Japanese Equity Market Commentary November 2013 Exhibit 1: Major Equity Market Performance Market Overview (as of 31 October) There was almost no change in the Japanese Country Index YTD QTD Oct equity market in October with the TOPIX rising USD 24.6% 0.0% 0.0% TOPIX by 0.01%. Domestically, PM Abe decided to JPY 41.4% 0.0% 0.0% Japan raise consumption tax by 3% to 8% (a 60% USD 22.3% 0.0% 0.0% MSCI Japan increase in real terms) from April 2014 while JPY 38.7% 0.0% 0.0% there was little deliberation of the growth U.S. S&P500 USD 23.2% 4.5% 4.5% strategy. These factors put investors into “wait USD 17.6% 4.1% 4.1% Europe FTSE Eurofirst 300 and see mode”. Overseas, the US fiscal EUR 14.0% 3.7% 3.7% MSCI AC Asia dilemma pushed the Japanese stock market Asia USD 1.7% 4.3% 4.3% (ex. Japan) downwards as expected. The delay of FRB’s tapering off the Quantitative Easing also halted Exhibit 2：Sector Performance of MSCI JAPAN (as of 31 October, JPY) the yen depreciation; which resulted in a weaker upward momentum in the Japanese Top 5 Sector Bottom 5 Sector Telecommunication 4.3% Materials -4.6% equity market. Services Health Care 3.3% Energy -3.3% Japan’s wealthy older consumers pull the Consumer Staples 1.8% Utilities -1.9% Information Technology 1.3% Financials -1.1% consumption Consumer Discretionary -0.1% Industrials -0.3% It is well known that population is ageing in Source : Bloomberg, SuMi TRUST Japan, however, what is not so well known is that it is the baby boomer generation who have set the fashion for consumption behavior in Japan. Today, the baby boomer generation are reviving luxury consumption through the purchasing of sumptuous items such as watches and jewellery, aided by the fact that they have recently begun receiving their retirement allowance. The term “baby boomer” originates from the large birth hike, seen globally, in the aftermath of World War II - in Japan the biggest hike was seen between 1947 and 1949. Not only is it the baby boomers who are driving consumer spending, but also other elderly people who are spending on their hobbies, notably tourism (this group are referred to as “active seniors” and are the front runners of luxury spending). The BoJ said in its regional economic report that “the recent consumption trend is luxury spending by elderly people.” All the BoJ branches reported that elderly people with time and assets are very eager to travel and the expensive hotels are getting busy now. For example, the new train cruising service “Seven Stars”, which JR Kyusyu started this October aiming to be an Oriental Express in Japan, has exceptional popularity among seniors. All the tickets before next June were sold out despite its fares ranging from JPY 400,000 to 600,000(USD 4,000 to 6,000). This clearly shows that elderly people are starting to enjoy luxury spending rather than saving. Another characteristic of elderly people’s spending is that they are willing to buy expensive goods such as leather-made school bags, expensive educational toys and seasonal festival goods for their grandchildren. Department stores are taking advantage of their luxury line-ups and increasing their sales. The luxury sales at department stores were very strong after January and it was YoY +22.8% in May. The hot summer kept people at home, so the sales decreased but it still increased by around YoY +15%. The consumption tax hike next April may bring a rushed demand and the inheritance tax hike in 2015 induce elderly people to purchase expensive pictures and watches so that they can leave real assets rather than leaving cash and being imposed higher tax. We believe this luxury spending by elderly people will last even after the consumption tax hike.

Exhibit 3：Travel demand by elderly (DI) Exhibit 4：Luxury goods sales in department stores (YoY)

25% 20 20% 15 15% 10 10% 5 0 5% -5 0% Mar-12 Sep-12 Mar-13 Sep-13 -5% Apr-12 Oct-12 Apr-13 N.B. Data Sep-13 is outlook Source: Japan Department Stores Association Source: Japan Travel Association

The team at SuMi TRUST conducts rigorous research on a wide range of Japanese individual corporations. Under the changing environment of this transition period, the ability of individual companies to cope with the change determines their survival. We believe bottom-up research on individual companies works effectively, especially under this investment environment.

Portfolio Manager’s focus: J. Front Retailing (3086) The department stores are benefiting from wealthy elderly people’s luxury spending and J. FRONT RETAILING (3086) is a good example. This company mainly consists of two department store chains after a merger in 2007, one is (just like the Saks Fifth Avenue in the US) and the other is (like Nordstrom in the US). There are five points that we focus on J.FRONT.

