Japanese corporate earnings are steadily improving on top-line sales growth and a better exchange rate. Investors can also capture the potential opportunity through country-specific ETFs.
“Going forward, corporate guidance remains conservative, which in turn makes further upward revisions likely over coming quarters. All said, we maintain our call for 25% earnings-per-share (EPS) growth in the current FY3/2018 (third quarter of fiscal year 2018), against the 13% now implied by the consensus. If realized, this implies a TOPIX level of 2,000 as a reasonable target over the coming six months, in our view,” Jesper Koll, Chief Executive officer of WisdomTree Japan, said in a note.
Corporate guidance outlines assumptions that sales will increase 3.2% ahead and the exchange rate will average ¥110 against the dollar, which could translate to a 13.1% rise in the Japanese TOPIX benchmark. The double digit returns may be impressive in an extended bull market environment, but the forecasts appear conservative as sales growth has averaged 4.5% this year, which on its own could add 15% to profits if maintained in the second half, Koll said.
Further supporting the Japanese equity outlook, a weakening yen currency would bolster the large export industry. It is expected that for every ¥1 of yen weakness would add back about 1% to profits, fueling additional momentum for positive earnings growth surprises from here.
“All said, we maintain our bullish call for Japanese equities: valuations are attractive, and positive earnings momentum is likely to keep going,” Kill said. “Japan is not a ‘value trap.’ In our view, profits can rise 25% in FY3/2018, which in turn suggest TOPIX at 2,000 is a reasonable fair-value target.”
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The Tokyo Stock Exchange Tokyo Price Index, or TOPIX, is current hovering around 1,794.
Investors who are interested in gaining exposure to this segment of the global market have a number of ETF options to choose from, with currency-hedged strategies currently outperforming as the Japanese yen depreciates against the U.S. dollar.
The WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) has been a go-to options to access Japanese equities markets while hedging against foreign exchange risks, but potential investors should keep in mind that the funds could underperform non-hedged funds if the yen strengthens.
ETF investors may also look to some relatively new dynamic or adaptive currency-hedged international stock strategies that changes its currency-hedge weight based on prevailing market conditions. For instance, WisdomTree also offers the WisdomTree Dynamic Currency Hedged Japan Equity Fund (BATS: DDJP), which hedge currency fluctuations in the relative value of the foreign currency against the USD, ranging from 0% to 100% hedge based on interest rate differentials, valuations and relative price momentum of the foreign currencies compared to the USD.
For more information on the Japanese market, visit our Japan category.