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See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts. Any authors named on this report are research analysts unless otherwise indicated.
June 2013
Nomura
Yunosuke Ikeda
Managing Director Head of FX Strategy, Japan yunosuke.ikeda@nomura.com +81 3 6703 3885
Tomo Kinoshita
Managing Director Chief Economist Japan tomo.kinoshita@nomura.com +81 3 6703 1280
Naka Matsuzawa
Managing Director Chief Japan Rates Strategist naka.matsuzawa@nomura.com +81 3 6703 3864
Hiromichi Tamura
Managing Director Chief Equity Strategy Japan hiromichi.tamura@nomura.com +81 3 6703 1680
Kevin Gaynor
Managing Director Global Head of Asset Allocation Strategy kevin.gaynor@nomura.com
Source: Nomura
Introduction
2015-> Success
Japan has embarked on a process from the lost decades to a very different future. Abenomics is merely the toolkit to deliver that future. Investors need to understand both the problem being addressed and what would constitute success. The application of the 3 Arrow toolkit has identifiable investment implications too. However, it is unlikely that these implication will be linear from the old Japan to the new Japan. In any event, whether successful or not Japan and its markets are likely to be an important factor for the global economy and markets for several years and therefore cannot be ignored. This presentation tries, as best as can be done today, to define what success looks like and the path from here to there.
Source: Nomura
Objective achieved? What does it look like? Asset class winners and losers New Opportunities
allocation
Deflation
entrenched as the government and the corporate sector failed to act when needed
Lag in restructuring balance sheets after demand shocks (1990 bubble collapse, 2008 Lehman bankruptcy shock) Fiscal stimulus lacked consistency and monetary easing fell behind the curve Current account surplus and deflation exacerbated strong JPY, pressuring corporate earnings further
Domestic credit market very small No inflation hedging required and thus small linker market Banks balance sheets swap from loans to government bond holdings
Fixed income investment behaviour becomes focused on particular modes of analysis such as carry and roll
Ballooning
Despite increases in government debt, private sectors surplus cash flows back into capital markets, thus preventing a fiscal crisis. Loss of corporate competitiveness led to a decline in foreign currency reserves, gradually depleting domestic surplus cash. Reliance on currency policies With fiscal and monetary policy failing to bring about intended results, the government would have little choice but to depend on a weak currency.
Source: Nomura
1.0
0.8 0.6 0.4 0.2 0.0
1995
Source: Cabinet Office
2000
2005
2010
Japans potential growth rate declined from above 4.0% to around 0.5% after the two demand shocks (i.e., collapse of financial bubble in 1990, Lehman shock in 2008).
20
Nomura Forecast (12-15)
15
10
-5
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
(FY)
Total Population(lhs)
80
30.0
25.0
60
20.0
Estimates
15.0
40 10.0 20 5.0
0 1920
0.0 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 (CY) 8
Note: 1)Some data missing for periods of conflict. 2) Projections are median estimates from National Institute of Population and Social Security Research data. Source: Nomura, based on Ministry of Internal Affairs and Communications, and National Institute of Population and Social Securities Research Data
Perhaps little surprise then that there has been instability in Japan politics?
The big difference is, Prime Minister Abe has won great popularity unlike several previous Prime Ministers. We finally see signs of political stabilization, which would be positive for the economy.
Cabinet support rating
cabinet support rating, % 90 80 Abe 70 60 50 40 Koizumi 30 Abe 20 10 0 01 29 Jul 09 03 05 11 Jul 04 07 29 Jul 07 09 11 11 Jul 10 13 28 Jul 13 ? LDP (majority) Dec 16? 15 Jul 16 17 CY Fukuda Hatoyama
Aso
Kan
Noda
House of Councillors Liberal Democratic Party (majority) The House of Representatives LDP (the leading party )
16 Dec 12
And given this macro and political backdrop, debt levels have continued to grow
-2
-4
-6
140 130
-8 1990 1993 1996 1999 2002 2005 2008 2011 2014 (FY)
120 2000 2002 2004 2006 2008 2010 2012 2014 (FY)
10
12.0 Depositary institution Insurance & Pension funds General government 37.5
Households
9.7
22.2 Overseas
11
Lack of growth and weak domestic capex has led to continued corporate surplus and a tiny credit market
Abenomics is trying to move frozen cash in corporate sector Targeting 70trn capex from current 60+ trn level
Cash of Japanese companies
(trn)
80
75
70trn
70
65
170
60
160 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
55
12
And so while Japanese banks are some of the healthiest, they have very high loan-to-deposit ratios
Totally different from early 2000s when Japans banks faced a major NPL concern
Ranking of Banking Systems Based on Banks Balance Sheet Indicators, 2012:Q3
Japanese banks
CET1 ratio
10%
8%
6%
4%
2%
Sources: Bloomberg L.P.; SNL Financial; and IMF staff estimates. Note: AT = Austria; CH = Switzerland; DE = Germany; ES = Spain; FR = France; GR = Greece; IE = Ireland; IT = Italy; JP = Japan; NL = Netherlands; PT = Portugal; SE = Sweden; UK = United Kingdom; US = United States. The closer a banking system is to the center of the figure, the more balance sheet adjustment it needs to undertake. Rankings are based on the aggregate position for a large sample of banks headquartered in each country (more than 90 percent of the banking system in most cases) as of 2012:Q3 or as of the latest available data before then. Bank buffers are the ratio of core Tier 1 capital and loan loss reserves to impaired loans as reported in banks financial statements. The loan-to-deposit ratio is gross loans as a percentage of deposits (for Italy and Spain, adjusted for retail debt). Change in the impaired loan ratio is the annual change in impaired loans as a percentage of gross loans. Return on assets is average annualized retained earnings over the past year as a percentage of tangible assets minus derivatives. See footnotes 17 and 18 in the main text.
