Recent Development of Japanese Economy

Arranged for Global Interdependence Center Program in Milan

May 10th , 2013

Recent development of Japanese Economy ～ What is happening by ABENOMICS? ～

Kozo Koide Chief Economist DIAM Co.,Ltd

Comment on ABENOMIX

ABENOMICS : Three Arrows

Bold monetary policy, Flexible fiscal spending, & Growth strategy – 1. Bold monetary policy » BOJ launched inflation target at 2% at the latest policy meeting (1/22) with open-end asset purchase program. Issued joint announcement with government. » Assign new BOJ Governor & Deputy Governor to facilitate bolder QE.

– 2. Flexible fiscal spending » Government launched 13.1 Tyen supplemental budget, 2nd largest in the past. (1/15) 5.2 Tyen public construction & (about 3.3 public consumption at most). Estimation: +1.1 to +1.6% push up of GDP, +0.7 to +1.0% contribution within 2013fy.

– 3. Growth strategy » Supposed to be launched toward June. Already committed to start TPP negotiation Targeting policies (ex : tax incentives for employment. healthcare, women, energy) Deregulation (ex : nursery care station) 1

Kozo Koide, Chief Economist DIAM

Comment on ABENOMIX

Kuroda Shock : “Regime Change” To double monetary base with inflation target at 2% in next two years – “Quantitative & Qualitative Easing” , “Different level easing” – 1. Monetary base target (60 to 70 Tyen), 2. Purchase JGB with longer average duration (from 3years to 7 years), 3. Expand purchase of ETF & J-REIT – Integrate APP & Outright purchase of JGB (Rinban), Lift-up of BOJ Note Rule < Monetary Base: Banknotes （ YoY） >

％

40

NSA

A' - B' Monetary Base(*) YoY (A') Banknotes in Circulation YoY (B')

30 20 10

0 ▲10 ▲20 * NSA, unadjusted reserve rate data

Source: BOJ

2

13.01

12.01

11.01

10.01

09.01

08.01

07.01

06.01

05.01

04.01

03.01

02.01

01.01

00.01

▲30 99.01

DIAM Economic Research

Kozo Koide, Chief Economist DIAM

Comment on ABENOMIX

Weakened Credit Multiplier Effect Credit multiplier under the deflation has come down to very low level.

– Marginal credit multiplier has become very volatile and low (sometimes negative).

< Monerary Base & Credit Multiplier>

YoY (%)

3

13.5 13.0 12.5 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5

Monetary Base Credit Multilier(RHS)

Source:BOJ

13.04

12.04

11.04

10.04

09.04

08.04

07.04

06.04

05.04

04.04

03.04

02.04

01.04

00.04

99.04

98.04

97.04

96.04

95.04

94.04

93.04

92.04

91.04

90.04

89.04

88.04

87.04

86.04

85.04

84.04

(Note)M2 : Connected the former data set using MoM change after S.A.

83.04

50 45 40 35 30 25 20 15 10 5 0 ▲5 ▲10 ▲15 ▲20 ▲25 ▲30

82.04

DIAM Economic Research Kozo Koide, Chief Economist DIAM

Comment on ABENOMIX

Weakened Relation between Money & CPI

Under the deflation, growth of money has almost lost its effect on CPI. If we aim for inflation solely by QE, the size would be gigantic.

CPI Core

< M ２ (YoY） ・ CPI Core （ YoY） >

（ YoY ％） 9 8 7

３ MMA

1980/01～2013/2 1995/01～2013/3

6 5

y = 0.2665x - 0.228

4 3 2 1 0 ▲1

y = 0.0328x - 0.1574

▲2 ▲3 ▲2

M2(YoY%) ▲1

0

1

2

3

4

5

6

7

8

9

Source : BOJ, Ministry of Internal Affiairs & Communications

4

Kozo Koide, Chief Economist DIAM

10

11

12

13

DIAM Economic Research

14

Comment on ABENOMIX

Kuroda Shock : “Still Channels are Open”

Kuroda emphasized a room for additional easing effect under deflation – 1. Interest rate channel : to push down longer-term interest rate. » In Shirakawa Era : long term interest rate can not be controlled by BOJ, dangerous to rip off the efficiency in the market. But this time BOJ will soak up about 70% of new issues

– 2. Portfolio rebalancing channel : facilitate reallocate assets to riskier assets » Financial institution, households (& corporations): hard to accept too low fixed income from cash & deposits.

