• With increased domestic and international demand, a resurgence in inbound tourism, and improving yen exchange rates, Japanese companies are experiencing a renewed trend of rising profits.
• Small and mid-sized businesses (SMEs) are shifting toward profit growth, raising expectations for wage increases as input costs decline.
• The trend is your friend. However, Japanese stocks have been stuck in a rut, and investors have yet to capitalize on this momentum.

Mercari has launched an MVNO. They are a bit late to the game but Mercari has launched a new consumer-facing mobile service alongside its eCommerce and fintech offerings. The new service can help tie those two offerings together (indeed, payment is through Merpay or Mercard only for now) whilst Mercari uniquely offers users the ability to buy or sell unused data volumes in 1GB increments, tying mobile directly into the C2C commerce platform. Headline pricing of ¥990/2GB and ¥2,390/20GB is roughly competitive with MVNOs like IIJmio, which charges ¥440 for 2GB/data and ¥2,240 for 35GB with incremental (campaign) pricing of ¥500 for voice calling.

KEY TAKEAWAYS

• No matter how cleverly coded software products can be, each evolution of IT tech requires more infrastructure.
• Why cheap and compact AI from China surprised the market is beyond me. From calculators to Electric Vehicles, it always happens.
• AI software products remain a solution looking for a problem. Developer share price valuations escalate without making money. So, invest in hardware.

KEY TAKEAWAYS

• Tariff – ‘the most beautiful word in the dictionary.’ China might agree, with the HSI up +8% and CSI 300 +2.69% month-to-date in US$ terms, while the Nikkei 225 is down -1.54% and DJI -0.98%.*
• President Trump's love of tariffs started when he was a real estate developer, believing Japan was taking advantage of Americans and hindering US businesses.
• During his second presidency, it is essential to focus on his objectives rather than the tariffs to understand what will happen and where investments should be directed

KEY TAKEAWAYS

• Japan appears more of a safe haven today than it has in years, following the first summit between Prime Minister Shigeru Ishiba and President Donald Trump.
• A trade spat was never seriously considered, but addressing trade imbalances was—and a relatively easy fix at that by snubbing Russian LNG imports.
• The dispute over Nippon Steel acquiring US Steel has been resolved, becoming 'investment’ in the US as promised. PM Ishiba will smoothe the way back home.

KEY TAKEAWAYS

• Disaster movies “Deep Impact” and “Armageddon” imagined it, but here comes the real thing, a large rock from the heavens that may hit us in seven years’ time.
• The US, Japan and China are developing defenses, the US has tested one, Japan and China plan to test theirs. All use kinetic energy to change the course of an asteroid.
• Japan’s precision landings on heavenly bodies, chasing space junk and new launch systems highlight potential new businesses for Japan’s space companies.

IIJ posted Q3 results that beat for revenue but missed at the OP line although EBITDA and net income were broadly in line. We consider this an encouraging quarter as operating profit (+9%) and EBITDA (+10%) grew at the highest rate since Q1 23, which puts full-year financial targets within reach whilst Q3 orders received rebounded strongly from Q2 and were the highest ever. We remain at Buy.

Solid eCommerce and fintech results have driven another quarterly beat and LY Corp is on track to exceed its full-year profitability targets with c. 80% progress to both EBITDA and EPS guidance already locked in. The company has mostly exceeded quarterly expectations since its operational nadir in 2023 but an increase in the dividend for the first time since the LINE/Yahoo merger and talk of further buybacks makes the recovery seem more real. We remain at Buy.

This was a great quarter. The company largely met or exceeded Q3 consensus and raised its full-year targets across the board. Expectations for FY24e EBITDA and net income have been raised by 4% and 6% respectively whilst a 23% increase in the dividend means shareholders benefit immediately. Management also laid out plans to drive mid- to long-term space revenue growth that make our current forecasts look conservative. We remain at Buy.

KDDI posted mixed results with retail mobile sales predictably weaker than previous quarters but business service revenue also coming in light. The former was offset somewhat by stability in the roaming revenue stream coming out of Rakuten whilst the contribution from Lawson remained relatively robust despite expectations of seasonal easing. The company is largely on-track to meet its FY24e financial targets despite an OP miss this quarter, as it laps a tough Q4 last year.