Barclays
MUFG
SMFG
Mizuho
HSBC
BNP
SG
Citi
Household asset allocations different from other G7 countries for good reason
Cash has been king for the long deflation period in Japan
Composition of household financial assets in Japan
Bonds, 2.1%
TOTAL
Other total, 4.2%
Japan
Cash & deposits, 55.2% Bonds, 9.5% Cash & deposits, 14.3% Bonds, 7.0% Investment trusts, 11.8%
USD15.9trn
US
USD54.4trn
Euro area
USD25.4trn
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
inv, %
-5
-4 25 -3
20
-2
15
-1
0 10 1
5
79 82 85 88 91 94 97 00 03 06 09 Source : Nomura, based on Ministry of Internal Affairs & Communications and Bank of Japan data
CY
12
15
Japanese pension funds have decreased Japanese equity allocation for more than a decade
Pension funds are possible net buyers of Japanese equities other than nonresident and individual investors
Weight of Japanese Equities in Corporate Pension Funds and GPIF
(%)
GPIF
35
30 25
20
15 10
5
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
16 Source : Nomura, based Government Pension Investment Fund and Pension Fund Association data
90 80 70 60 50 40 30 20 10 0 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
17 Source: Nomura, based on Tokyo Stock Exchange and Toyo Keizai data
20
40
-16.8
60
80
100
-24.8 Export volume Price 2008 2009 2010 2011 Import volume Actual change 2012
120 80
70 1995
1997
1999
2001
2003
2005
2007
2009
2011
18
Changes in nominal mineral fuels imports (from Jan-Nov 2010 to Jan-Nov 2012)
80%
72.6%
64%
70%
53.5%
60%
60%
50%
50% 38.9%
40%
30.8%
40%
6.6%
30%
2.9% 30% 57.1%
20% 32.3% 27.9% 15.8% 12.3% 1.1% 14.1%
32%
29.8% 50.1%
20%
10%
11.2% 0%
0%
2012
2013
LNG
LPG
Coal
19
20
allocation
Re-emergence of domestic credit market and linker market Leveraged loan market and securitised asset market growth Higher domestic and cross-border M&A volumes (inward FDI higher too)
Source: Nomura
22
Forecast assumptions
CY13 CY14 CY15 FY12 (F) (F) (F) 1.6 2.5 1.7 1.6 2.0 1.0 USD/JPY rate 83.0 0.8 1.5 1.1 (average) 0.8 0.4 -0.1 0.0 0.5 0.7 1.6 1.2 0.3 Consumption tax rate (end- 5.0 7.9 1.4 -1.1 fiscal year) -2.5 5.9 6.5 0.0 0.0 0.1 1.9 1.2 1.4 WTI spot 110.0 price 9.9 4.6 -7.1 1.4 8.0 9.2 Source: Nomura 1.5 5.3 5.8 -2.5 -2.2 -1.7 1.0 4.3 3.2 -0.6 1.8 1.5 -0.2 4.9 3.1 1.0 3.4 2.3 -0.1 2.4 1.9 0.1 2.4 1.9 0.1 -0.6 4.0 -10.6 -9.1 -10.4 5.0 51.4 1.0 0.7 1.8 3.8 -9.3 -7.8 -8.4 8.2 79.1 1.6 1.0 1.5 3.6 -8.2 -6.7 -7.2 10.4 96.4 2.0 FY13 FY14 FY15
101.0
105.0
108.0
5.0
8.0
10.0
100.0
97.0
96.0
23
Observations
This is a multi-year process. There are several failure modes and dates to get through. Ultimate success is not guaranteed, which implies market returns will not move in a straight line.
Creation of effective demand = higher growth Higher wages Wealth effects Increase in private consumption
Reforms like this almost always generate unintended consequences and unknown unknowns we have to keep monitoring.
However, falling at the first hurdle seems unlikely plus sensible policymakers always make the cost of reversal higher than the cost of moving on (c.f. the euro area). Investors may believe or be sceptical but the process is likely to be live and important globally for several years.
Source: Nomura
Growth Increase in corporate capex Increase in exports strategy (including tax reform)
Expectation effects
Higher importprices
25
The BOJ introduced quantitative and qualitative monetary easing that far exceeded market expectations (4 April 2013)
Increase the net purchase of JGBs to JPY50trn per year for both 2013 and 2014
Previous plan was net JGB purchases of about JPY30trn in 2013 and JPY23trn in 2014
Extend the average remaining maturity of the JGBs that the BOJ purchases to about 7 years
Increase the holdings of ETFs and J-REITs by JPY1trn and JPY30bn, respectively, for both 2013 and 2014
Change from the previous operating target of "uncollateralized overnight call rate"
Targeting the monetary base has been a long-held proposal by Deputy Governor Iwata. There was also an intention to set a more realistic operation target.
26
150
132.0
100
50
Note: December's average figures are used for actual figures. For target figures, year-end figures are used. Source: The Bank of Japan and Nomura Securities Co.
