Beyond Abenomics – The Bull-Case for Japan’s Economy

Jesper Koll Japan Macro Outlook

Beyond Abenomics : The Bull-Case For Japan’s Economy

Jesper Koll

“The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to

learn how to avoid being deceived by economists�

Joan Robinson (1903-1983) ; Exercises in Economic Analysis, Cambridge 1960 Jesper Koll

Economic Goals ◆

Freedom

freedom from Govt intervention & unfair competition

◆

Equity

fair distribution of wealth & equality of opportunity

◆

Efficiency

making most of all resources

Japan

US

◆

Security

stability and predictability

◆

Growth

innovation  growth  higher living standards

Germany

France Source: National Institute of Population and Social Security Research

Jesper Koll

Household Wealth Patterns 2014 wealth per adult in US$ -- Global Wealth Databook Credit Suisse

Median Japan $96k USA $50k France $86k UK $126k Australia $168k

below $10K 9.0% 28.1% 16.9% 10.0% 7.2%

above $1M 2.0% 6.4% 3.7% 4.9% 5.7%

Old & Wise…or Scared ? % of Population over 65-years

Japan

Europe

USA Median Age

30

25

Japan

20

Monaco Japan Germany EU US US

52 47 47 43 38

15

10

5

China Germany Turkey Germany India Iran France Iraq

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

Jesper Koll

Source: World Bank & CIA World Fact Book

37 30 28 29 20

BAD Inflation CPI for Medical Services – Japan versus US 240

220

Japan

200 180

US

160

140

Germany 120

Germany

100

France 80 2000

Jesper Koll

2004

2008

2012

Source: Cabinet Office & TSE

2016

Engaged Human Capital Labor Force Participation Rate (15-65 year male & female)

Japan versus US 78

Japan

76

US

74

Germany

72

Germany

France

70

1995

Jesper Koll

1998

2001

2004

2007

2010

Source: OECD

2013

2016

Japan Reality !

Jesper Koll

Japan Dynamics:

End of Delfation Workers Compensation – current Yen trillion 290 280 270 260

250 240 230

220 1990 Jesper Koll

1993

1996

1999

2002

2005

2008

2011

2014

2017

Source: Japan Cabinet Office

Japan Dynamics:

New Middle Class Full-Time Employment – million

34.3 34.1 33.9 33.7 33.5 33.3

33.1 32.9

32.7 32.5

2008 Jesper Koll

2009

2010

2011

2012

2013

2014

2015

2016

Source: National Institute of Population and Social Security Research

Japan Dynamics:

Demographic Sweet Spot Employees : non full-time as % of total

40

35

30

25

20 1990 Jesper Koll

1995

2000

2005

2010

2015

Source: National Institute of Population and Social Security Research

Japan’s New Middle Class :

Mortgage Credit Growth Loan Growth 2013-2016

Total Loans

: Y48.8 trillion

o/w

Mortgages

Jesper Koll

: Y11.8 trillion

Financials Real Estate

: :

Y 7.4 trillion Y 6.1 trillion

Overseas

:

Y 5.3 trillion

Government Utilities

: :

Y 4.8 trillion Y 3.2 trillion

Industrial

:

Y 2.8 trillion Source: BoJ

Japan Dynamics:

New Credit Cycle Interest Rate on New Loans versus Total Bank Credit 600.0

2.0 1.8

560.0 1.6 520.0

1.4 1.2

480.0

1.0 440.0 0.8 400.0

0.6 1998

Jesper Koll

2000

2002

2004

2006

2008

2010 Source: BoJ

2012

2014

2016

2018

Yes, Still Growing Japan Population versus Employment 130

60.5

128

60.0

126 59.5 124 59.0 122 58.5 120 118

58.0

116

57.5 1990

Jesper Koll

1994

1998

2002

2006

2010

2014

2018

Source: Cabinet Office

2022

2026

2030

Pragmatic Immigration % of non-Japanese by Total Resident Population, Working-Age Population, avg. Taxable Income

Population

Japan

1.4%

1st Kawakami (Nagano)

15.8%

4th 5th 6th 7th 8th

9.1% 7.7% 7.0% 7.0% 6.9%

Shinju-ku Toshima-ku Minato-ku Taito-ku Arakawa-ku

Jesper Koll

WorkAge

Income

2.3%

3.3m

27.1%

3.4m

12.7% 10.9% 10.9% 10.5% 10.6%

5.0m 4.3m 10.2m

4.0m 3.7m

Source: 2015 Japan Census and 2015 Tax Survey ; also NIKKEI March 20, 2017

Real Success: Inbound Tourism Boom Tourist Spending as % of Total Consumption

Inbound vs Outbound

1.4 1.2

Japan 1.0 0.8

US

0.6

Germany

0.4

Germany

0.2

France

0.0 1994

Jesper Koll

1996

1998

2000

2002

2004

2006

2008

2010

Source: Cabinet Officec

2012

2014

2016

Japan Dynamics:

New Japan Inc. Dec 1989 590 50%

Dec 2016 591 7%

Foreign Holdings

4%

30%

Foreign Trading

8%

69%

61x 21 1.9% 1165

15x 100 8% 1885

Market Cap Cross Holdings

P/E EPS RoE Companies

Source: TSE, Bloomberg, Jesper Koll Calculations

Jesper Koll

Yes, Capital Stewardship Historic First 2016 :

Listed Companies EPS - TOPIX Yen

Despite a drop in Corporate Profits Buybacks & Dividends continue to grow (year-to-date 2016, annualized)

100

Buyback Stream

80

2013 : 2014 : 2015 : 2016 :

60 40

Y3.7 trillion Y4.3 trillion Y5.7 trillion Y6.7 trillion

20

Dividend Stream 0 -20 -40 2007

Source: National Institute of Population and Social Security

2009 Research 2011

Source: Bloomberg, TSE

Jesper Koll

2013

2015

2017

2013 : 2014 : 2015 : 2016 :

Y7.0 trillion Y7.2 trillion Y8.4 trillion Y9.6 trillion

Long Way To Go Total Shareholder Payout Ratio – Dividends and Buybacks as % of Operating Cash Flow

Japan

US Germany Germany

France

Jesper Koll

Source: Bloomberg, TSE, WisdomTree

Inclusive Capitalism ?

