JPMorgan-Japan Equity Strategy Double bottom concerns for Japanese eq...-110254194

Global Markets Strategy10 September 2024J P M O R G A Nwww.jpmorganmarkets.comEquity StrategyRie Nishihara AC(81-3) 6736-8629rie.nishihara@jpmorgan.comJPMorgan Securities Japan Co., Ltd.Yong Guo, CFA(81-3) 6736-8623yong.guo@jpmorgan.comJPMorgan Securities Japan Co., Ltd.Mansi Das(91) 2261 573343mansi.das@jpmchase.comJ.P. Morgan India Private LimitedMislav Matejka, CFA(44-20) 7134-9741mislav.matejka@jpmorgan.comJ.P. Morgan Securities plcRajiv Batra(65) 6882-8151rajiv.j.batra@jpmorgan.comJ.P. Morgan Securities Singapore Private LimitedWendy Liu(852) 2800-1087wendy.m.liu@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) Limited/ J.P. Morgan Broking (Hong Kong) LimitedDubravko Lakos-Bujas(1-212) 622-3601dubravko.lakos-bujas@jpmorgan.comJ.P. Morgan Securities LLCThe II-Japan research survey is opening soon. If our research adds value, please consider voting for us for 1) Equity Strategy, 2) Thematic Research with 5 stars.Following the release of US employment data September 6, the yen strengthened to the ¥142/$ level and Nikkei 225 futures fell more than 3% over the weekend. Japanese stocks opened this week by declining more than 2% September 9, with most sectors facing selling pressure. However, a double bottom for the stock market is not our main scenario. The first reason is a continued recovery in the domestic economy. Data released last week showed real wages rising YoY for a second consecutive month, an ongoing recovery in consumer spending, and an increase in corporate investment. This recovery in the domestic economy, in contrast to a US economic slowdown, is the reason why we believe the outlook for Japanese stocks is now different than before. Second, a US recession is not our main scenario. Based on our view that the yen has limited scope to appreciate even when factoring in interest rate cuts to a Fed Funds rate of 3% at end-2025, we believe the stock market can absorb a stronger yen in the future. In Japan, we are starting to see evidence of wage growth and recovery in consumer spending, marking the final chapter for overcoming deflation, and corporate reforms are also accelerating. We recommend buying on weakness through the end of 2024 while watching US market volatility with a view to FRB rate cuts and the US presidential election.•Economic concerns rise on worse US employment data; yen strengthens, stocks weaken: Following the release of US employment data September 6, the yen strengthened to the ¥142/$ level and Nikkei 225 futures fell more than 3% over the weekend. The market factors in the probability of a US recession at 58% (Figure 1; based on economic indicators as of September 5). This week opened with TOPIX falling 0.7% and the Nikkei 225 0.5% on September 9, with 24 of the 33 TOPIX sectors facing selling pressure. The end-2025 USD/JPY rate implied by Japanese and US interest rate futures was ¥142 before the sell-off on August 1, fell to ¥135 just after the sell-off, returned temporarily to ¥141, and was ¥136 on September 9