27
Commercial paper
Pecuniary Trusts IndexLinked Corporate Exchangebond Traded Funds[ETFs ] Held as Trust Property
Pecuniary Trusts Japan Real Estate Investment Trusts [JREITs] Held as Trust Property
CP (repos)
Loans
Bank notes
Coins
11
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 1 2 3 4 5 6 7 8 9 10 11 12
59.1 60.9 62.0 66.1 70.7 77.5 81.7 89.2 91.3 67.9 70.1 70.7 73.2 76.3 77.5 79.9 82.9 81.7 86.1 88.9 89.2 91.3 92.9 91.3 98.1
0.3 1.6 1.5 2.0 1.6 1.9 1.4 2.1 1.2 1.7 1.6 1.6 1.6 1.7 1.9 1.7 1.5 1.4 1.5 1.9 2.1 2.0 2.0 1.2 1.4
0.2 0.6 1.1 1.5 2.0 2.2 2.7 2.9 2.9 1.7 1.8 2.0 2.0 2.2 2.2 2.4 2.6 2.7 2.9 3.0 2.9 3.0 3.0 2.9 2.9
0.2 0.3 0.6 0.8 0.8 1.3 1.4 1.5 1.5 0.8 0.8 0.8 0.9 1.1 1.3 1.3 1.3 1.4 1.4 1.5 1.5 1.5 1.5 1.5 1.7
0.02 0.02 0.05 0.06 0.07 0.09 0.10 0.11 0.12 0.07 0.07 0.07 0.08 0.09 0.09 0.09 0.09 0.10 0.11 0.11 0.11 0.11 0.12 0.12 0.13
82.6 66.1 72.5 72.5 64.3 60.6 62.7 59.3 63.8 64.7 69.8 64.3 63.4 61.5 60.6 60.1 61.5 62.7 61.7 60.9 59.3 58.5 60.6 63.8 67.1
18.2 19.3 22.4 24.1 16.6 16.7 21.2 24.5 34.0 14.6 14.5 16.6 17.2 16.8 16.7 17.8 19.7 21.2 21.5 22.7 24.5 27.3 29.0 34.0 36.0
53.9 35.3 39.4 36.0 35.4 32.4 30.7 26.9 21.7 37.2 42.6 35.4 34.7 33.3 32.4 31.0 30.6 30.7 29.0 27.0 26.9 23.3 23.6 21.7 23.1
0.2 0.4 0.5 0.5 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
0.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
1.5 1.5 1.4 1.5 1.4 1.4 1.3 1.4 1.4 1.5 1.5 1.4 1.4 1.4 1.4 1.4 1.4 1.3 1.4 1.4 1.4 1.4 1.4 1.4 1.4
0.2 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
126.2 117.0 118.0 125.1 119.8 128.9 129.4 138.5 146.0 114.6 113.0 119.8 123.1 115.7 128.9 122.5 122.6 129.4 128.5 125.9 138.5 130.9 131.3 146.0 155.3
40.8 33.2 34.6 36.5 34.4 43.1 44.0 47.2 58.1 29.9 28.0 34.4 36.4 30.9 43.1 36.8 37.0 44.0 42.8 39.7 47.2 43.7 43.9 58.1 66.2
80.9 79.3 78.9 84.0 80.8 81.2 80.9 86.7 83.4 80.2 80.5 80.8 82.2 80.3 81.2 81.1 81.1 80.9 81.3 81.7 86.7 82.6 82.9 83.4 84.5
4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.6 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.6 4.6 4.5 4.5 4.6
142.4 129.6 137.7 143.0 139.5 143.6 149.9 158.4 164.3 136.9 144.2 139.5 141.2 142.8 143.6 145.5 150.0 149.9 153.7 156.4 158.4 159.8 163.5 164.3 174.7
12
3.3 3.4
13 12
13
1 2 3 4
Outlook End-2013 End-2014 140 190 13.0 18.0 2.2 2.2 3.2 3.2 2.5 3.5 0.14 0.17 59.0 72.9 200.0 270.0 107.0 175.0 88.0 90.0 5.0 5.0 220.0 290.0
28
2-year bonds 5-year bonds 10-year bonds 20-year bonds 30-year bonds 40-year bonds Inflation-linked bonds
5.60
>
< >
More than 1 year and up to 5 years More than 5 years and up to 10 years More than 10 years
3.003.50
3.003.50 0.801.20
1.90
>
Total
9.95
Total
Note: Bond issuance data are monthly amounts for FY13 while the bond purchase figures are monthly averages for May 2013 through end-2014. Source: Japan Ministry of Finance, the Bank of Japan and Nomura Securities Co.
