1407 gic (e)

Arranged for Global Interdependence Center

July 11th , 2014

(Jackson Hole Conference)

Recent Development of Japanese Economy

Kozo Koide Chief Economist DIAM Co.,Ltd

Recent GDP data

GDP : Jan.-Mar. Q, High by Last Minute Buy Real GDP QoQ :+1.6%. High contribution of consumption – Contribution of personal consumption : +1.4%pt, Cap-ex : +1.1%pt

< Real GDP (QoQ Contribution)>

％ 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 ▲0.5 ▲1.0 ▲1.5 ▲2.0 ▲2.5 ▲3.0 ▲3.5 ▲4.0 ▲4.5 ▲5.0

Public Sector

Net Export

Residential Investment Inventory Investment Private Capital Expenditure

14.03

GDP

DIAM Economic Research

Source:Cabinet Office

1

13.09

13.03

12.09

12.03

11.09

11.03

10.09

10.03

09.09

09.03

08.09

08.03

07.09

Personal Consumption

07.03

◆

Kozo Koide, Chief Economist DIAM

Looking Back “Lost Two Decades”

Lost Two Decades : Deflation since ’94 ◆

Deflation : Since ’94 with some temporal exceptions.

– Why almost all of economists in ’93 were wrong to be optimistic?

– Why the majority of economists now are cautious?

2

Kozo Koide, Chief Economist DIAM

VAT Hike

VAT Hike : Highest Propensity to Consume ◆

Stronger than expected, but restricted reaction to decrease – 66% of households says “Not change the level of spending from April” 52% is “Affirmative for VAT hike” vs 32% of negative (Nikkei, Apr. 18-20) – “Money Illusion” : Growth in nominal (not real) income is important

3

Kozo Koide, Chief Economist DIAM

Solid Personal Consumption

Labor Market Condition is Much Tighter ◆

Labor Supply DI has come down below zero.

– 3rd time since ’80. ’88, ‘’07 & now – The spring-time wage hike rate is the highest in 15 years

◆ Capital DI (Excessive-Insufficient) 30

slack in macro picture has been almost wiped out

< TANKAN : Production Capacity・ Employment Conditions DI (all industries & all sizes) > E

20 10 0 ▲10

▲20 Average from 94/3〜～09/6（3 Business Cycles) Both Production Capacity & Employment

▲30 ▲40

Note : There is no continuity between the figures up to the December 2003 survey and those from the March 2004 survey.

▲50

Employment Conditions

Production Capacity

Source:BOJ

14.03

13.03

12.03

11.03

10.03

09.03

08.03

07.03

06.03

05.03

04.03

03.03

02.03

01.03

00.03

99.03

98.03

97.03

96.03

95.03

94.03

93.03

92.03

91.03

90.03

89.03

88.03

87.03

86.03

85.03

84.03

83.03

82.03

81.03

80.03

▲60

DIAM Economic Research

4

Kozo Koide, Chief Economist DIAM

Solid Personal Consumption

Labor Market Condition is Much Tighter ◆

Smaller room for additional temporary staffing – Expect major change in Temporary Staffing Service Law again (Abolish the restriction on staffing by business areas vs Facilitate shifting temporary staff to regular workers at dispatcher side)

5

Kozo Koide, Chief Economist DIAM

Solid Personal Consumption

China : Soaring Labor Cost ◆ ◆

ULC in China has been soaring.

Import from China has been inflated more than total CPI

6

Kozo Koide, Chief Economist DIAM

Low Capital Expenditure

Cap-ex : Weak under Fairly High Return ◆

Slow cap-ex with soared return on investment – Expected return on investment has been elevated closed to the highest level but cap-ex continued to decrease from previous year.

– This discrepancy can not sustain. Finally we see upturn momentum.

7

Kozo Koide, Chief Economist DIAM

Low Capital Expenditure

Cap-ex : Becoming Larger ◆

Cap-ex plan in Tankan Survey : sign to become solid – Excluding real estate and including software in Tankan Survey become solid in large (strongest since 2007) & mid-size corporation.

8

Kozo Koide, Chief Economist DIAM

Stagnation of Export

Export : Should Have Been Much Larger ◆

Real export : 40% larger if the structure has remained – If the elastisities to overseas demand and to exchange rate have been remained as those before Lehman Shock, real export should have been larger by 40%.

– Can be explained by accumulated FDI (& behavior change in export pricing.)

