Japan is one of the few developed economies whose overall trailing PE is below the long run median, due to stronger EPS growth than in Europe or the US, though it has the highest CAPE worldwide.

“The global PE based on trailing EPS has rerated back up to the 17x long run median. With EPS going nowhere over the period, this PE expansion has accounted for all the 46% increase in global equities since 2011,” says a recent Citi report. The US and Europe ex-UK are above their long run medians with a PE of about 19x.

Japan’s price growth driven by earnings

Japan, whose EPS growth wasn’t entirely based on multiple expansion, is trading at a discount to other developed market equities despite having a strong 2013. Citi Japan strategist Kenji Abe thinks the looming consumption tax will slow growth, but that EPS growth will still hit 25% for 2014 as the effect of a weak yen continues to wind its way through the economy. Even if EPS growth doesn’t hit such a high mark, Japanese equities have some way to go before their PE looks expensive compared to other DM.

Japan

Japanese CAPE highest in world, but still below historical median

CAPE tells a slightly different story. Japan is still well below its long run median, but it is more expensive than any other market in absolute terms; only the US comes close with a CAPE of 25x. Emerging markets are cheap by both measures, but they also carry the most tapering-related risk.

“The key risk to our bullish view remains a disorderly reaction to rising rates, especially in EM. We remain wary on those EM countries with significant current account deficits”, says the report.

Japan

Overall, Citi continues to be bullish on global equities, with a 10% growth target for MSCI AC World. Its analysts are most optimistic about Asia ex-Japan, the UK, and emerging markets (20%, 19%, and 18% growth respectively), and least optimistic about growth in India, Poland, South Africa, and Taiwan. The US, with a growth target of 7%, is expected to grow more slowly than most other DM, but Citi still expects it to have a good year.