cycle chart for manufacturing

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Note: Data is from Jan 2013 to May 2017. 3 months moving average.(Source) Ministry of Economy, Trade and Industry

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CPI is creeping up, but not strong enough for BOJ to feel confidenceCPI is slowly rising led by positive change in energy prices. Baseline CPI was still negative in May, which is

expected to become positive around Summer this year.

In the latest perspective report released on July 20th, BOJ conceded the timing to achieve 2% target from 2018to 2019. Extra-easy monetary policy is going to continue in Japan despite possible tapering in Europe and US.

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Nationwide CPI and contribution of components(YoY %)

(Source) Ministry of Internal Affairs & Communications

Forecast by SMAM

Note: Effect of consumption tax hike in April 2014 is excluded.

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Real disposable income is forecast to grow on a fine balance Real disposable income is forecast to grow mildly assuming low inflation less than 1%.

Wage growth needs to outpace the scheduled increase in social insurance costs and inflation so that positivegrowth in real disposable income continues.

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(Source) Cabinet Office, compiled by SMAM

Forecast by SMAM

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Approval rating for Abe cabinet is deterioratingApproval rating for the Abe cabinet fell sharply from 48% to 35% in July. Disapproval rating is now Jumped from

36% to 48%.

“Kake-school scandal” is causing a damage to PM Abe’s reputation. He is suspected to have benefitted one ofhis closest friends in gaining approval of opening a school for a feline practitioner. Arrogantly looking passage ofthe counter conspiracy bill was also negative.

However, approval of the leading opposition party has not picked up at all, which makes the toppling over of PMAbe’s cabinet still unlikely.

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Obuchi Mori Koizumi Abe 1 Fukuda Aso Hatoyama Kan Noda Abe 2 Abe 2 disapproval

Approval ratings of Japanese cabinets by Prime Ministers(%)

Note: Data is from Aug 1998 to Jul. 2017(Source) NHK (Japan Broadcasting Corporation)

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Current Abe

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Outlook for Japanese Stock Markets

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Stock market outlook: SMAM expects upbeat Apr-Jun quarterly earnings to lift the stock marketSMAM short-term view SMAM expects upbeat earnings for Apr-Jun quarter to be announced between late July and August, which

should lift the Japanese stock markets. PER (Price Earnings Ratio) for TOPIX index based on 12M forwardearnings is just above 14x, which seems attractive compared to near 18x for US and around 15x for Europe.

Longer-term outlook (6-months and beyond) Continuing expansion of global economy and corporate earnings would support the Japanese stock market in

the long term. Expected capital investment by companies to improve productivity is also a long-term positive.Major risks are such as historically high stock valuation for US markets, deterioration of PM Abe’s politicalpower, deepening confusion in US politics and geo-political risk in East Asia.

Note: SMAM’s  projection is as of  Jul. 19th, 2017 and subject to updates without notice. 

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TOPIXForecast range upsideForecast range downside

TOPIX index forecast range by SMAM

(Source) TOPIX: Tokyo stock exchange, Forecast by SMAM

(Points)

(Month/Year)Note: Topix data is from Jan. 5th 2015 to Jul. 19th 2017.

Base scenario & Upside / Downside risks for our forecasts

Our Base Scenario is assuming the following views:• Practical Trump trade policies are made and serious trade disputes can be avoided.• US economy keeps growing despite delay in Trump stimulus policies.• Japan’s private consumption to grow mildly supported by wage growth.• Japanese yen does not get extremely stronger beyond 100 yen against US$.• Further fiscal stimulus will be made and extra easy monetary policy should sustain economic growth in

Japan.• Tension in the East Asia does not ignite a war.

Upside Risks include:• Stronger-than-expected global growth.• Stronger-than-expected measures by the Abe government.

Downside Risks include:• Confrontational foreign policies taken by Trump presidency shake global trades.• Trump policies for stimulating US economy fail to pass US congress.• “Russia-gate” scandal flares up.• Populism gains in Europe further destabilizing EU.• Heightening geo-political tensions in Middle East & East Asia.• Rekindled concern over emerging economies including China.• “Moritomo” and “Kake” scandals make a fatal blow to PM Abe.

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Note: SMAM’s  projection is as of  Jul.19th, 2017 and subject to updates without notice. 

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Japanese stock market is slightly lagging other developed markets lately

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Emerging stock markets made a strong rally in the first half of July.

Japanese stock market is gathering strength, however, slightly lagging other developed markets.

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S&P500

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US$ based performance of stock markets (Dec 2015 =100)

(Source) Datastream, MSCI and Tokyo Stock Exchange, compiled by SMAM.

Notes: Data is up to Jun. 19th 2017.(Month/Year)

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The latest 12M forward EPS forecast for TOPIX advanced steadily to 114. Historical EPS alsoadvanced.

11.4% EPS growth is forecast in the coming 12 months.

EPS forecasts by analysts continue to expand

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IBES EPS consensus forecast for TOPIX

Historical EPS(left) 12M forward EPS Forecast (left) 12M EPS growth forecast(right)

Note: Weekly data from Jan. 6th 2011 to Jul. 13th 2017.

(Source) Datastream, IBES

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Japanese companies are maintaining positive sentiment

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The latest BOJ TANKAN survey shows that Japanese businesses are in an upbeat sentiment.

Annual CAPEX plan for FY2017 rose in the June survey to +8% YOY increase, which is a strong reading evenafter considering seasonal pattern of increase from March.

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(Source) Bank of Japan(Quarter/Year)

PER (Price Earnings Ratio) at 14x looks cheap compared to other markets

EPS forecast for TOPIX is constantly rising, which keeps PER at around 14x in spite of the rising stock prices. Based on 12M forward EPS of 114, TOPIX PER is calculated at 14.27x with TOPIX at 1627.75 as of July 14th. PER for MSCI US index is 18x and for MSCI Europe is just under 15x, which makes Japanese stock market

look attractive in global comparison .

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Note: Data is weekly from Jun. 27th 2008 to Jul. 14th 2017. TOPIX was 1627.75 at the end of the period. (Source) Tokyo Stock Exchange, Datastream and IBES, compiled by SMAM

TOPIX

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15xPM Abe's 2nd term started

Investors’ activity has calmed down in June and July Foreign investors’ activity shrank since June, whereas trust banks were buyers, which might be a seasonality

after the start of the new fiscal year. Individuals are still selling Japanese equities in a market recovery.

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Bar charts (Yen billion)

(Source) Japan Exchange GroupNote: Data is for Tokyo stock exchange and Nagoya stock exchange up to Jul.7th 2017.

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Disclaimer

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 Asset Management Company, Ltd. (hereinafter “SMAM”), 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 SMAM’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 SMAM can not and does not guarantee its

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