JPMorgan-Japan Equity Strategy January-March earnings outlook Expect...-107639875

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Global Markets Strategy

16 April 2024

JPMORGAN

www.jpmorganmarkets.com

Equity Strategy

Rie Nishihara AC

(81-3) 6736-8629

rie.nishihara@jpmorgan.com

JPMorgan Securities Japan Co., Ltd.

Yong Guo, CFA

(81-3) 6736-8623

yong.guo@jpmorgan.com

JPMorgan Securities Japan Co., Ltd.

Mansi Das

(91) 2261 573343

mansi.das@jpmchase.com

J.P. Morgan India Private Limited

TOPIX companies will issue initial FY2024 guidance, and we think they may guide

for a bigger net profit decline than the past 10-year average, despite expecting top-line

growth. However, we recommend not worrying too much if this does happen. That is

to say, one year ago they issued FY2023 net profit guidance that was weaker than

initial FY2024 guidance, mainly due to cautious cost pass-through assumptions, but

earnings then overshot so they now guide for 10.9% net profit growth. Companies

assume a cautious USD/JPY exchange rate of ¥141.4 in FY2024, and given also the

yen’s current further weakening due to high US interest rates persisting (high for long),

we think they will raise guidance later. We expect earnings turnarounds in the energy,

transportation, real estate, food, information services, and construction sectors.

•January–March earnings likely to beat guidance but match market

expectations?: We expect January–March quarter earnings to beat company

guidance. Japan’s economic surprise index was positive (Figure 3), while real

GDP growth was firm in the US, and improved even in China. Further, USD/

JPY rose (the yen depreciated) YoY in January–March, and this supported

earnings at external demand-related companies. However, the Bloomberg

consensus view for FY2023 net profit is 14% growth, and we think actual

earnings may be broadly in line with market expectations (Figure 2). By sector,

we expect business conditions to improve in energy, transportation, real estate,

food, information services, and construction, but to deteriorate in

telecommunications, automobiles, electric power & gas, machinery,

wholesaling, and iron & steel (Figure 8). Meanwhile, business conditions

appear to be weak in chemicals, paper & pulp, and basic materials (Figure 7).

•Expect cautious FY2024 guidance: TOPIX companies will issue initial

FY2024 guidance, and we think that despite guiding for top-line growth of

around 1% as usual, they will guide for a 4% net profit decline, which would

be bigger than the average net profit decline over the past 10 years of around

1.6% (Figure 13). However, based on the BOJ’s Tankan survey, one year ago

they issued FY2023 net profit guidance for a 5.4% decline, but they now guide

for 10.9% net profit growth, and we calculate the yen depreciation impact at

only around 4ppt, pointing to an earnings overshoot in real terms (Figure 11).

Note that if companies indeed guide for net profit to fall, they may be

conservatively estimating the likes of cost pass-through (the Tankan shows that

companies are raising product price forecasts, indicating they intend to

maintain cost pass-through efforts). Given also the yen’s current further

weakening due to high US interest rates persisting (high for long), we think

they will raise guidance later.

•USD/JPY exchange rate assumption of ¥141 looks cautious: TOPIX

companies assume a USD/JPY exchange rate of about ¥141.4 in FY2024

(¥140.4 at external demand relateds; Figure 6), which we regard as cautious.

The average rate in FY2023 was ¥144, so they expect around ¥2.5 or 2% yen

appreciation on average in FY2024, which we calculate would depress TOPIX

EPS by about 1%.

See page 9 for analyst certification and important disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that

the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision.

Japan Equity Strategy

January-March earnings outlook: Expect cautious

guidance, leaving room for revising up

Rie Nishihara AC

(81-3) 6736-8629

rie.nishihara@jpmorgan.com

Global Markets Strategy

16 April 2024 JPMORGAN

•Focus on capital policy, and measures to improve corporate value: Companies may

implement capital policy and other corporate value measures, as part of efforts to increase

corporate value as instructed by the TSE (Figures 18-19). Since they are releasing full-

year results, our focus is on corporate action, especially at companies announcing new

medium-term business plans (see report).

Rie Nishihara AC

(81-3) 6736-8629

rie.nishihara@jpmorgan.com

Global Markets Strategy

16 April 2024 JPMORGAN

Figure 1: Japan and US earnings announcement schedule

20%

40%

60%

80%

100%

04/08~

04/14

04/15~

04/21

04/22~

04/28

04/29~

05/05

05/06~

05/12

05/13~

05/19

After 05/20

(ratio) Japan (# of com.) US (# of com.)

Japan (Cum. Mcap) US (Cum. Mcap)

Source: Bloomberg Finance L.P., J.P. Morgan

Note: As of Apr 15. Use TSE Prime names for Japan, S&P 500 names for US as universe

Figure 2: TOPIX EPS estimates

150

160

170

180

190

200

05/22 07/22 09/22 11/22 01/23 03/23 05/23 07/23 09/23 11/23 01/24 03/24

(JPY)

FY23E YoY EPS growth: +14.2%

FY24E YoY EPS growth: +9.7%

FY24E YoY EPS growth: +9.1%

FY23 Con. EPS FY24 Con. EPS

FY25 Con. EPS 12m forward EPS

Source: Bloomberg Finance L.P., J.P. Morgan

Note: Estimates are Bloomberg consensus estimates.

Figure 3: Economic Surprise Index

-100

-80

-60

-40

-20

100

23/04 23/05 23/06 23/07 23/08 23/09 23/10 23/11 23/12 24/01 24/02 24/03 24/04

Japan US Europe China

(pts)

Source: Bloomberg Finance L.P., J.P. Morgan

Figure 4: Japan, US, Europe and China EPS revision index

-20

-15

-10

-5

22-Apr 22-Jul 22-Oct 23-Jan 23-Apr 23-Jul 23-Oct 24-Jan 24-Apr

Japan US

Europe China

(4W moving avg, %)

Source: DataStream, J.P. Morgan

Note: The 4-week moving average is used to calculate the weekly revision index.

Figure 5: Large enterprises business conditions DI

-40

-30

-20

-10

16 17 18 19 20 21 22 23 24

(DI) Large Manufacturer

Large Non-manufacturer

Large Manufacturer Fwd

Large Non-manufacturer Fwd

Source: BOJ, J.P. Morgan

Figure 6: FX rate assumption for corporate guidance (March Tankan)

Companies

1H 2H

FY23 140.36 139.04 141.68 139.38

FY24 141.42 141.60 141.25 -

FY23 139.68 138.51 140.86 138.38

FY24 140.40 140.43 140.36 -

Dec Tankan

(ref)

Export companies

(Large, manufacturing)

FX Rate (USD/JPY)

All companies

(All size, all industry)

Source: BOJ, J.P. Morgan

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GlobalMarketsStrategy16April2024JPMORGANwww.jpmorganmarkets.comEquityStrategyRieNishiharaAC(81-3)6736-8629rie.nishihara@jpmorgan.comJPMorganSecuritiesJapanCo.,Ltd.YongGuo,CFA(81-3)6736-8623yong.guo@jpmorgan.comJPMorganSecuritiesJapanCo.,Ltd.MansiDas(91)2261573343mansi.das@jpmchase.comJ.P.MorganIndia...

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