Japan Equity Strategy_ BOJ June Tankan survey_ US tariffs not weighing on business sentiment. Tue Jul 01 2025

Summary of J.P. Morgan Japan Equity Strategy Conference Call Industry Overview - The conference call primarily discusses the Japanese corporate sector, focusing on the findings from the June BOJ Tankan survey regarding business sentiment and corporate earnings forecasts. Key Points and Arguments Impact of US Tariffs - The June BOJ Tankan indicates that US tariffs have not significantly dampened corporate sentiment, with a business conditions diffusion index (DI) for large manufacturers remaining steady at 13 points, surpassing the Bloomberg consensus of 10 points [1][4] - However, corporate earnings forecasts predict a 10% drag on net profit, particularly affecting the manufacturing sector, especially automobiles and other processing industries [1][4] Corporate Earnings Forecasts - The FY2025 net profit growth forecast for large enterprises is revised to -5.3%, down from -1.3% in the March survey, aligning with the broader TSE Prime constituents' forecast of -5.8% [1][4] - Manufacturers lowered their profit growth forecast to -9.8%, while non-manufacturers raised theirs to -0.8% from -2.0% [1][4] Sales and Capital Expenditure (Capex) - Both manufacturers and non-manufacturers have increased their sales forecasts, with capex plans revised sharply upward to +11.5% YoY overall for large enterprises, driven by investments in semiconductors, automation, and power transmission/distribution [1][5] - Capex growth for manufacturers is projected at +14.3%, while non-manufacturers expect +9.9% [5] Foreign Exchange and Inflation Outlook - The corporate forex estimate for FY2025 is set at ¥145/$, indicating a 4% YoY strengthening of the yen, which is expected to negatively impact EPS by approximately 2 percentage points [5][30] - The inflation outlook has slightly decreased, with companies expecting general prices to rise by 2.4% in one year, down from 2.5% previously [5][31] Sector-Specific Insights - Business conditions DI worsened in sectors more exposed to US tariffs, such as automobiles and machinery, while sectors like materials (paper & pulp, steel, oil & coal) and construction showed improvement [4][5] - The market consensus appears more cautious than company outlooks in sectors like steel, services, and paper & pulp, while being relatively optimistic for electric & gas utilities, real estate, and communications [4][5] Overall Corporate Sentiment - Despite the challenges posed by tariffs, corporate earnings remain resilient, particularly in domestic non-manufacturing sectors, which aligns with the investment strategy focusing on domestic demand sectors and potential upside in semiconductors and machinery [1][5] Additional Important Information - The report highlights the limited impact of tariffs on business conditions, with a flat DI for manufacturers and slight deterioration for non-manufacturers, which was in line with market expectations [4][5] - The report also notes that the FY2025 TOPIX consensus EPS has seen downward revisions in overseas demand sectors, particularly automobiles, which have been lowered by 18% over the past three months, yet still shows a modest +3.3% YoY profit growth forecast as of end-June [4][5] This summary encapsulates the critical insights from the conference call, providing a comprehensive overview of the current state of the Japanese corporate sector and its outlook amidst external pressures.