The message from the current corporate results season is straightforward: Japan’s corporate earnings power continues to rise. This is due to both higher top-line sales growth as well as positive tailwinds from the exchange rate. 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.

Specifically, corporate guidance—which is closely followed by Japanese analysts—is still based on the assumption that sales will rise 3.2% and the exchange rate will average ¥110 against the dollar. With this, TOPIX earnings should rise 13.1%. This is conservative because so far this year—April to October, as Japan’s fiscal year starts in April—sales growth has averaged 4.5%, which on its own should add almost 15% to profits if maintained in the second half of the year. 

Regarding the foreign exchange (FX) market, the baseline assumption of ¥110 against the dollar compares to a realized average of ¥111.9 against the dollar so far this fiscal year. Every ¥1 of yen weakness basically adds back about 1% to profits, thus contributing additional momentum for positive earnings growth surprises from here.

The following matrix aims to pull it all together. It shows the implied fair-value TOPIX level given various combinations of sales growth and FX assumptions. The current consensus is highlighted in blue—with FX at ¥110 against the dollar and 3% sales growth, the implied EPS should come to 112, which in turn puts today’s TOPIX on a multiple of 16x earnings. Note that throughout Abenomics, the TOPIX price-to-earnings ratio has fluctuated between 19x and 13x.