A new report from Citi Equity Strategy notes that Japan could post record earnings in FY2015. Analyst Kenji Abe concludes that even with the yearly tax hike, the  industrial production will increase in parallel, owing to the Abenomics led recovery. In light of the Q2 earnings, Citi has increased its FY3/15 TOPIX EPS estimate to 89.3, whereas the index is expected to reach 1590. Citi estimates a sales growth forecasts of 9.6% in FY3/14 and 5.5% in FY3/15.

Japan

This is a pretty big statement since with an EPS of 89.3, TOPIX earnings will eclipse their pre-U.S. financial crisis peak which Citi calls pre-Lehman peak. According to Kenji Abe’s analysis further weakening in yen and cost restructuring initiatives by Japanese firms will both work to increase profits and revenues in the next two years. TOPIX recorded an EPS of 80.4 in the third quarter of FY2015.

TOPIX companies expected to post record earnings

Citi expects 178 firms on TOPIX 500 to post record earnings in 2015.

Citi finds that Japanese sectors which have managed to cut down on depreciation costs are petro products and electronics. As part of economic recovery Japanese companies are reducing their capital expenditures. Citi also thinks that auto earnings will be strong, so much that they will outpace their record performance in 2001. Their analysis sees the most upside in Fuji Heavy Industries Ltd. (OTCMKTS:FUJHY) (TYO:7270), Bridgestone Corp (OTCMKTS:BRDCY) (TYO:5108), HINO MOTORS, LTD. (TYO:7205), KDDI Corp (TYO:9433).

Take a look at hedge fund short positions in Japan.

Other companies that are rated Buy by Citi are Tokio Marine Holdings Inc (OTCMKTS:TKOMY) (TYO:8766), KANSAI PAINT CO., LTD. (TYO:4613) and Otsuka Holdings Co Ltd (TYO:4578).

Reasons for the bullish view on Japan

The risks to the projected record high in TOPIX EPS would be strengthening of yen or if it weakens slowly against the  U.S. dollar. Another risk would be a slowdown in industrial production below what was witnessed in 1998, both unfavorable circumstances are seen as unlikely by the Citi analyst. One of the reasons for the bullish view on Japan is that Kenji Abe sees the Fed increasing interest rates in the near future which will counter the consumption tax rates increase that will occur in Japan in the coming years. Citi sees it as a win-win scenario, adding that, “Even if nuclear plant restarts are slower than expected we think this would only cut around 1.8pts from the TOPIX EPS.”