29
APP
9.5 16.9 26.3
Other
14.1 15.3 9.8 17.0 8.1 0.6 65.0
Total holdings
23.6 32.2 9.8 17.0 8.1 0.6 91.3
Source: Nomura Global Economics from the BOJ and the MOF of Japan
30
(years) 9
8 7 6 5 4
120
100
80
60
40
20
3 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 (FY)
31
Note: Actual figures through FY11; budget draft for FY12 Source: Nomura, based on MOF data
2.5 2.0
Forecasts of the majority of Policy Board Members Lower bound Nomura's forecast
1.5 1.4 1.0 0.5 0.4 0.8 0.7 0.7 1.1 0.9
0.0
-0.2 -0.5 2012 2013 2014 2015
Fiscal year average
Source: Nomura, based on BOJ and Cabinet Office data
32
1
0 -1 -2 -3
0 -2
-4
-6 -8 -10
Note: (1) Actual output gap figures are Cabinet Office assumptions, forecasts by Nomura. (2) We assume potential growth rate of 0.5%, the same as the figure used by the BOJ. For estimates, we use the median forecast of the majority of policy board members, as shown in the BOJ's Outlook Report (April). (3) Core CPI is extrapolated from the future supply/demand gap. Source: Nomura, based on BOJ, Cabinet Office, and MIAC data
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
(CY)
33
% y-y
10 Headline CPI Core CPI ( = CPI excluding f resh f ood) Core core CPI ( = CPI excluding energy and f ood) 2% level
-2
-4 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Note: Core CPI is CPI excluding fresh food. Source: Nomura, based on Ministry of Internal Affairs and Communications data
34
3.3
Note: Elasticity values were calculated for periods when both manufacturers input prices and consumer goods prices were rising or falling in unison, taking into consideration lag times and using only those months when the correlation coefficient was at its highest. Source: Nomura, based on MIAC and BOJ data
35
-5
-10
-15 02 03 04 05 06 07 08 09 10 11 12 13
36
% y-y
4
Fresh food Eating out Housing Rent Fuel, light & water charges Electricity Furniture & household utensils Clothes & Footwear Medical care Transportation & communication Public transport Private transport Communication Education Culture & recreation Miscellaneous Total
Source: Cabinet Office and Nomura
-1
-2
-3 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Source: Cabinet Office, CEIC database and Nomura
37
FY14 economic stimulus package FY12 budget for reconstruction FY11 4th budget
FY15 economic stimulus package
1,500
1,000
FY11 2nd budget 500
2011
2012
2013
2014
2015
38
Economic packages
Fiscal outlay
3.8 1.6 2.2 3.1 1.8 0.9 0.1 0.3 3.1 0.8 0.9 1.4
Spending 5.5 1.7 3.8 12.3 3.2 8.5 0.3 0.3 2.1 0.9 1.2
0.3
10.3 4.7 2.8 13.1
0.3
20.2 6.8
20.2
Note: Figures for public works spending are Nomura estimates based on Cabinet Office estimates of project sizes. Source: Nomura, based on MOF and Cabinet Office data
39
(trn)
20 18 16 14 Nomura est Income tax Corporate tax Consumption tax
12
10
8
6 4
Source: Nomura, based on MOF data
(FY) 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
40
-2
-4
-6
140 130
-8 1990 1993 1996 1999 2002 2005 2008 2011 2014 (FY)
120 2000 2002 2004 2006 2008 2010 2012 2014 (FY)
41
Microeconomic policy
Headquarters for Japans Economic Revitalization
Consists of ministers, h eaded by PM Abe
Macroeconomic policy
Council on Economic and Fiscal Policy
collaboration
Consists of ministers, BOJ Governor and private-sector participants, headed by PM Abe Will announce in June the Basic Policies for Economic and Fiscal Management and Structural Reform
collaboration
42
By 1718 June Government to officially announce growth strategies (and the Basic Policies for Economic and Fiscal Management and Structural Reform)
28 June End of current Diet session 4 July (tentative) Official announcement of Upper House elections
43
Call on Japanese industry to ensure at least one female is appointed to the board of every listed company
Target women accounting for at least 30% of leadership positions by 2020 Aim to eliminate childcare waiting lists by FY17 Extend eligibility for financial support to extended-hours childcare at kindergartens Ease subsidy requirements for childcare facilities inside business premises Call on Japanese industry to allow childcare leave to be taken until a child reaches three years old Provide support to individuals returning to the workplace following childcare leave (retraining subsidies, etc)
44
Target 70trn 30trn Double 1trn 10trn 1020mn 3x or more Double 10 universities
Note: Of the growth strategies mentioned in Prime Minister Shinzo Abe's speech on 17 May, we have listed those that are not among the growth strategies proposed by the Industrial Competitiveness Council and theme-based committees. Source: Nomura, based on Prime Minister Shinzo Abe's speech
45
46
Examine ways to stem the population decline and maintain the population at a certain size. Examples include: tax breaks for companies that offer childcare support; use of TOEFL in university entrance exams and other areas; establishment of international universities either by invitation to leading overseas universities or jointly by Japanese universities; large-scale expansion of student capacity at technical colleges; creation of mid-to-long-term internships as part of formal education programs; greater diversification of work contracts (fixed contracts of over three years, region-, job- and project-specific contracts, etc); rationalization/clarification of rules of employment; wider scope of eligibility for government subsidies, including for trial employment; regional transfer and opening-up to the private sector of the Hello Work scheme; establishment of social systems to support September university entrance and Gap Year programs. Enhancing Japan's competitiveness as a place to do business Improve the regulatory environment Enhance traffic and urban infrastructures Internationalize the business environment Augment measures to stimulate regional economies Rectify high-cost structures Improve urban environments Promote Abenomics strategy zones (tentative name) that feed directly through to economic growth Make effective use of government assets and household financial assets Take steps to rectify areas that make it difficult to do business globally. Examples include: reduction in corporate tax; international leading-edge tests and their trial introduction in special zones; separation of power transmission & distribution operations at an early stage (introduction of "negawatt" trading by this summer); implementation of the internet/ICT AutoBAHN concept; extensive improvements to airports in the greater Tokyo area; easing of regulations on plot ratios and property uses in metropolitan areas; measures to make active use of big data and open data; promotion of Abenomics strategy zones (tentative name); promotion of Doshusei system; sale of low-priority government assets; study into best practices for investing public and quasi-public funds and managing associated risk. Achieving balanced supply-demand for clean, economic energy Supply-side (procurement) initiatives Demand-side (consumption) initiatives Distribution initiatives Adopt policies to support the areas of supply, demand and distribution/logistics in order to secure an affordable and stable supply of the energy Japan needs. Supply-side initiatives include the early restart of nuclear power plants verified as safe, greater efficiencies in coal-fired thermal power generation via use of gas turbine combined cycle and other systems, sourcing of LNG more widely and affordably, deregulation to promote wind power generation. Demand-side initiatives include the introduction of a purchasing scheme for cogeneration power, the introduction of energy-saving homes equipped with energy management systems, the development and promotion of next-generation automobiles, installation of smart meters and other infrastructure (demandresponse infrastructure), promotion of the Energy Bank concept (battery development), study into possible introduction of summer time. Initiatives in the area of distribution include electricity system reform (the establishment of wide-area regional transmission organizations, full liberalization of retail electricity sales) and the strengthening of electricity cooperation (expansion of capacity of systems to convert frequency).
