The message from the current corporate results season is straightforward: Japan’s corporate earnings power continues to rise. This is due to both higher top-line sales growth as well as positive tailwinds from the exchange rate. Going forward, corporate guidance remains conservative, which in turn makes further upward revisions likely over coming quarters. All said, we maintain our call for 25% EPS growth in the current FY3/2018 (fiscal year ending March 2018), against the 13% now implied by the consensus. If realised, this implies a TOPIX level of 2,000 as a reasonable target over the coming six months, in my view.

Specifically, corporate guidance—which is closely followed by Japanese analysts—is still based on the assumption that sales will rise 3.2% and the exchange rate against the Dollar will average Y110/$. With this, TOPIX earnings should rise 13.1%. This is conservative because so far this year—which is April to October, as Japan’s fiscal year starts in April—sales growth has averaged 4.5%, which on its own should add almost 15% to profits if maintained in the second half of the year.

On FX, the base-line assumption of Y110/$ compares to a realised average of Y111.9/$ so far this fiscal year. Every Y1 of Yen weakness basically adds back about 1% to profits, thus adding additional momentum for positive earnings growth surprises from here.

The following matrix aims to pull it all together. It shows the implied fair-value TOPIX level given various combinations of sales growth and FX assumptions. The current consensus is highlighted in blue—with FX at Y110/$ and 3% sales growth, the implied EPS should come to 112, which in turn puts today’s TOPIX on a multiple of 16x earnings. Note that throughout “Abenonmics,” the TOPIX PE fluctuated between 19x and 13x.

Sources: WisdomTree, Bloomberg, as of 31/10/17.

All said, I maintain my bullish call for Japanese equities: valuations are attractive and positive earnings momentum is poised to keep going. Japan is not a “value trap.” In my view profits can rise 25% in FY3/2018 which in turn suggest TOPIX at 2,000 is a reasonable fair-value target.

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