We maintain our view that Japanese risk assets—equities and real estate—are on track for a multiyear structural bull market. 2017 is poised to bring a positive reversal of earnings momentum, with a pickup in top-line sales growth and a weaker currency capable of delivering 25% to 30% earnings growth (after last calendar year’s drop of around 8%).1 Given the relatively attractive valuation backdrop—TOPIX is trading at a modest discount to its 10-year averages on both trailing and forward price-to-earnings (P/E) multiples—the rising visibility of earnings is likely to be the principal driver of Japan’s market performance. In contrast, policy action and initiatives are expected to be relatively less important market drivers for Japan, with the Bank of Japan (BOJ) expected to stay put and maintain its zero-rate 10-year bond yield target for the foreseeable future.

Focus on Corporate Results

Now that the U.S.-Japanese bilateral economic, trade and investment dialogue is off to a good start—last week’s first round of meetings went well and constructive engagement has been agreed upon—the next key to propelling Japanese markets out of the disappointing downward adjustment is poised to be the upcoming corporate results season. As that overlaps with the annual “Golden Week” holidays, Japan’s performance is expected to rise in coming weeks, in our view.

Specifically, we expect a steady stream of upward revisions as companies report their full fiscal year earnings end-April/early May. This is because baselines are still very conservative, with companies and analysts still “budgeting” for an average ¥/$ exchange rate of around 105 and top-line sales growth of just below 2%. Note that for every 10 yen of yen depreciation, listed companies receive a windfall profits boost of around 8%. Given that the actual realized exchange rate in the January–March quarter was around ¥113, that would suggest a rise in profits of around 15%, rather than the 8% anticipated by the corporate consensus.2