Note: The above lists various items presented by theme-based committees prior to the Industrial Competitiveness Council meeting of 23 April. Source: Nomura, based on Industrial Competitive Council materials
47
Provide impetus to the healthcare industry, build a society in which everyone can receive the world's highest levels of healthcare Build a society in which the health of the populace supports economic growth
Consider taking the following steps to create a society in which people live long and healthy lives: lay foundations for affordable, simple medical consultations ("one-coin consultations"); lower medical fee deductions for the elderly; promote iPS cell research; ease regulations for approval of medical equipment; introduce a Japan-style NIH system and manage budgets of relevant ministries/agencies on an integrated basis; introduce a "my number" system and basic income program; eliminate elderly waitlists for special homes for the aged; create a healthcare REIT market; conduct a national debate on broader acceptance of migrant workers. Expand agriculture exports and boost competitiveness of agriculture industry Consolidate farmland Encourage corporate entry into agriculture industry (revise requirements for gaining status of agricultural production corporation) Set up growth industry fund for agriculture, forestry and fisheries (sixth-order industry fund) Agricultural special zones Agricultural export special zones Maintain functions of farming communities
Provide direct income compensation Promote greater industrialization of agriculture and use of ICT Human resource development and R&D Establish an export structure
Public-private initiatives with overseas partners (such as mutually beneficial partnerships in food, energy) Initiatives in forestry/fishery industries
Reorient agriculture industry to one focused on the consumer rather than the producer, and aim to turn agriculture into a growth industry and an export industry. Specific initiatives include: deregulation to support large-scale business enterprise in agriculture; use of trusts to match farmland to producers; incentives to increase use of vegetable factories; establishment of agricultural schools and business schools; creation of an accreditation system to boost value added via introduction of Japan-style agricultural occupancy condition (AOC) scheme; establishment of agricultural export special zones; creation of agricultural export business model with the aim of achieving Japan-style "food valleys"; construction of healthcare and long-term care facilities in farming communities. Enhancement of science & technology innovation and IT Appreciably strengthen frameworks for promoting innovation in science & technology Step up public-private R&D investment Strengthen activities to support innovation by the private sector
Enhance functions of universities and public research institutes Enhance IP strategies, standardization strategies Consider the following measures to promote innovation as a key source of industrial competitiveness: Reorganize the existing Council for Science and Technology Policy and strengthen its command functions; set up the FIRST-II program as a successor to the FIRST project for leading-edge R&D; ensure an equal footing in terms of plant, property and equipment tax, etc; provide IP support for small and midsize enterprises.
Note: The above lists various items presented by theme-based committees prior to the Industrial Competitiveness Council meeting of 23 April. Source: Nomura, based on Industrial Competitive Council materials
48
Item
% GDP
The government looks likely to underestimate the real economic impact of the TPP as it merely takes into account the impact from reducing tariffs to zero. The TPPs actual benefits stem not only from reduced tariffs but also from (1) harmonized trade rules, (2) liberalized service trade, and (3) fewer restrictions on cross-border investment activity. The TPP is also likely to generate further benefits by spurring negotiations for a Japan-China-Korea FTA and RCEP (ASEAN+6).
