Japan-Weekly Strategy Report “Nikkei Average exceeds 28,000 points, rising cabinet approval ratings and policy expectations” April 11, 2023 251

Report type: Weekly Strategy

Semiconductor manufacturing equipment export controls, Taiwan situation, BOJ financial policy

The Nikkei Average, after showing a solid recovery and upward trend for about two weeks until last week, turned around and fell by 860 points from a high of 28,287 points on 4/4 to a low on 6/4. It returned to a price level near 27,500 points where it languished in February this year. The gains from the close on 29/3, the final day of rights issue for the fiscal year ending 31/3, were wiped out. There may also be a backlash from the over-purchasing of the Nikkei Average itself, as index-linked ETFs play up supply and demand factors, such as buying futures to maintain NAVs on ex-dividend dates of the index.

Geopolitical risks underlying the decline in the Nikkei Average cannot be ignored. First, the Chinese government expressed “grave concern” about the Japanese government’s planned export restrictions on 23 items of semiconductor manufacturing equipment. Japan’s exports of semiconductor manufacturing equipment to mainland China in 2021 accounted for nearly 40% of its total global exports. Although non-advanced items in the volume zone are exempt from these export restrictions, companies such as Tokyo Electron (8035) are expected to present a headwind for the Nikkei Average due to its high contribution to the index. In response to the export restrictions on semiconductors imposed by the US and Japan, the Chinese government is considering a ban on the export of manufacturing technology for high-performance rare earth magnets, a core component of high-tech products such as electric vehicle (EV) motors. This is a risk factor that needs to be recognized.

Taiwan’s President Tsai Ing-wen visited the US and met with Speaker of the House of Representatives McCarthy. The Chinese government, which sees it as contrary to the “One China” principle, responded with warnings of “decisive measures” to be taken. This has led to an increase in risk aversion in the stock market. On the other hand, there are also moves to promote a conciliatory approach, such as the visit of Taiwan’s largest opposition party Kuomintang’s President Ma Ying-jeou to China for talks with the Chinese Communist Party leadership. Indeed, the situation in Taiwan needs to be closely monitored as the presidential election in January next year approaches.

In Japan, BOJ Governor Ueda will be inaugurated on 9/4. The Monetary Policy Meeting will be held on 27-28/4, and the “Outlook for Economic Activity and Prices (basic views)” will be announced. There are speculations in the market about possible monetary policy revision by the BOJ, and the yield on newly issued 10-year JCB is approaching the upper limit of the allowable fluctuation range of 0.5%. In public documents released by the Executive Board of the IMF on 31/3, many executive directors encouraged the BOJ to consider options to give more flexibility to the framework of the yield curve control (YCC) while maintaining accommodative monetary policy towards the sustained achievement of the 2% inflation target. For example, it is perhaps possible to incentivize financial institutions to capitalize on the yield spread between short- and long-term interest rates by encouraging lower yields on government bonds with shorter maturities. There may therefore be room to view banking stocks, including major banks, as good buying opportunities on current dips.

In the 10/4 issue, we will be covering K&O Energy Group (1663), Nisshinbo Holdings (3105), Chiyoda Corp (6366), and SBI Sumishin Net Bank (7163).


K&O Energy Group Inc (1663)            2,127 yen (7/4 closing price)

・Established in 2014 by means of share transfers from Kanto Natural Gas Development Co., Ltd. (established in 1917) and its subsidiary, Otaki Gas Co., Ltd. Operates a Gas business that handles everything from natural gas development to supply, and an Iodine business that uses brine, a byproduct of natural gas production.

・For FY2022/12 results announced on 13/2, net sales increased by 60.7% to 106.2 billion yen compared to the previous year, and operating income increased by 85.5% to 7.304 billion yen. Results by segment are as follows: Sales in the Gas business increased 64% YoY to 89.9 billion yen, and operating income increased 12% YoY to 5.3 billion yen. Sales in the Iodine business increased 60% YoY to 8.8 billion yen, and operating income increased 2.9x YoY to 4.7 billion yen.

・For FY2023/12 plan, net sales is expected to decrease by 8.6% to 97.1 billion yen compared to the previous year, operating income to decrease by 9.6% to 6.6 billion yen, and annual dividend to increase by 2 yen to 34 yen. On 4/4, PM Kishida announced at the “Ministerial Council on Renewable Energy, Hydrogen and Related Issues” that he plans to promote the use of thin, lightweight, bendable “perovskite solar cell” panels by 2030. Japan produces about 30% of the world’s iodine, the main material for such solar cell panels. Company is one of the world’s leading suppliers.

Nisshinbo Holdings Inc (3105)            988 yen (7/4 closing price)

・Established in 1907. A conglomerate consisting of the Wireless Comms, Microdevice, Automobile Brakes, Precision Instruments, Chemicals, Textiles, Real Estate, and Other business segments. Aiming to become an “Environment and Energy Company”.

・For FY2022/12 results announced on 10/2, net sales increased by 1.1% to 516.085 billion yen compared to the previous year, and operating income decreased by 29.2% to 15.435 billion yen. Segment profit in the Microdevice business grew 2.1x YoY to 8.947 billion yen due to growth in EV and semiconductor manufacturing equipment applications, but profits declined in the Wireless Comms business and the Automobile Brakes business, impacting results.

・For FY2023/12 plan, net sales is expected to increase by 7.9% to 557.0 billion yen compared to the previous year, operating income to increase by 55.5% to 24.0 billion yen, and annual dividend to increase by 2 yen to 36 yen. Sales and profits in the Mobility segment of the Wireless Comms business had declined in the previous fiscal year due to a decrease in ITS (Intelligent Transport Systems) for automobiles. However, company has advanced technology that simultaneously detects 3D position and speed information by combining camera images and millimeter-wave radar. Ban on “Automated Level 4” driving on public roads was lifted on 1/4.

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