1) DAIMARU is based in and MATSUZAKAYA in ; therefore, it is easy for them to show the synergy effect through a diversification of locations. Even within Tokyo, DAIMARU is located next to Tokyo station and MATSUZAKAYA is located in Ginza, which are two separate shopping zones. 2) They are focusing on increasing the sales in their Tokyo store. The newly re-opened DAIMARU Tokyo store, which has 40% larger floor space, is increasing its sales by adopting new luxury brand tenants and deploying popular brand shops like Tokyu Hands. Daimaru also takes advantage of its location which is next to Tokyo station. People on business trips or sightseeing buy souvenirs or lunch boxes which they eat on the bullet train, “Shinkansen”. 3) The purchase of PARCO (like Printemps in France), which is well known as a metropolitan life style producer, brought new know-how in selecting tenants and managing shopping centres. MATSUZAKAYA and PARCO co-work to plan a new store in Ueno, in northern Tokyo, taking advantage of that know-how. 4) The sales in the first half of FY2013 were YoY +22.2% due to the consolidated account with PARCO and the strong climax closing sales in MATSUZAKAYA Ginza store. 5) In addition to strong sales thanks to Abenomics, MATSUZAKAYA will re-build and re-open two new stores in Tokyo in 2017. We expect the further increase in sales and profit. Exhibit 5：DAIMARU Tokyo store Illustrated by J. FRONT Retailing Portfolio managers and analysts at SuMi TRUST believe the current J. FRONT share price has not priced in these potentials and there is still room for upside. Recently, J. FRONT announced that some restaurants in DAIMARU and MATSUZAKAYA misguided customers by showing a prawn on the menu although they provided a black tiger prawn. This became apparent when other hotels and restaurants announced the same case. To maintain its credibility, J.FRONT has already placed stricter control on restaurants’ menus. We believe the impact on earnings and share price is limited. The department stores have suffered from this stagnant deflation during the so called “Lost Decade”, but now is the time to end the deflation by Abenomics and wealthy people have started to purchase luxury items at the department stores to defend themselves from inflation, the hike in consumption and inheritance tax. Higher stock prices, retiring baby boomers and expected wage increases will also work positively for department stores.

Review of our Stock Picks Exhibit 6：Performance of the Stock Picks（as at 31 Oct） Ryohin Keikaku outperformed TOPIX due to the Relative return strong sales in Asia, including ten stores in China. to TOPIX Sector Date From the The sales in Italy have also bottomed out. date we Oct Mitsubishi Heavy Industry outperformed as well commented Pola Orbis HD (4927) Chemical due to the favorable performance in the defense 31-Aug-12 -44.6% -5.6% Daikin Industries Machinery 28-Sep-12 114.6% 8.0% industry. On the other hand, Suruga Bank (6367) underperformed despite its strong earnings since Calbee (2229) Foods 31-Oct-12 -22.4% -9.6% there was a concern that the consumption tax Ryohin Keikaku Retail 31-Oct-12 24.5% 10.4% hike may press down the mortgage demand. Our (7453) portfolio managers still maintain their basic Suruga Bank (8358) Bank 30-Nov-12 -8.5% -7.9% conviction on these stocks. Nippon Steel (5401) Iron & Steel 28-Dec-12 13.9% -3.0% Daibiru (8806） Real Estate 29-Mar-13 -2.5% 8.7% SuMi TRUST, as a well-resourced, bottom-up Hino Motor (7205） Automobile 30-Apr-13 -9.5% -4.5% Mitsubishi Heavy stock picker, has a team of around 40 research Machinery 31-May-13 -7.0% 10.5% Industry (7011) analysts in Tokyo and Hong Kong who cover over Electronic Enplas (6961) 28-Jun-13 -17.8% 3.7% 1,000 Japanese and Asian companies. We Component leverage this resource seeking to generate Resorttrust (4681) Service 31-Jul-13 20.0% 5.9% returns in excess of the market both in Japan and Kajima (1812) Construction 30-Aug-13 10.2% 4.0%

Asia. It will be achieved by identifying attractive Don Quijote (7532) Retail 30-Sep-13 6.0% 6.0% investment opportunities, exploiting our expertise to deliver accurate and up-to-date earnings Source : Tokyo Stock Exchange estimates, and non-consensus insights, as well as by conducting a detailed analysis of the Asian supply chain.

Disclaimer Any enquiries regarding the products This marketing communication is issued by Sumitomo Mitsui Trust International Limited (“SMTI”). SMTI is authorised and regulated by the United Kingdom’s Financial Conduct Authority (the “FCA”), whose address is 25 The North Colonnade, Canary should be made to: Wharf, London, EC3N 2AA, United Kingdom. This marketing communication has been made available to you only because SMTI has classified you as a professional client in accordance with the FCA’s rules. If you have received this marketing communication from a source other than SMTI, you should contact SMTI before using it or relying on it. You must not send this marketing communication to any other person without first having received written approval from SMTI. The information contained in this Yusuke Karube marketing communication (the “Material”) is being made available for information purposes only and is designed to provide information on the investment services which SMTI may offer to clients. Nothing in the Material amounts to or should be Director, International Sales construed as an actual offer by SMTI to provide any investment services to any person. If SMTI agrees to provide any investment Sumitomo Mitsui Trust International Limited services to any person, those services will be the subject of a separate written agreement between SMTI and that person. Furthermore, the Material has not been prepared with any consideration of the individual circumstances of any person to whom it 3rd Floor, 155 Bishopsgate, is communicated. Accordingly, it is not intended to, and does not, constitute a personnel recommendation in relation to the purchase or sale of, or exercise of any rights in relation to, any financial instruments or advice in relation to any investment policy London EC2M 3XU, UK or strategy to be followed. The Material also does not contain the results of any investment research carried out by SMTI and is not intended to amount to a financial promotion of any particular financial instrument which may be referred to in it. While SMTI Direct: +44 20 7562 8460 uses all reasonable endeavours to ensure the Material is accurate, it has not been prepared with a view to any person relying on it. Accordingly, SMTI accepts no responsibility for any loss caused to any recipient of this document as a result of any error, [email protected] inaccuracy or incompleteness in the Material, nor for any error in the transmission or receipt of this communication.