The US economy slows down, but is it the Japanese stock market that's going to "

This Sunday, Japanese stocks followed the US market and fell under pressure. Despite the market's increasing expectations for a US economic recession, JPMorgan remains optimistic about investment opportunities driven by Japan's economic recovery.

After the release of US employment data on September 6, the yen appreciated to 142 yen against the US dollar, and the Nikkei 225 futures fell by more than 3% over the weekend. On Monday, the Japanese stock market opened down by more than 2%, with most sectors facing selling pressure.

In this context, concerns about the possibility of a "double bottom" in the Japanese stock market have intensified. However, JPMorgan pointed out in its latest research report that this scenario is not the main expectation.

There are two main reasons. First, Japan's domestic economy continues to recover, with key economic data showing an upward trend for the Japanese economy. Second, JPMorgan believes that a US economic recession is not a high-probability event.

Domestic economic recovery supports the stock market

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JPMorgan points out that the continuous improvement of Japan's domestic economy is an important factor supporting the Japanese stock market.

Data shows that Japan's real wages have been growing year-on-year for two consecutive months, consumer spending continues to rebound, and corporate investment from April to June exceeded expectations, despite software investment being affected by supply constraints due to labor shortages.

These positive data indicate that the Japanese economy is gradually emerging from deflationary shadows, showing a healthier growth momentum.

JPMorgan's analysis shows that during past US economic recessions, Japanese corporate earnings were highly correlated with the US market. However, the current situation is different. The internal growth momentum of the Japanese economy is strengthening, which will help Japanese companies to be more composed in the face of external challenges.

In the current cycle, earnings per share for both external demand and internal demand companies are showing growth.Even in the risk scenario where the U.S. economy may enter a recession, we believe that the recovery of the domestic economy will be able to offset these negative impacts to a certain extent, which is an important distinction from previous periods of U.S. economic downturns.

Corporate earnings growth expectations remain stable

The research report also emphasizes that, even with a stronger yen, the earnings growth expectations of Japanese companies remain robust. J.P. Morgan forecasts that even if the yen appreciates and the Federal Reserve's benchmark interest rate drops to 3% by the end of 2025, Japanese corporate earnings will continue to grow.

In the past year, although the depreciation of the yen has had a positive impact on corporate earnings, it is not the only driving factor; the growth in domestic demand has also made a significant contribution.

For instance, the TOPIX earnings per share (EPS) grew by 18% in 2023, but we estimate that the yen's depreciation accounted for about 5% of this growth. Based on our foreign exchange forecasts, we estimate the impact of foreign exchange on EPS to be approximately 1.3% in fiscal year 2024 and about -5.1% in fiscal year 2025.

Concerns about a U.S. economic recession are overblown

Despite recent weak U.S. employment data causing market concerns, J.P. Morgan believes that these concerns may be overblown.

We assume that the market reaction on September 9 followed this pattern: U.S. labor force data indicating a weak labor market → signals of a U.S. economic recession → yen appreciation → decline in the Japanese stock market.

As the Federal Reserve adjusts its interest rate policy and the U.S. presidential election approaches, market volatility may increase. However, based on the solid recovery of the Japanese economy, J.P. Morgan believes that investors are likely to find attractive investment opportunities amid market adjustments.