49
2. 5
1.96
1. 0
Government's estimate
0. 66
0. 5
0.24 0.0 After 10 years 2015
0. 27
2020
2025
Note: TPP 12 shows impact when the current negotiating 12 countries join TPP while TPP 16 assumes the participation by not only the existing participants but also Korea, Indonesia, Philippines and Thailand Source: Nomura from the Government of Japan and Asia Pacific Trade
50
New growth strategies featured in newspaper reports (including items under consideration)
Introduction of special zones, including Abenomics strategic zones Revival of domestic infrastructure using PFIs Export of high-efficiency coal-fired power generation technology Easing of regulations on industrial robot installation (to reduce factory construction costs) Initiatives to promote wider use of affordable long-term care robots Establishment of "human resource bank" (tentative name) as a means of providing support to SMEs when female workers take maternity and childcare leave
Initiatives to raise minimum wage Easing of visa restrictions for Southeast Asians (Thailand, Malaysia, Vietnam, etc) Placement of Japan tourism advertisements in overseas magazines and on television Study into legalizing casinos Establishment of farmland middle management organization (tentative name) to support consolidation of farmland, elimination of uncultivated farmland
Study into export of agricultural production data system in which produce cultivation technology is collated in digital form
Introduction of private-sector English language tests such as TOEFL as part of career bureaucrat examinations for new ministry and agency workers from FY16
Note: Collated from articles between 23 April and 9 May in the Nikkei, Yomiuri Shimbun, Asahi Shimbun, Mainichi Shimbun, and Sankei Shimbun. Includes items still under consideration, so all may not be included in the final growth strategies. Source: Nomura, based on various news reports
51
6,000
5,000
4,000
3,000
2,000
1,000
0 80 81 83 84 86 87 88 90 92 93 95 96 98 01 03 05 06 08 10 11 1979 2000 13
(FY)
53
2,500
2,000
1,500
1,000
500
0 1968
72
76
80
84
88
93
98
2003
08
13
(FY)
54
TOPIX
40 35 30 25
TOPIX (rhs)
Note: Latest data as of 21 May. Recurring profits for FY12 and thereafter are based on Nomura estimates Source: Nomura, based on Tokyo Stock Exchange
90 80 70 60 50 40 30 20 10 0 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
56 Source: Nomura, based on Tokyo Stock Exchange and Toyo Keizai data
%
10
0
81 86 91 96 01 06 11
Source: Nomura, based on MHLW data
CY
57
35,000
30,000
500 0
2,000
1,500
25,000
1,000
20,000
15,000
10,000
5,000
0 85 90 95 00 05 10 15 yy
-500
58
CET1 ratio
10%
8%
6%
4%
2%
Sources: Bloomberg L.P.; SNL Financial; and IMF staff estimates. Note: AT = Austria; CH = Switzerland; DE = Germany; ES = Spain; FR = France; GR = Greece; IE = Ireland; IT = Italy; JP = Japan; NL = Netherlands; PT = Portugal; SE = Sweden; UK = United Kingdom; US = United States. The closer a banking system is to the center of the figure, the more balance sheet adjustment it needs to undertake. Rankings are based on the aggregate position for a large sample of banks headquartered in each country (more than 90 percent of the banking system in most cases) as of 2012:Q3 or as of the latest available data before then. Bank buffers are the ratio of core Tier 1 capital and loan loss reserves to impaired loans as reported in banks financial statements. The loan-to-deposit ratio is gross loans as a percentage of deposits (for Italy and Spain, adjusted for retail debt). Change in the impaired loan ratio is the annual change in impaired loans as a percentage of gross loans. Return on assets is average annualized retained earnings over the past year as a percentage of tangible assets minus derivatives. See footnotes 17 and 18 in the main text.
Barclays
MUFG
SMFG
Mizuho
HSBC
BNP
SG
Citi
(%)
5 4 3 2
1 0 -1
-2 -3 -4 -5 -6 01 02 03 04 05 06 07 08 09 10 11 12 13
60
Source: Nomura, based on BOJ
Individual investors starting to come back into the Japanese equity market
80
Nonresident investors
1,000
70
800
60
600
50
400
40
30
20
-200
-400 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Mar-10 Mar-11 Mar-12 Jan-13 Nov-10 Nov-11 May-10 May-11 May-12 Nov-12 Sep-10 Sep-11 Sep-12 Mar-13 10
Japanese institutional investors
(CY) 00 01 02 03 04 05 06 07 08 09 10 11 12 13
May-13 61
Implementation of individual savings account from Jan 2014 has big potential to move retail investors cash in to riskier assets
200 180 160 140 120 100 80 60 46.8 40 26.3 20 0 00 01 02 03 04 05 06 07 08 09 10 16 30.3 34.5 55.1 80.1 78.6 70.4 173.5
192.7
Other total, 3.9% Insurance and Equities, pension investments, reserves, 14.3% 31.7%
11
0%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
62
Note: Data after 2009 includes Personal Equity Plan. Source: Nomura, based on Financial Services Agency
Note: Data for Japan and the US as of end-Dec 2012; data for Europe as of end-Sep 2012. Source: Nomura, based on BOJ
When the current growth strategy is a success, government debt outlook should stabilize
Government Outlook for Outstanding Debt Assumption of Growth Strategy Scenario: The average annual growth rate for the FY2011FY2020 period is projected to reach approximately 3% in nominal and 2% in real terms. The rate for change in the Consumer Price Index is projected to turn positive in FY2012, and to stay as high as around 2% over the medium to long term. Assumption of Prudent Scenario: The average annual growth rate for the FY2011FY2020 period is projected to reach mid-1% in nominal and over 1% in real terms. The rate of change in the Consumer Price Index is projected to turn positive in FY2012, and to stay as high as around 1% over the medium to long term.