Workers Compensation as % of Corporate Value-Add

SMEs vs Large

80 60

Japan

40

US

20

Germany Germany

0

France

Japan Jesper Koll

US

Germany Source: OECD

Underutilized Assets Listed Companies’ Corporate Cash Balances as % of GDP

2005 vs 2016

140% 120%

Japan

100% 80%

US

60%

Germany 40%

Germany

20%

France

0% Japan

Jesper Koll

France

China

UK

Korea

US

Brazil

Germany

Source: Milken Institute, Bloomberg and Jesper Koll calculations

Japan Inc is Global Source of Profits for Listed Manufacturing Companies

Total Domestic 41% Global 59% Exports 28% Offshore 31%

US

China

10% 14% 24%

5% 6% 11%

AsiaX

6% 5% 11%

US includes Mexico & Canada Jesper Koll

Source: TSE, METI and Jesper Koll calculations

Rich Japan R&D spending by public and private sector as % of GDP

Japan

3.5

3 US

2.5 Germany

2 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014

Jesper Koll

Source: OECD

Real Success:

Global Market Share -- Shipbuilding

60.0% 50.0%

China 40.0%

Korea

30.0% 20.0% 10.0%

Japan

0.0% 2002

Jesper Koll

2004

2006

2008

2010

2012

2014

2016E

Source: Clarsons& JP Morgan

No Room For Complacency Patent Applications Per Million People 2006 & 2016 Patens Outstanding millions

US Japan China Korea Germany

2.64 1.95 1.47 0.91 0.60

3500

Japan

3000 2500

US

2000 1500

Germany

1000 500

Germany

0

Korea

Jesper Koll

Japan

USA

Source: World Intellectual Property Office

France Germany China

Cool Japan Inside‌ Analog Engineering versus Marketing Genius

Jesper Koll

Source: Corporate Websites

Abe’s “Japan First” ◆

Power Politics, Not Consensus

◆

No Taboos Japan

◆

Unorthodox

◆

Focus on Coordination

◆

“Kakusa Complex”

◆

Fiscal Dominance Source: National Institute of Population and Social Security Research

Jesper Koll

US

Germany

France

“In policy as well as in morality, the grand secret is not to constrain the actions, but to

awaken the inclinations of mankind.�

Jean-Baptiste Say (1967-1832), A Treatise on Political Economy (1803)

Jesper Koll

The Cost of Debt Fiscal Debt Outstanding versus Interest Expense 12

900 800

10

Japan

700

8 US

600

6 500

Germany

4

400

Germany 300

2

France

0

200 1995

Jesper Koll

1999

2003

2007

2011

Source: MoF -- All Yen Trillions

2015

Debt Nationalization % Ownership of Public Debt Securities:

Private Sector

&

BoJ

90.0 Japan 60.0 US Germany

30.0

Germany

France

0.0 2004 Jesper Koll

2009

2014 Source: MoF, BoJ

2018

Growing Dependency Foreign Ownership of Japan Public Debt : % of Free-Float ex BoJ Holdings 30.0

20.0

10.0

0.0 2004 Jesper Koll

2009

2014 Source: MoF, BoJ

2018

Save Not Spend Quarterly Growth In Current Yen

Consumer Spending vs Workers Compensation

3.0 2.0

During 2016 : Compensation up 5.4trn Consumption up 1.9trn

1.0 0.0

During Abenomics

-1.0

(End-2012 to End-2016)

Compensation up 17.3trn Consumption up 10.6trn

-2.0 -3.0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Jesper Koll

Source: Cabinet Office and Jesper Koll Calculations

Sources of Growth Share of Entrepreneurs versus Economic Growth 18

USA

16

14

Germany

12 10 8

Japan

6 4 France

2

0 0

Jesper Koll

0.5

1

1.5

2

2.5

Note : Averages for 1995-2013 Source: OECD, Global Entrepreneurship Council ; Jesper Koll

Full-Time Jobs Created by Age of Company Cumulative 2010-2015, Millions

2 1 Japan

0 US

-1 -2

Germany

-5Source: National -10Institute of-20 -30 -40 Population and Social Security

-50

France

50-

Research Source: Professor K.Fukao and Jesper Koll

Jesper Koll

Paradigm Shift

Jesper Koll

Who is Afraid of China? % of Country’s Exports That Compete Head-to-Head with Made-In-China Products in the US Market

Japan Korea Taiwan Philippines Thailand Indonesia Jesper Koll

1996

2006

2016

8% 28% 35% 46% 48% 56%

28% 49% 69% 76% 77% 67%

65% 72% 87% 81% 86% 78%

Source: Jesper Koll Calculations based on UNCTAD Trade Statistics

Japan

US

Germany

France Source: National Institute of Population and Social Security Research Source: Guangzhou Automotive Company

Jesper Koll

Japan Dynamics ◆

National Ambition – 1st Class Power

◆

Fiscal Dominance

◆

Rich Companies & Rich Consumers

Japan

US

◆ ◆

New Middle Class Lifestyle Super-Power Germany - Local Baby-Boomer Retirees - Asian Tourists Source: National Institute of Population and Social Security Research

Jesper Koll

France

Not Sinking ?

The Yen floats on water…

Jesper Koll