– 3. Expectation channel : boost inflation expectation in markets, households & corporations. Governor Kuroda emphasize this channel in particular. » Aggressive QE with clear cut commitment of BOJ will change the expectations. » Not proved authentic theory to argue direct causality from QE to expectation. Now leading studies have been appearing but the outcomes are diversified. Woodford(2010), Thornton(2012), Hoffman & Zhu(2013) 5

Kozo Koide, Chief Economist DIAM

Expectation Chanel

Expectation Chanel : May Exist through TSE Â&#x2039;

Chanel through assets markets exist, that through expectation is hazy

6

Kozo Koide, Chief Economist DIAM

Comment on ABENOMIX

Inflation Expectation : Picked Up Already

D.I. of expected inflation by households & corporations are picking up – Though causality directly from monetary base to expected inflation by households and corporations are seemed to be weak, they have already been picking up.

– Besides the economic recovery with the progress in inventory adjustment together with the correction of too high yen and the rise of stock price. < CPI (core)・ Expected Inflation D.I. Of Households >

%pt 110 100 90 80 70 60 50 40 30 20 10 0 10 ▲ ▲20

%pt

％

30

2.5

20

< PPI ・ Expected Sales Price D.I. of Corporations >

2.0 1.0 0.5 0.0 ▲0.5 ▲1.0 ▲1.5 ▲2.0

Source ： Cabinet Office,Ministry of Internal Affairs & Communications

7

13.04

12.10

12.04

11.10

11.04

10.10

10.04

09.10

▲2.5 ▲3.0 09.04

08.10

08.04

07.10

07.04

06.10

06.04

05.10

05.04

04.10

04.04

Expected Inflation D.I. Core CPI（ YoY,Right Scale)

DIAM Economic Research

10 0 ▲10 ▲20 ▲30 ▲40 Expected Sales Perice D.I. (Large Manufacturing) PPI(domestic final goods excluding consumption tax)

▲50 ▲60

9 8 7 6 5 4 3 2 1 0 ▲1 ▲2 ▲3 ▲4 ▲5 ▲6 ▲7 ▲8 ▲9 ▲10

86.03 87.03 88.03 89.03 90.03 91.03 92.03 93.03 94.03 95.03 96.03 97.03 98.03 99.03 00.03 01.03 02.03 03.03 04.03 05.03 06.03 07.03 08.03 09.03 10.03 11.03 12.03 13.03

1.5

％

Source : BOJ

Kozo Koide, Chief Economist DIAM

DIAM Economic Research

Comment on ABENOMIX

Deflation Gap, Possibly Overestimated Deflation gap may be about half of the estimation by the government.

– Production capacity DI in Tankan has been deviating the capacity utilization rate. Possibly obsolete facilities has been left unused to be filed in capital stock data.

– Deflation gap estimated by Tankan DI of capital and labor, the gap is much smaller.

DI(Excessive

< Manufacturing: Tankan Production Capacity / Manufacturing CapacityUtilization Index >

- Insufficient）

120

FY2005=100

60

Production Capacity DI （Manufactuing / All sizes）

100

Manufacturing capacity utilization index (SA, RHS）

70

2.0 1.0

60 40 20

80

0.0

90

▲1.0 ▲2.0 ▲3.0

100 ▲4.0

▲5.0 110 ▲6.0 ▲7.0

0

Source: BoJ, METI

8

GDP Gap (estimated by Tanakan DI) Estimated by Cabinet Office

DIAM Economic Research Source: CAO, BOJ

Kozo Koide, Chief Economist DIAM

12.12

10.12

08.12

06.12

04.12

02.12

00.12

98.12

96.12

94.12

92.12

90.12

12.03

10.03

08.03

06.03

04.03

02.03

120 ▲8.0 00.03

98.03

96.03

94.03

92.03

90.03

88.03

86.03

84.03

82.03

80.03

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

78.03

▲40

4.0 3.0

80

▲20

< GDP Gap >

％

DIAM Economic Research

Comment on ABENOMIX

Deflation Pressure from China, Eased

Unit labor cost in China continue to soar, while Japanese stay stable.

– 2005=100 : 2012/3Q (4QMA) China 297, Japan 104 – The import from China has not so deeply discounted recently.

< China：Unit Labor Cost（Mfg.）YoY >

％

45

4QMA

％

0.0

40

< CPI (weighted by the import from China) (YoY)> (note) CPI of items which are matched with the components of imports from China.Weighted average by the value as of 2005cy.