(% of nominal GDP) 250 Actual 225 Prudent Scenario Growth Strategy Scenario 200
175
150
125
100 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 (FY)
Source: Nomura, based on Cabinet Office
63
Employed persons can increase by 2.04 million if womens employment rate rises to potential employment rate
95% 90% 85% 80% 75% 70% 65% 60% Woman's potential labor force rate 55% Woman's employment rate in 2012 50% 20 24 2529 3034 35 39 40 44 45 49 50 54 55 59
Source: Nomura, based on Ministry of Internal Affairs and Communications
86.7
Employed persons would be boosted by 2.04 million in 5 years (current total employed = 54.86 million)
79.0 80.9 78.9 82.5 78.2
78.0
64.6
(age)
64
Sector Staples Industrials Tech Materials Industrials Discretionary Financials Financials Financials Financials
Code 3382 6326 6501 6988 7013 7203 8306 8316 8591 8801
Name Seven & I Kubota Hitachi Nitto Denko IHI Toyota Motor MUFG SMFG Orix Corp Mitsui Fudosan
Share Nomura price Rating (14 Jun) (14 Jun) (yen) Buy 3,360 Buy 1,468 Buy 643 Buy 5,660 Buy 344 Buy 5,590 Buy 567 Buy 3,990 Buy 1,257 Buy 2,747
P/E (x) 17.0 17.7 13.2 12.4 17.7 11.1 10.4 12.5 9.2 37.1
Recurring profit growth estimate This FY Next FY (%) (%) 16.6 10.0 42.0 17.0 33.5 21.7 57.3 10.8 31.1 13.7 65.0 7.0 2.0 3.1 -32.6 -6.6 31.6 23.8 7.3 6.8
ROE (%) 8.8 13.1 10.8 14.5 10.2 12.6 7.3 7.4 8.7 5.4
P/B (x) 1.57 2.43 1.49 1.91 1.75 1.46 0.71 0.85 0.93 2.04
Note: (1) P/E, ROE, and dividend yield based on estimates for next FY in case of companies with less than three months before their FY-end and on estimates for current FY for companies with three months or longer before their FY-end. (2) P/B ratios are based on most recently announced fiscal year-end BPS, calculated with shares outstanding (ie, issued shares less treasury stock). (3) Data are based on US GAAP when available and on Japanese accounting standards otherwise. In addition, data are consolidated when available and parent when consolidated data are not available. Recurring profit figures for US GAAP- and IFRS-reporting companies are based on their pretax profit figures. (6) Share prices, earnings forecasts, and ratings as at 14 June 2013. Source: Nomura
65
Market forecast
(%) Latest 7-Jun Japan Basic loan rate Unsecured O/N call 3M Tibor 2yr JGB 5yr JGB 10yr JGB 20yr JGB 30yr JGB USD/JPY EUR/JPY Nikkei 225 (K)
Source: Nomura
2013 June 0.30 0.08 0.22 0.13 0.33 0.80 1.60 1.75 98 127 13.5 September 0.30 0.08 0.20 0.11 0.25 0.70 1.55 1.70 98 127 13.5 December 0.30 0.08 0.20 0.11 0.25 0.70 1.55 1.70 100 128 14.0 0.30 0.08 0.20 0.13 0.33 0.80 1.70 1.90 103 130 14.5 March 0.30 0.08 0.20 0.15 0.43 0.95 1.80 2.00 105 132 15.5
2014 June September 0.30 0.08 0.20 0.15 0.43 0.95 1.80 2.00 105 132 15.5
0.30 0.08 0.23 0.13 0.28 0.84 1.66 1.80 97.56 128.96 12.88
~ ~ ~ ~ ~ ~ ~ ~ ~ ~
0.10 0.23 0.16 0.50 1.00 1.80 1.95 105 135 15.0
~ ~ ~ ~ ~ ~ ~ ~ ~ ~
0.10 0.23 0.16 0.45 0.95 1.80 1.95 105 135 15.0
~ ~ ~ ~ ~ ~ ~ ~ ~ ~
0.10 0.23 0.16 0.45 0.95 1.80 1.95 105 135 16.0
~ ~ ~ ~ ~ ~ ~ ~ ~ ~
0.10 0.23 0.18 0.55 1.10 1.95 2.15 106 135 16.0
~ ~ ~ ~ ~ ~ ~ ~ ~ ~
0.10 0.23 0.20 0.60 1.20 2.05 2.25 110 138 16.5
~ ~ ~ ~ ~ ~ ~ ~ ~ ~
0.10 0.23 0.20 0.60 1.20 2.05 2.25 110 138 16.5
- We expect 10yr yields to trade at around 0.80% at end-June and 0.70% at end-December. We expect the next major market downturn to take place sometime in January-March 2014. - We expect 10yr UST yields to trade in a 1.8-2.2% range at end-June and trade in a 1.8-2.2% at end-December. - As the amount of JGB purchases by the BOJ is set to exceed the national budget deficit, JGB supply and demand should tighten if investors simply replace redeemed bonds. - The BOJ is unlikely to increase JGB purchases further. It could increase equity purchases if conditions warrant. We think the Japanese government will devise a supplementary budget after the July upper house election. - Fed officials will likely tone down their language on an early QE3 exit toward summer.
- As US rates rise, major domestic investors and retail investors (via toshin) could shift funds out of JGBs.
-Weaker JPY could cause investor selling of super-long JGBs that exceeds BOJ purchases.
67
Key issues
options
Government: Stimulus measures, fiscal reform, consumption tax hike Investors: Domestic accounts reducing yen bond exposure, their
68
- Rates downside risks: BOJ extension to longer-dated funds in its signal operations, BOJ rate cut; Chinas early shift to monetary tightening, and an economic hard landing.
69
Long-term views
- Weak yen should encourage investor and corporate funds to shift into foreign markets; yen rates to trade in higher ranges as deflationary pressures decrease. - Retirement of baby-boomers helps companies reduce payrolls (2012~); wage deflation eases. However, we expect CPI inflation to remain in a 0.5-1.0% range, with the BOJ missing its 2.0% inflation target. - A consumption tax hike from April 2014; decrease in bank deposits and increase in public pension funds to create flattening pressure; ahead of a consumption tax hike, last-minute purchases should boost spending in H2 2013.