9

Kozo Koide, Chief Economist DIAM

Stagnation of Export

Export : Restrained by Not-Dumping ◆

Export price in contractual currencies has little changed – Regardless of depreciation of the yen, export price index in contractual currencies has little changed, whereas that in yen has soared.

– Exporters have not cut their prices in local currencies to boost competitiveness.

10

Kozo Koide, Chief Economist DIAM

Low Capital Expenditure associated with Stagnation of Export

Globalization, with Needs of Domestic Cap-ex ◆

FDI should be promoted with domestic higher value-added – Share of overseas earnings has been elevated gradually.

– Progress of value-added in export, which has been waned started to rise again.

– Regeneration of domestic capital stock with globalization is indispensable.

11

Kozo Koide, Chief Economist DIAM

Back to the 1st Arrow

Negative Real Interest Rate ◆

Finally real long-term interest rate hovers under zero bound – Unloosed the fetter of positive real interest rate under deflation

12

Kozo Koide, Chief Economist DIAM

Back to the 1st Arrow

Rebalancing of Cash & Deposit ◆

Cash & Deposit / Sales Ratio: Elevated under deflation – If it would be come down to the level of the end of ’07FY, 38Tyen (25%) cash & deposit, equivalent to 54% of total cap-ex in ’13FY would come out.

13

Kozo Koide, Chief Economist DIAM

Back to the 1st Arrow

Rebalancing of Cash & Deposit Cash & Deposit / Financial Assets of HH : Coming down – If it would be come down to the level of 2Q/’07, 74Tyen (9%) 、5.7 times of net purchase of domestic equity by foreigners in ’12FY would come out.

– ＧＰＩＦ：Structural change will invite blind following of private pensions. < Transaction of Private Pension (4QTotal) > Others Securities except Equity & Bonds Domestic Equity

100M yen 90,000

Cash & Deposits JGB Overseas Securities

Loan Domestic Bond Total

80,000

70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 ▲10,000 ▲20,000 ▲30,000 ▲40,000 ▲50,000 ▲60,000 ▲70,000

Source: B O J

14

Kozo Koide, Chief Economist DIAM

13.12

13.06

12.12

12.06

11.12

11.06

10.12

10.06

09.12

09.06

08.12

08.06

07.12

07.06

06.12

06.06

05.12

05.06

04.12

04.06

03.12

03.06

02.12

02.06

01.12

01.06

00.12

00.06

99.12

99.06

▲80,000 98.12

◆

DIAM Economic Research

Third Allow

Don’t Discount Too Much, It is Not Darts ◆

Corporate Governance : Comes first – To change the rule of filing at TSE before June 2015 – To facilitate better governance through the Japanese Stewardship Cord

◆

Some Holes in Bed Rock Regulations – – – –

◆

Abundant of centric guidance by Japan Central Union of Agricultural Cooperation.(legislation in ’15) To allow private cooperation to have less than 50% of equity in agricultural cooperation (law in ’15) To submit the law in ’15 to allow Mixed Medicare.

Aim to submit the law in ’15 on exemption of working hour for high income workers

Special Economic Areas – To allow migration in households services. Further planning will be coming (ex. Tokyo)

◆

Commitment to cut Corporate Tax Rate – MoF abundant the budget balance rule within the same FY – To expand tax collection base by Tax Based on External Non-income Indices on small businesses

◆

Commitment to change the structure of GPIF – AA has been already changing. Law on structural change will be submitted in ’15 15

Kozo Koide, Chief Economist DIAM

Disclaimer ◆ ◆ ◆ ◆

◆

◆

This documentation was prepared independently by DIAM Co., Ltd. and is not required pursuant to the Financial Instruments and Exchange Law. This documentation is required to be used only by the investor to whom it is distributed.

This documentation is only for the purpose of providing information and is not intended to be used to solicit investments.

This documentation was prepared using data that DIAM Co., Ltd. has judged to be reliable. However, DIAM Co., Ltd. does not guarantee its completeness or accuracy. Additionally, the published data are only indicative of past performance and do not provide a guarantee of future performance.

The contents included in this documentation are only current as of the date this documentation was prepared (July 4th , 2014) and are subject to change without notice.

The intellectual property and all other rights pertaining to the data published in this documentation including benchmark indices shall remain the property of the publisher and licensor.

16

Kozo Koide, Chief Economist DIAM