Key Takeaway
The Japanese equity market has risen for seven consecutive months as investors
gradually accept that economic and monetary policy is moving towards
financial repression. We remain Bullish. In the short-term, the market has
become overbought and close to our target (11,860). Our year-end target for
USD/JPY is unchanged at ¥95.
The next significant event is the election of a BoJ Governor. Markets would take
the appointment of Mr. Iwata as being a very Dovish leader. There are also signs that PM
Abe is engaged in a policy of rapprochement with China following his election.
Everything to play for (II): While the markets may have been disappointed by the recent
BoJ meeting, the rate of change of easing remains positive. Furthermore, the Yen remains on
the weak side against the major crosses. We highlight that three alternative and coincident
indicators, CDS spreads, dividend swaps and inflation protection bonds continue to affirm
financial repression
Japan and Korea: Swapping Roles: Korea is experiencing a wave of earnings
downgrades. We do not expect the earnings environment to improve as the yen/won rate
works against Korean exporters while the inventory-to-shipment ratio continues to climb.
Furthermore, there is unlikely to be a major shift in BoK policy to alter the won's trajectory.
We highlight the earnings results for Japanese companies in January. Less than
half (43%) of the companies posted better than expected earnings for an average of 3.5%
below expectations in magnitude terms. Large-cap companies have so far announced better
results than mid- and small-cap companies. Information Technology, Telecommunication
Services (albeit from a small sample) and Utilities stood out in earnings surprises.
“Six Easy Pieces” – We spotlight our Japan team top picks for 2013. Each allows a different
way to play the Japan rally. We include a one-page primer per stock on why to own these
names.