▲5.0

35 30

▲10.0

25 20

▲15.0 15 10 (Note) ULC = Wage (manufacturing) / IIP IIP for 1Qis the average of previous Q and next Q

DIAM Economic Research

9

Source: MOF, Ministry of Internal Affairs and Communications

Kozo Koide, Chief Economist DIAM

13.01

12.07

12.01

11.07

11.01

10.07

10.01

09.07

09.01

08.07

08.01

07.07

07.01

12.12 13.03

12.06 12.09

11.12 12.03

11.06 11.09

10.12 11.03

10.06 10.09

09.12 10.03

09.06 09.09

08.12 09.03

08.06 08.09

07.12 08.03

07.06 07.09

06.12 07.03 Source: NBS

06.07

▲25.0

0

06.01

5

▲20.0

DIAM Economic Research

Comment on ABENOMIX

Depreciation of Yen Would Roll On

The interest differentials between US & Japan will expand.

– Recently the sensitivity of yen rate against real expected interest rate differentials has been elevated. yen/$

< $/Yen Rate & Interest Rate Differentials >

Log10

%

$/Yen Rate (Log10) Interest Rate Differentials between US & Japan (3 year government bond,RHS)

2.25

7.0

< Yen/$ Rate & Real Expected Interest Rate Differentials>

100

0.2

6.5 2.20

Sensitivity of interestrate differentials has been elevated

2.15

6.0 5.5

95

5.0 4.5

2.10

4.0

%

90

yen/$ rate

0.0

Real Expected Interest Rate differentials (5ys) RHS

▲0.2 ▲0.4

3.5

2.05

3.0 2.5

2.00

▲0.6

85

▲0.8

2.0 1.5

1.95

1.0

80

▲1.0

0.5

10

DIAM Economic Research

Source : BOJ, Bloomberg

Kozo Koide, Chief Economist DIAM

13.05

13.04

13.03

13.02

13.01

12.12

12.11

12.10

12.09

12.08

▲1.2 12.07

12.10

11.10

10.10

09.10

08.10

07.10

06.10

05.10

04.10

03.10

02.10

01.10

00.10

99.10

98.10

97.10

96.10

95.10

94.10

93.10

92.10

91.10

90.10

89.10

Soure：Datastream, BoJ

75 12.06

▲0.5

1.85

12.05

0.0

(Shadow）：Recession in Japan

12.04

1.90

DIAM Economic Research

Comment on ABENOMIX

Depreciation of Yen Would Roll On The current account surplus of Japan has been dramatically shrunk.

– The biggest reason is the sharp rise of LNG import after the tsunami. < Current A/C of Japan & $/YEN Rate >

log10

$/YEN Rate JPN:Current Account / Nominal GDP (4QTotal % , 1Y leading RHS)

2.20

0.5 1.0

2.15

1.5 2.10

2.0 2.5

2.05

3.0 2.00

3.5 4.0

1.95

4.5 1.90

5.0 5.5 15.09

13.09

11.09

DIAM Economic Research

Source : BoJ

11

09.09

07.09

05.09

03.09

01.09

99.09

97.09

95.09

93.09

91.09

89.09

1.85 87.09

Kozo Koide, Chief Economist DIAM

Comment on ABENOMIX

Harbinger to be Levered Again

Bank lending has resumed to grow again.

– 2013/03: +1.7%(YoY), +0.1%(s.a. MoM) grew 10 months in a row.

Corporations has resumed to be levered again after a long blank.

– The financial leverage of large corporations was elevated in 2012 for the first time since 1976. < Loans and Discounts (Average Amounts Outstanding, YoY) >

%

< Fianacial Leverage Ratio(Large Corporations) YoY >

％

5.0

12

4Q average

a: Bank total (After adjustments)

4.0

10 8

3.0

6

2.0

4

1.0

2

0.0

0 ▲2

▲1.0 ▲4

▲2.0

▲6 (Note): Total Assets / Capital

Gray Shadow : Recession

▲3.0

Source: MOF DIAM Economic Research

Source: BOJ

12

Kozo Koide, Chief Economist DIAM

12.06

10.06

08.06

06.06

04.06

02.06

00.06

98.06

96.06

94.06

92.06

90.06

88.06

86.06

84.06

82.06

80.06

78.06

76.06

74.06

72.06

70.06

68.06

66.06

64.06

62.06

60.06

13.01

12.07

12.01

11.07

11.01

10.07

10.01

09.07

09.01

08.07

08.01

07.07

07.01

06.07

06.01

05.07

05.01

04.07

04.01

03.07

03.01

02.07

02.01

01.07

01.01

▲8

DIAM Economic Research

Wage Increase : Macro Change w/ Policy

Non-structural unemployment is decreasing, Expected tax incentives – Gap between employment and structural employment has been squeezed, which is putting upward pressure in wage.

