PSA Japan Research Round-Up for the Week Ending July 27, 2018

The Weekly Comment
The topic of the week for Japanese equities has been whether the BoJ is preparing to steepen the yield curve. Pelham Smithers sets out and comments on options for the BoJ.
Reports / Flash Notes Summaries at a Glance
1. Hitachi Chemical (4217 JP) FY18 Q1 Results: Slow Start, But Valuation Support is Intact
2. Murata (6981 JP) FY18 Q1 Preview – Raising our Full Year OP
3. Mitsubishi Motors (7211 JP) FY18 Q1 Results: Further Progress Made on Path to Sustainable Growth
4. Shin-Etsu Chemical (4063 JOP) Posts Strong Q1 and Issues Ultra-Conservative Guidance (Again)
5. Fanuc (6954 JP) FY18 Q1 Results – Upside from Currency Assumption but China Remains a Concern
6. Ferrotec (6890 JP) – Still Semiconductor Driven
Company / Sector / Thematic Comments at a Glance
1. Alps (6770 JP) Revises Up / Alpine Merger
2. Nidec (6594 JP) FY18 1Q Results as Expected, Ups Forecast
3. Advantest (6857 JP) Reports a Blow-out FY18 1Q
4. Tokyo Electron (8035 JP) FY18 1Q Misses Inflated Expectations
5. Canon (7751 JP) Revises Down Full Year OP
6. Nikon (7731 JP) Announces Re-entering Mirrorless Market
7. Ricoh (7752 JP) FY18 1Q OP +4%
8. Fujitsu (6702 JP) FY18 1Q Results Overstate Performance
9. Shin-Etsu (4063 JP) to Receive Continued Support from PVC
10. Shin-Etsu Chemical (4063 JP) Issues Admittedly Conservative Guidance
11. Auto Sector up On Easing Tariff Tensions
12. Fanuc (6954 JP) Revises Up H1 OP by Only 10% (H1 RP by 15%)
13. Heard on the Grapevine about A/Cs
14. Komatsu’s (6301 JP) FY18 Q1 OP is 28.3% of Full-Year Guidance
15. CyberAgent (4751 JP) Disappoints the Market; We Remain Confident
16. LINE (3938 JP) Had a Good FY18 Q2
17. MonotaRO (3064 JP) Delivers a Solid FY18 2Q, Splits Stock
18. Details of Eisai (4523 JP) AD Drug Trial Emerge
19. Shionogi (4507 JP) Revises Up (Slightly)
20. Chugai Pharmaceutical (4519 JP) Reports FY18 2Q OP +36% YoY
21. BoJ Policy Change or “Fake News”?
22. China Moves to More Proactive Fiscal Policy
23. Strong Department Store Data

PSA Company Visits, Tours and Interviews

• Results-related conference calls for Fanuc (6954 JP), Hitachi Construction Machinery (6305 JP), Komatsu (6301 JP), Shin-Etsu Chemical (4063 JP), Hitachi Chemical (4217 JP), Sumitomo Dainippon Pharma (4506 JP), Monex (8698 JP), LINE (3938 JP), CyberAgent (4751 JP) and Yahoo Japan (4689 JP)

Weekly Market Comment by Pelham Smithers

Whereas in the west, business lobbies politicians who inform bureaucrats who instruct business, in Japan, business lobbies bureaucrats who instruct politicians who deliver contracts to business. Since politicians come and go, the Japanese system is more stable, but more prone to inertia and pork barrel politics – in part because normally the status quo favours the incumbents – so lobbying is conservative rather than progressive in nature. So, it would be strange to see Japan’s commercial banks lobbying the Bank of Japan for change, if we hadn’t seen it before, two years ago. Then, bankers were pushing for an end to the negative interest rate policy of the time. Now, they are pushing for an end to the BoJ’s “flat curve” policy. Both policies pose problems for Japanese banking profitability – the first by reversing the interest rate differential between deposits and loans, the second, by thinning the margins on the standard borrow short, lend long policy that is the basic banking business model. In both cases, the story has been leaked to the press as “the BoJ considering a change in policy” accompanied by reasons why the change in policy “is a good idea”. Ending negative interest rates immediately won grassroot approval, because most Japanese are cash rich but not generating any return on their assets. It was also popular with investors as many felt that the damage done at the micro level exceeded the seemingly nebulous benefits at a macro level. Consequently, the BoJ, finding itself in a position with no choice but to at least put a floor on interest rates, at least found that it was now on the right side of the debate.