Musha Research Commentary

7 November 2023

S\Strategy
Bulletin (No. 343)

Brightness of Japanese Stocks to Become
More and More Clear by 2024
Japanese Stocks, the World's Brightest Spot

Japan may be the brightest of the major economies, both in politics and in theeconomy and stocks. Even though the Kishida administration's approval rating has
declined significantly, its base of power is solid, aided by a weak opposition party. In
the economy, the IMF revised its October global economic outlook (2023) for Japan
upward to 2.0% from 1.3% in April. The robust performance of the Japanese
economy stands out amidst the downward revisions in China and the Eurozone. Thisis also reflected in the performance of equities over the first 10 months of the year.
The +23% performance of the Nikkei Stock Average stands out among the majorcountries' stock markets: US SP500 +14%, Germany DAX +8%, UK FT100 0%,
China Shanghai Composite -2%, South Korea Composite +6%, Taiwan Kwai Kwan+17%.

Musha Research Co., Ltd.
President
Ryoji Musha
musha@musha.co.jp
http://www.musha.co.jp
Tel ＋81-3- 3740 2143
2-16-7-3912, Konan,
Minato-ku, Tokyo108-0075,JapanFigure 1: Stock Market Performance by Countries

Geopolitical Situation Becoming More Chaotic
Looking around the world, however, the stock investment environment is far from favorable. First, thegeopolitical situation is becoming increasingly chaotic. The postwar international order based on democracy
and international law has been greatly shaken by the confrontation between the U.S. and China, the growing
possibility of a Chinese invasion of Taiwan, Russia's invasion of Ukraine, Hamas's attack on Israel, andIsrael's counterattack. The decline of the U.S. presence is significant. The Obama administration said thatthe U.S. could not stand to be the world's policeman, and the Trump administration has increased its
disregard for alliances by advocating MAGA. While China is building up its military at an exceptionally fastpace, the U.S. defense budget has halved from 7.7% of GDP in the Reagan era at the end of the Cold War
between the U.S. and the Soviet Union to 3.6% of GDP in 2022

1/4

Strategy Bulletin vol343

7 November 2023

Social Divisions in Developed Countries, with Historical Issues at the Roots
The political climate within each country is also marked by increasing fragmentation and populism. In Europe,
right-wing populist parties that are anti-immigrant are on the rise. In the United States, the fall of the middle
class, the left-right divide, the decline of centripetal force within the Republican and Democratic parties, andthe dysfunctional Congress are all contributing to the growing political uncertainty ahead of the presidential
election in 2024. Behind this domestic division in the advanced Western nations lies the negative legacy ofeach country's domination of the world through slavery and colonial rule, a historical problem. In Japan,
historical issues have been a source of friction with neighboring countries such as China and South Korea,
which have questioned how to deal with past wars and colonial rule. This is now becoming a constraint onpolitical stability and economic growth in the West. The seriousness of this problem may be even greaterthan in Japan.
On the economic front, the bursting of the bubble in China, the world's factory, is inevitable, and there arefears of a sharp slowdown. The economy is falling into a typical liquidity trap in which monetary easing isineffective. The eurozone economy is also facing increasing difficulties, including a fragile energy supply
that has made it too dependent on Russia and a rapidly widening trade deficit with China. The U.S. economy,
which is enjoying unexpected strength for the time being, will inevitably slow down as the effects of the Fed's
sharp interest rate hikes become apparent.

Japan's Brightness Stands Out Amid Global Turmoil

This is a rare situation in which Japan's brightness emerges as the seeds of global unrest grow larger. Forthe past 30 years, Japan has been the world's underachiever. It was the only country in the world to sufferfrom long-term deflation, and its nominal GDP remained flat at just over 500 trillion yen for 30 long years. It
was the only country in the world where wage growth stopped for 30 years and was overtaken by SouthKorea. Japan's share of the MSCIAC Index, a basket of global equities, fell from over 40% to 5%, almost
one-tenth. During this period, global investors continued to sell Japanese stocks, and by reducing the ratioof Japanese stocks, they were able to win the investment competition. Not only the Japanese but also
investors around the world have developed an attitude of neglect and disregard for Japan. Suddenly, Japanis becoming the world's brightest spot. Chart 2 shows the multiple of TOPIX vs. the SP500, which peaked
at 8.3x in 1990 and then declined sharply, hitting a bottom at the beginning of 2022 when it dropped to .042x.
Since then, it has rapidly increased and currently stands at 0.54x. Investors around the world are closely
watching to see if this change in Japan can be sustainable.

Figure 2: TOPIX/SP500 Ratio
6000

5000

Figure3: Recurring Profit Margin
109.0(%)

98.0

8SP500(l)4000TOPIX/SP500ratio (r)
3000

77.0
6.0

65.0

54.0

432

1000

085 88 91 94 97 00 03 06 09 12 15 18 21

Source BBG,Musha Research

3.0
2.0

1

1.0

00.0

1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
2020
2023

2000

Source MOF Musha Research

2/4

Musha Research.