Metals and Commodities Outlook: Metals like copper, zinc, and aluminum show strong potential for price increases in 2025 due to supply constraints and rising Chinese demand. Iron ore, nickel, and lithium markets are stabilizing, while thermal and metallurgical coal could recover driven by Indian steel growth.

China and India in Trade: China diversifies away from U.S. dependency, expanding renewable energy and reducing oil imports. India faces challenges, including energy costs and decreased FDI, but economic growth and fiscal incentives may spark recovery in 2025.

India’s Economic Recovery: Despite 2024 disappointments, India anticipates improved growth due to tax cuts, infrastructure spending, and controlled inflation. Key risks include global trade shifts and reliance on Russian energy.

Press reports indicate the government will introduce legislation to the next Diet session to amend rather than abolish NTT Law. This has really been the only potential path as results from a Ministry of Industry Affairs and Communications (MIC, the regulator) review back in October recommended that key elements of the Law remain in place so it should come as no surprise. We are taking this opportunity to publish an update to our forecasts after Q2 results, although the changes our minor and our ¥207/share valuation by fiscal year-end is the same. We remain at Buy.  

• We sit in the most heavily armed part of the world, with parts of Japan 25 miles from Russia, 70 miles from Taiwan, and 31 miles from the Korean Peninsula.
• The JSDF is undergoing an expensive transition costing 2% of GDP. Record tax collections in FY2024/25, and unrealised national assets, could fund more.
• The GCAP fighter plane project with the UK and Italy, planned for service in 2035, has taken an interesting turn. Japan is responsible for its stealth airframe design.

Softbank, alongside Oracle and OpenAI, has announced a $100-500bn project to build AI infrastructure in the US. The revelation of concrete plans for its expected $70bn+ AI pivot is good news for Softbank. Not only were ARM shares up 4% on the reveal, but we expect markets will start to build AI upside into their valuations now that we know where Softbank intends to go. We remain at Buy.

Despite the apparent volatility in the share price, Softbank Group shares have essentially been range-bound for more than a year now when adjusted for NAV. Masa’s trip to Mar-a-Lago did not move the needle very much, although a positive resolution to the TikTok dilemma this weekend could unlock an eventual ByteDance IPO and boost NAV. Outside of that, updates on Softbank’s AI plans remain the focus. The company has been silent but press reports in December and January have filled in some of the gaps on what we might expect. Shares continue to look cheap at 50% of NAV and we remain at Buy.

• Japanese spending picks up during seasonal festivities: Hanami picnics early in the year, summer holidays, trips to admire the autumn leaves, and a very commercial Christmas and New Year celebration.

• A minority government is in place, policies are tangled, and the LDP getting things done will be like waiting for a vending machine to accept a crumpled ¥1000 note.

• Meanwhile, across the Pacific, a reinvigorated Donald Trump is back to run the country; a lot will change, and much will get
done very quickly.

• Japan might not change much, but in the U.S., who knows what’s coming? This could be a strong reason to be overweight equities in both countries.

LY Corp has delivered a fourth consecutive quarter of solid numbers with core advertising and eCommerce sales ahead of expectations and strategic fintech in-line with our robust forecasts. A ¥150bn buyback to improve its liquidity metrics is also compelling whilst optimism on its filing with the MIC on administrative guidance extends support even further. Shares have had a tough time rebounding from weakness last year but there are enough elements here, even in a difficult market, to drive shares higher. LY Corp has been our top Internet pick and these results are encouraging. We remain at Buy. 

• Japan has been active in space for decades. However, plans to go to the moon in 2028 and a USD6.5bn R&D fund now focus the attention of companies, startups, and their investors.
• Japan’s revolutionary heavy-lifting H3 rocket successfully puts satellites into orbit. To cut costs, it repurposes a lot of car parts and 3D-printed components.
• Japanese companies are developing their commercial space business strategy, from lifting satellites and removing space junk to selling toothpaste and apparel.