Global & Japan Economics_Strategy_ Japan’s Resilience to JPY Appreciation

Summary of Key Points from the Conference Call Industry and Company Overview - The focus of the conference call is on the Japanese economy and its resilience to the appreciation of the Japanese yen (JPY) [1][3][4]. Core Insights and Arguments 1. Economic Resilience: The Japanese economy is expected to remain resilient against JPY appreciation due to strong inflation expectations, domestic demand, pricing power, and increased domestic production. This resilience is projected to hold unless the JPY appreciates beyond 130 in the short term [1][4][10]. 2. Wage Growth: A third consecutive year of strong wage hikes is anticipated, driven by a structural labor shortage, which will support domestic demand and real income recovery [4][58]. 3. Capital Expenditure (Capex): Non-cyclical structural factors are expected to drive robust capital expenditures, including labor-saving investments and digital-related investments in AI and data centers [4][58]. 4. Export Dynamics: Japanese exports are shifting towards high value-added goods, which are less sensitive to price competition, providing a buffer against the adverse effects of currency fluctuations [4][58]. 5. Impact of US Tariffs: US tariffs may negatively impact the US economy, potentially leading to lower interest rates, which could support a stronger yen against the dollar [5][10][11]. 6. Equity Market Outlook: Japanese equities are viewed positively, with expectations of high-single digit EPS growth in 2025-2026. The 12-month forward P/E multiple for TOPIX is slightly below its 10-year average at 13.8x [6][75]. 7. Inflation Expectations: Japan's inflation is unlikely to revert to zero or deflation, supported by rising domestic wages and inflation expectations. Core-core CPI growth is forecasted to stabilize slightly below 2% in the second half of 2025 [48][49]. 8. Model Simulations: A simulation indicates that a 10% yen appreciation could reduce real GDP by approximately 0.3%, with varying impacts on consumption, exports, imports, and private capex [53][54]. 9. Long-term Projections: The yen is expected to appreciate to around 141 against the dollar by the end of 2025, with limited adverse impacts on the economy [46][54]. Additional Important Insights 1. Structural Changes: The shift in Japan's economy from a deflationary environment to a more normal inflationary state is seen as a critical factor enhancing resilience against yen appreciation [63][66]. 2. Corporate Adjustments: Japanese companies have adjusted their pricing strategies to account for higher costs, which has allowed them to maintain profit margins despite falling import prices [89]. 3. Market Dynamics: The correlation between exchange rates and equity markets in Japan has weakened, indicating that domestic demand plays a more critical role in economic performance than previously thought [19][21]. 4. Potential Risks: There is a risk that a sharp yen appreciation could adversely impact the economy, particularly if it breaches the 130 level in the short term [68][67]. This summary encapsulates the key points discussed in the conference call, highlighting the resilience of the Japanese economy amidst currency fluctuations and the positive outlook for Japanese equities.