– Labor Evaluation DI (Tankan) has turned into net shortage in March.

– Abe Government : Planning tax incentives for wage incentives. Point is not to incentives for employment. Government would facilitate flexible labor shift. < Unemployment Rate Caused by Lack of Demand & Nominal Hourly Wage Index >

％

Nominal Hourly Wage Index(YoY) Unemployment Rate Caused by Lack of Demand(Right Scale, Inverse Scale)

8 7

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

％

▲0.4 ▲0.2

DI(Excessive-Insufficient) 30

E

20

6

∵Deregulation at the Labor Market

5

0.0

10 0

4

0.2 ▲10

3 0.4 2

▲20

▲40

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

Source : Ministry of Health, Labour, & Welfare, Ministry of Internal Affairs & Communications

13

Source:BOJ

DIAM Economic Research

Kozo Koide, Chief Economist DIAM

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

96.03

95.03

Production Capacity 94.03

93.03

92.03

91.03

90.03

89.03

88.03

87.03

86.03

85.03

84.03

83.03

Employment Conditions 82.03

▲60 81.03

1.2

80.01 81.01 82.01 83.01 84.01 85.01 86.01 87.01 88.01 89.01 90.01 91.01 92.01 93.01 94.01 95.01 96.01 97.01 98.01 99.01 00.01 01.01 02.01 03.01 04.01 05.01 06.01 07.01 08.01 09.01 10.01 11.01 12.01 13.01

▲3

▲50

80.03

▲2

1.0

00.03

0.8

▲1

99.03

0

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

▲30

98.03

1

97.03

0.6

DIAM Economic Research

Views on Tokyo Equity Market

NIKKEI : Depends on the Exit from Deflation Deflation → NIKKEI’s sensitivity to corporate profits lowered

– Now, almost a mirror of JGB yield. Even so, the higher target at the end of ’12 was about 12400. Current surge is not a bubble, no excess liquidity is taken into account.

– In ’98 (worst year of financial crisis) : Corporations became a large saver. Deflation → debt & depreciation grow in real term. Cut debt with cap-ex, lower total factor productivity.

– What if deflation is over? Levered with cap-ex for higher total factor productivity. Higher sensitivity to corporate profits, 18700 as of the last year-end – Retrospect on what I told before large US macro hedge fund in Oct. ’04, 12000 or 18000? < N IK K E I2 2 5 : E s tim a tio n > 4 0 ,0 0 0

< C a pex & D e pre ciatio n C o st (L arg e C o rpo ratio ns) >

1 00 M il Ye n 4 5 0,00 0

N ikke i225 E st. 3 (b y c o r p o r a te p ro fi ts & J B G y i e l d , fr o m '9 5 ) E st. 2 (b y c o r p o r a te p ro fi ts, J G B y i e l d , e x c e ss l i q u i d i ty , i n '8 0 s) E st. 1 (b y c o r p o r a te p ro fi ts, J G B y i e l d , fr o m '8 0 -'8 4 ）

4Q M A

D e pr ec ia tio n C o st C a pi tal E xp en di tu re C a sh F low

4 0 0,00 0

3 5 ,0 0 0

W h a t H a ppe n e d? ?

3 5 0,00 0

3 0 ,0 0 0 2 5 ,0 0 0

3 0 0,00 0

2 0 ,0 0 0 2 5 0,00 0

1 5 ,0 0 0 1 0 ,0 0 0

2 0 0,00 0

S o u rc e : D a ta s tre a m , M o F , B o J

14

Sour ce:M OF

D IA M E c o n o m i c R e se a r c h

Kozo Koide, Chief Economist DIAM

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

1 5 0,00 0 92.03

12.12

10.12

08.12

06.12

04.12

02.12

00.12

98.12

96.12

94.12

92.12

90.12

88.12

86.12

84.12

82.12

80.12

0

91.03

( N o te ) N ikke i2 2 5 f o r '1 3 /1 - 3 Q is th e a v e r a g e f r o m '1 3 /1 - '1 3 /2 /1 4