Strategy Bulletin vol343

7 November 2023

Two factors behind Japan's brightness: (1) Initiative-taking change
What has happened to Japan? Two major changes should be noted. The first is an initiative-taking change:
Japanese companies and the economy have improved during the Abenomics era since 2013. Throughreforms and the creation of new business models, companies have doubled their profit margins and continue
to post record profits. Public pension fund (GPIF) investment income has quadrupled to 108 trillion yen. Tax
revenues have increased 70% over the past 10 years. Wage growth, which had been lagging, has begun,and 2% inflation is on the horizon.
Many Japanese companies have developed creative business models that are not copycats, have madegreat strides in corporate governance reform, and are now profitable enough to meet the demands of theirshareholders. The value created by these companies is currently being stored in the form of ample retained
earnings. In order to circulate this retained earnings to whole sectors in the economy , the Kishidaadministration is implementing a new capitalist policy that will trigger a virtuous cycle from savings toinvestment. The supply-demand balance for Japanese stocks will be greatly improved by (1) promoting
higher wages, (2) requiring companies with P/B ratios below 1x to take corrective measures, encouraging
them to buy back their own shares, increase dividends, and otherwise return profits to shareholders, and (3)promoting equity investment by household through NISA reform.

Figure 4: Remarcable Improvement of Japanese Economic Indicators

Two Factors Behind Japan's Brightness, 2) Major Changes in the GeopoliticalEnvironment
The second factor is the external environment, the major change in the geopolitical environment surrounding
Japan. The U.S.-China confrontation has worsened, and the U.S., which once went crazy in its efforts tobash Japan, now needs a strong Japan to decouple from China and has come to accept a weaker yen toachieve this. The establishment of a significantly weakened yen has changed the major framework of theJapanese economy. The deflationary period caused by the strong yen is over, and 2023 is the brightest
volume boom year for the Japanese economy since the burst of the bubble economy, and 2024 will see anacceleration of this trend. Factories, capital, business opportunities, and jobs that fled Japan overseas dueto the strong yen are returning to Japan due to the weak yen. The weak yen has also increased inboundtourism, and foreign tourists are stimulating local domestic demand in every corner of Japan.

3/4Musha Research.

7 November 2023

Strategy Bulletin vol343

Strong Japan Symbolized by Toyota's 60% Profit Increase
Symbolic of this rapid recovery of Japanese companies is the sharp increase in Toyota's profits. Toyota hasannounced an upward revision of its consolidated net income forecast for the fiscal year ending March 31,
2024, to 3.95 trillion yen (up 61% from the previous year), a 50% increase over the previous forecast. Thisis a 40% increase over the company's record-high profit and leaves room for further upward revision in viewof foreign exchange assumptions and other factors. Increased production due to the resolution of thesemiconductor shortage and price rise due to improved vehicle functionality contributed to the increase. The
average sales price in the U.S. during July-September 2011 was $46,674 (approximately 6.1 million yen), a19% increase in four years (Wards Automotive News). In contrast to China, where excessive competition isworsening profitability, the strength of the sales base and high brand loyalty in the U.S., where consumers
have strong purchasing power, is a major factor. The significant depreciation of the yen has also spurred
this trend. On a half-year basis, Toyota's net profit margin of 11.8% was higher than Tesla's 9.4%, which
benefits from large subsidies. Toyota's profitability, which exceeds that of market darling Tesla, which has
more than twice the market capitalization, is a sign of the improving earning power of Japanese companies.
The burden associated with EV investment will begin to take hold in earnest in the future. Toyota plans toinvest 5 trillion yen in EVs alone by the year 2030. In the EV investment competition, which will be in fullswing, the ability to generate sustainable cash will be the decisive factor for victory. This is an event
suggesting that Japan's time has come.

Figure 5: PPP and Dollar/Yen trend from Punitive to Beneficial(¥/US$)

360
330

From punitive strong yen to benefiicial weak yen
Punitive strong yen

300

Beneficial weak yen
Spot rate < PPP

270
240
210
180
JPY/USD spot rate
2022/12/31 131.5
2023/11/7 150.0

Domestic-foreign
price differentials

15012090PPP2022 95.2

60

Inversedomesticforeignprice
differentials

70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18 21
Source: OECD, Musha Research© Copyright 2023 Musha Research Co., Ltd. Although the information contained herein is based on sources that Musha Research believe reliable, Musha Research do not make any representation orwarranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of the information and opinion herein. Musha Research is not responsible for any losses
or damages incurred by your relying on such information and opinion. The analyses or opinions contained herein may be based on assumptions that if altered can change the analyses or opinion expressed.
Nothing contained herein shall constitute any representation or warranty as to future performance of any financial product, credit, currency rate, interest rate or any other market or economic measure.
Furthermore, past performance is not necessarily indicative of future results. Musha Research has no obligations to update, modify or amend this document or to notify a reader in the event that any matterstated herein changes or subsequently becomes inaccurate. When you analyze risks and issues on investment, finance, tax, law and/or accounting contained herein, you should take steps to ensure thatyou understand the transaction and have made an independent assessment of the appropriateness of the transaction and it is strongly recommended to seek advice from your own experts and/or advisors,in light of your own objectives and circumstances. This document shall not be construed as and does not form part of an offer, nor an invitation to offer, nor a solicitation or recommendation to enter into anytransaction with DSI or any of its affiliates, nor is it an official or unofficial confirmation of terms. This document and any information contained herein are confidential and may not be reproduced or distributedin whole or in part without our prior written consent.

4/4

Musha Research.