- UST rates back up as the Fed exits QE3. Major banks incur valuation losses on foreign bonds
and reduce exposure to yen bonds. - BOJ should begin to decrease JGB purchases in January-March 2016. - Rates downside risks: Downshift in growth expectations; slowing corporate capital spending. - Rates upside risks: Japanese governments greater reliance on a weak-yen policy; decrease in the current account surplus; increase in capital flight.
70
Recommended investments
- Long 5s (at 0.40%, target of 0.25-0.30%) - Long 10s (at 0.90%, target of 0.65%)
Long term (from end-2013; assuming accelerated growth and end to monetary easing)
Short 20s (at 1.50%, target of 1.80%); caution needed in timing the entry due to negative carry. 5s20s steepener (at 125-130bp, target of 145bp); caution needed in timing the entry due to negative carry.
71
3.50 3.00
If the market factors in a 2% inflation rate, 1% real growth, and 2.5% short-term rates in five years, 10yr JGB yields should be trading slightly below 2.0%.
Assuming that the BOJ fails to achieve its inflation target within two years and continues with JGB purchases for a sustained period, interest rates should be kept down.
72
Rates continue to sell off despite improved supply and demand due BOJ purchases
10yr JGB yields and 10yr OIS rates
(%) 1.6 [a] less [b] 10yr JGB yields (RHS) [a] 10yr JPY OIS [b] (%) 0.5
(%) 4.5
1.4
0.4
4 0.4
1.2 0.3 1
0.2
3.5
0.3
2.5
0.2
0.4
0.1 1.5
0.2
-0.1
Source: Bloomberg
As BOJ purchases brought the JGB-OIS spreads close to zero, JGB rates would be unlikely to decline further on improved supply and demand conditions. The rates backup since the QQE adoption was not caused by the widening of JGB-OIS spreads, but rather by a rise in OIS rates.
When 10yr OIS rates were above 1.0% in Japan, those in the US were at 3.5%. A QE3 exit alone should not be enough to cause 10yr JGB yields to trade consistently above 1.0%.
73
Pattern 1: Bank selling Shortened BOJ policy duration causes banks to shed existing holdings and duration (similar to the 2003 sell-off). The markets confidence in the BOJ achieving the 2% inflation target could cause a sharp JGB sell-off. Pattern 2: Current account and capital account balances deteriorate further If the trade balance remains in deficit for a sustained period, foreign currency assets should increasingly be cashed out, thus bringing the capital account into deficit. Companies entry into overseas markets would worsen the trade account and increase the capital outflow. Industrial activity would be hollowed out more (similar to US in 1985-1995). Pattern 3: Abenomics fails Corporate bankruptcies could increase, entailing large bad debts at banks. Corporate and bank credits would be the first to face problems, rather than JGBs. Banks funding problems and their reduced risk tolerance could lead to bear flattening (as in 1998).
74
Investment themes: FX
Summary
The BOJs impact on the JGB market: The BOJ is going to purchase about 70% of monthly JGB issuance. The share of the BOJ in total JGB outstanding is expected to rise to 20% from 12% currently.
The direct impact through portfolio rebalancing: Households own less than 3% of JGBs, so institutional investors (Banks: 38%, Insurance: 19%, and Pensions: 10%) must move. Insurance companies are buyers of the super long zone, while banks trade at the shorter end. Pensions are investing more broadly.
The FX impact from portfolio rebalancing: The FX impact may be smaller than expected. Banks: Fund in local currencies when investing in foreign bonds. Pensions: Contrarians can be forced to change reference portfolios, but can still be dip buyers. Lifers: Most natural alternative investment is hedged basis foreign bonds. Indirect impact through risk appetite channel: More important for FX. Retail investors: Sentiment is clearly improving. Confidence indicators are at their highest levels in 10 years. The BOJs most recent policy announcements should improve risk appetite further 30%:BRL, TRY:20%, MXN:10%, ZAR:10%, RUB:10%? Lifers: A lower hedge ratio is more likely for high yield currencies: AUD in G10 Major government bond index: MXN, PLN, ZAR The impact on fixed income: Lifers may still prefer core, semi-core eurozone bonds (France and the Netherlands). UST investment will likely shift to the longer end to increase carry. US mortgage and EM bonds (MXN, PLN, AUD) are also likely targets, in our view.
76
350
300
250
200
150
100
50
0 1971
73
75
77
79
81
83
85
87
89
91
93
95
97
99
2001
03
05
07
09
11
13 (FY)
Note: Exchange rates are as recorded on Tokyo forex market Source: Nomura, based on BOJ data
77
Trade Balance
(as % of nominal GDP) Current Account Balance
20
40
Trade balance
30
Fossil fuels
10
20
10
-10
-5
Trade Balance
-20
-10
-30
-15 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 E E E
CY
-40
88 90 92 94 96 98 00 02 04 06 08 10
(CY)
12
78
Note: Nomura estimates CY13 toCY15 Source : Nomura, based on Trade Statics of Japan
130
120 110 100
90
80 70 60
Disclosure Appendix A1
ANALYST CERTIFICATIONS
We, Yunosuke Ikeda, Tomo Kinoshita, Naka Matsuzawa, Hiromichi Tamura and Kevin Gaynor, hereby certify (1) that the views expressed in this report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
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