90.03

5 ,0 0 0

D IA M E co n o m ic R es earc h

Views on Yen, additionally

Yen in a Cristal Ball : Easier to See Cheap ¥ Easier to explain cheap yen – Estimated by PPP(OECD for GDP), Current A/C(JP), Interest rate differentials(2Y) » 90.17 yen/$ (±σ：81.25 – 100.08) : timeframe(’87-’12) » 111.82 yen/$ (±σ：102.75-124.75） : timeframe(’87-’09), before the sensitivity against euro risk premium has elevated. yen/$ < YEN/$ : Estimation - 1 > 140

YEN/$ (Estimation)、 dotted line : ±σ

YEN / $

130 120 110 100.08 100 90.17 90 81.25 80 Estimated by PPP(OECD), Current A/C, Interest deffrentials(2Y, ’05-）, '87 - '12

Source : Datastream, Bloomberg, BOJ, OECD

15

12.06 12.09 12.12

11.03 11.06 11.09 11.12 12.03

09.12 10.03 10.06 10.09 10.12

08.06 08.09 08.12 09.03 09.06 09.09

07.03 07.06 07.09 07.12 08.03

05.12 06.03 06.06 06.09 06.12

70 05.03 05.06 05.09

DIAM Economic Research

Kozo Koide, Chief Economist DIAM

Views on Yen, additionally

Currency War !? : Unfair to Criticize Japan No currency intervention, Distorted appreciation for years – Basically under the floating exchange regime, Japan has autonomy in monetary policy.

– CF: PPP for GDP (OECD) in 2012: » Japan: 103.90 (yen/$) 30.2% higher. Germany: 0.799(€/$）2.7%higher, Korea: 815.93(KW/$) ▲27.6％cheaper ％

< Diviation of FX Rate from PPP>

100

Japan

Germany

Korea

80 60 40 20 0 ▲20 ▲40

2011

2009

2007

DIAM Economic Research

Source : OECD, Datastream

16

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

▲60 1985

Kozo Koide, Chief Economist DIAM

Comment on ABENOMIX

JGB : Higher Long-term Rate !?

JGB yield has gone up with bear flattening after the easing – The purchase amount with shorter duration than 5 years was smaller than expected. Those for 5years to 10 years is more than expected.

– BOJ may have another communication problem going forward.

– Three deferent opinions about yield curve under aggressive QE. ％

< JGB Yield Curve > 2012/12/28

0.8

2013/3/29

2013/5/10

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0

1

2

Source：Bloomberg

17

3

4

5

6

7

8

9

10

Year DIAM Economic Research

Kozo Koide, Chief Economist DIAM

APPENDIX

18

Kozo Koide, Chief Economist DIAM

Reading of recent major economic data

GDP: Hitting its Bottom Real GDP (Oct.- Dec. Q) : SAAR QoQ +0.04%, after down for 2Qs – Public spending and personal consumption contributed positively, but export, private capital expenditure and inventory investment contracted. Consumption bottomed from the decrease after the lift up tax incentives.

– Expected to turn to be positive from Jan.-Mar. Q – 2013FY(my forecast) : +2.3% (← +1.0%), public sector +0.7%, front-loaded demand before the tax hike +0.7%. Government forecast is 2.5%, consensus is a bit below 2%. ％ < Real GDP (QoQ Contribution)> 4.0

Public Sector

3.0 Net Export

2.0 1.0

Residential Investment

0.0

Inventory Investment

▲1.0 ▲2.0

Private Capital Expenditure

▲3.0

Personal Consumption

▲4.0

Source:Cabinet Office

19

13.03

12.09

12.03

11.09

11.03

10.09

10.03

09.09

09.03

08.09

08.03

07.09

▲5.0 07.03

GDP

DIAM Economic Research

Kozo Koide, Chief Economist DIAM

IIP: Increased for the 1st Time in 4 Quarters

Industrial Production (Mar.): +0.2% MoM (← +0.6% in Feb.) – Lower than the consensus of +0.4% but increased for four months in a row. Shipment increased (+0.3%) for second straight month. Inventory decreased (-0.2%), then the inventory ratio was down (-1.2%) six months in a row.

– The forecast for Apr. is +0.8% and for May. is -0.3%. 1Q’s IIP increased by +1.9%, up for the first time in four quarters. (4Q was -1.9%).

