Confirmation that the deceleration would lead to stable growth $EWJ [UBS Investment Research]

UBS’ economic scenario

In 2009, Japan’s cyclical recovery began earlier than the stock market’s expectation; growth was strong (at around +3%). However, because of yen appreciation, increased deflationary expectations, and falling bank stocks, the market could not factor in the corporate earnings recovery and remained sluggish. In 2010, we think that the cyclical recovery will be sustainable, owing to strong overseas growth, but the benefits owing to fiscal expansion and actualising pent-up demand should wane, so growth is likely to be slower; we forecast +1% trend growth. The yen is unlikely to rise much further because the government/BoJ are expressing concerns, and expectations for a rate hike in the US are likely to reverse US-Japan interest rates again. Without further yen appreciation alongside rising bank stocks, the stock market should price in an export-led corporate earnings recovery. We expect bank stocks to recover as deflationary expectations recede. Risk money may increase as bank stocks rise, and the yield curve could steepen as deflationary expectations recede. A steeper yield curve should underpin banks’ earnings, and stock prices could rise further, as if these factors are ‘playing catch.’ How these factors ‘play catch’ should determine the strength of the likely domestic demand recovery in 2011.



Confirmation that the deceleration would lead to stable growth