CIO’s View on Japan Equity Market
Nomura Asset Management Co., Ltd. Published August 9, 2024

Shintaro Harada
Chief Investment Officer – Active Japanese Equity
Since entering August, the Japanese equity market has experienced wild fluctuations,with TOPIX plunging 20%during the first three business days and rebounding 12% in thefollowing two. Whereas TOPIX’s valuation as of the end of July stood at PER 16x, it
dipped to PER 12x over the three days. The market appears to have shifted its main
scenario for the US economy from a soft landing (mild recession) to a hard landing (rapidrecession), abandoned expectations for upward revisions to Japanese corporate
performance due to appreciating yen, and quickly turned from optimism to pessimism.
However, the index has recovered approx. half of its decline, with PER recovering to 14x,
and returned to the average post-Abenomics level. The market’s sharp decline was likely
driven by supply and demand factors, while concerns outran any evidence to justify thepessimism.
There is no denying the conspicuous market volatility seen in Japan. During this same
period, the US (S&P 500) and German (DAX) markets saw a decline of 6% before a 23% rebound. We believe the discrepancy with Japan can be attributed to the Bank ofJapan’s monetary policy and the foreign exchange market. While the yen’s depreciation
fuels expectations of upward revisions of Japanese corporate performance, after a certain
point it drives concerns of rising costs due to increased import prices, leading to anegative impact from inflation. Furthermore, an overly depreciated yen cuts into the local
currency gains of foreign investors. On the other hand, while the yen’s appreciation
negatively impacts corporate profits, it does have a dampening effect on theaforementioned inflation. In particular, at present, a recovery of private consumption isnecessary for the normalization of monetary policy, and thus there is increased need fora correction to the weak yen. The market fluctuations have also been influenced by thefocus on accelerated interest rate hikes since BOJ’s announcement at the end of July,which in turn has accelerated the pace of the yen’s appreciation as investors close theiryen carry trade positions. Additionally, the strengthening yen has lowered incentives forearlier and larger rate hikes.
We believe that the facts of the past week, including US and other economic factors andyen exchange factors, have been priced into the market. Therefore, the focus moving
forward will be on the direction of the fundamentals. Determining this direction will requirea certain amount of time, during which further volatility is unavoidable. The Japanesemarket is seeing gradual improvement in the corporate governance of listed companies
thanks to TSE-led reforms (promoting management that is conscious of the cost of capitaland share prices). Though PBR dropped to a low point of 1.1x on August 5, the average
market ROE is improving toward 10%, and there is low risk of further PBR decline given
growing efforts to improve shareholder returns, including a significant jump in stockbuybacks since last year. We believe the recent dip was the floor for the near future.
Share prices are likely to stabilize around the current level for the time being, offering achance to calmly and objectively evaluate the fundamentals and price levels of individualcompanies and seize any investment opportunities.
*This commentary is based on personal views of the author and does not necessarily represent Nomura AssetManagement house view.
Disclaimer
This report was prepared by Nomura Asset Management Co., Ltd. for information purposes only. Although this reportis based upon sources we believe to be reliable, we do not guarantee its accuracy or completeness. Unless otherwise
stated, all statements, figures, graphs and other information included in this report are as of the date of this report andare subject to change without notice. The contents of this report are not intended in any way to indicate or guarantee
future investment results. Further, this report is not intended as a solicitation or recommendation with respect to thepurchase or sale of any particular investment. This report may not be copied, re-distributed or reproduced in whole orin part without the prior written approval of Nomura Asset Management Co., Ltd. Registration Number: Director-Generalof the Kanto Local Financial Bureau No.373 Membership: The Investment Trusts Association, Japan, Japan Investment
Advisers Association, Type II Financial Instruments Firms Association.

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