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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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