Traders and economists around the world have been slashing their forecasts for the yen and cranking up their forecasts for Japanese stocks. This is largely due to the return of Japan’s Prime Minister Shinzo Abe, who has promised a inflation in his effort to boost the economy.
In theory, inflation results in a weaker currency and higher stock prices.
Here’s Goldman’s outlook for the yen and Japanese stocks (as measured by the TOPIX):
Photo: Goldman Sachs
The stock market forecast assumes a stable yen. However, the analyst note how the stock market would move given changes in the yen. From a recent note:
This week our Japan equity strategist Kathy Matsui again raised her earnings forecast and price target for the TOPIX. Our revised EPS estimates now reflect 14% growth for FY 2014. Our new year-end 2013 target of 1100 represents a 23% return from current levels.
The new TOPIX EPS and index forecasts assume a stable USD/JPY exchange rate of 88. However, every ¥10 shift in the exchange rate equals roughly 6-8% growth in earnings. For example, if the yen continues to weaken and averages 100 or 110, our earnings estimates would rise and our TOPIX target would increase to 1190-1270. However, policy actions have yet to keep pace with the political pronouncements. sceptics ask why this round of stimulus and QE will result in a different outcome than in the past. Policy decisions during the next few months will determine whether the latest rally will continue (see Abe-nomics: Raising TOPIX target to 1100, 23-Jan).