– Apr.- Jun. Q : IIP is expected to grow with much clear momentum

20

DIAM Economic Research

Source : METI

Kozo Koide, Chief Economist DIAM

Disruption by East Japan Great Earthquake

60 55

13.04

13.01

12.10

12.07

12.04

12.01

11.10

11.07

50 11.04

13.05

13.01

12.09

12.05

12.01

11.09

11.05

11.01

10.09

10.05

10.01

09.09

09.05

09.01

08.09

08.05

08.01

07.09

07.05

07.01

Source : METI

11.01

95

70

65

Rivision of Forecast (2mts before vs 1mt before) : A Gap between Real Figure & Forecast: B A+ B Industrial Production(sa,right scale) 10.10

75

105

70

10.07

E：Es tim ate

75

10.04

115 80

80

10.01

85

85

09.10

125

90

09.07

90

95

09.04

135

95

100

09.01

100

105

08.10

145

110

08.07

E

115

08.04

155

Inventory Ratio (fine line : monthly) RHS

105

120

08.01

Production (fine line : monthly) 110

< Survey of IIP Forecast >

％ 6 4 2 0 ▲2 ▲4 ▲6 ▲8 ▲10 ▲12 ▲14 ▲16 ▲18 ▲20 ▲22 ▲24 ▲26 ▲28

07.10

165

07.07

3mma

07.04

< Industrial Production & Inventory Ratio >

07.01

FY2005=100 115

DIAM Economic Research

Real Consumption : Increased Sharply

Real Consumption Expenditure (Mar.): +2.0% MoM, +5.7% YoY – Total and core (excluding items not used for GDP calculation due to a large sampling bias) has been bottomed out in the last autumn and maintain an upward trend.

– The average propensity to consume is at around the highest level since 2000.

FY2010=100

< Household Survey （ All HH） : Real Consumption Expenditure （ S.A. Real Index） >

％ FY2005=100 < Average Propensity to Consume （Workers' HH） / Real Disposable Income > 3mma

110

Including Farmers & Fishermen

77

Total Total ex. Housing, Purchase of Vehicles, Money Gifts & Remittance Core *

104

78

3mma, SA

108

76

106

103

75

102

74

101

73

102

72

100

100

104

71 99

98

70

98 * Core : Excluding volatile items not used for the calculation of GDP

97

96

69

Real Disposable Income （RHS）

68

Average Propensity to Consume

94 Gray Shadow: Recession

67

Source: MIC

DIAM Economic Research

21

Source: MIC

Kozo Koide, Chief Economist DIAM

13.03

12.09

12.03

11.09

11.03

10.09

10.03

09.09

09.03

08.09

08.03

07.09

07.03

06.09

06.03

05.09

05.03

04.09

04.03

03.09

03.03

02.09

02.03

01.09

01.03

00.09

92 00.03

13.01

12.09

12.05

12.01

11.09

11.05

11.01

10.09

10.05

10.01

09.09

09.05

09.01

08.09

08.05

08.01

07.09

07.05

07.01

96

DIAM Economic Research

Machinery Order: Slow to Recover, to Grow Domestic Core (Feb.): +7.5% MoM, -11.3% YoY

– Up for the first time in two months and above the consensus of +6.9% MoM. – Manufacturing sector is weak. Cap-ex plan for 2013fy at the beginning is weak regardless of the recent correction of high yen.

– But the current marginal growth of capital stock is only matched with about +0.5% real potential growth at most. It should grow.

110

16 14

105

12

100

10

Connected to new classif ication f rom A pril, 2005 excl. mobile phone orders f rom A pril, 2005 *V olitile orders: Orders f or ships and those f rom electric pow er companies

70 65

Source: Cabinet Office, METI

22

13.01

12.07

12.01

11.07

11.01

10.07

10.01

09.07

09.01

08.07

08.01

07.07

07.01

06.07

06.01

05.07

05.01

04.07

60 04.01

03.07

03.01

02.07

02.01

01.07

00.01

6,000

01.01

Gray Shadow: Reces s ion 00.07

6,500

DIAM Economi c Resea r ch

*Volatile orders: Orders for ships and those from electric pow er com panies. *Relatecd export : Transportation m achinery, Electronic Machinery, Precision

▲8 ▲10

Source:Cabinet Office

Kozo Koide, Chief Economist DIAM

13.01

7,000

0 ▲2 ▲4 ▲6

12.10

75

12.07

80

12.04

7,500

4 2

12.01

85

11.10

90 8,000

8 6

11.07

95

8,500

3mma, NSA

Mfg.(Related to Domestic Consumption) Private Sector(exc.Volatile orders)

11.04

9,000

％

11.01

9,500

Mfg.(Related to Export) Non-Mfg.(exc.Volatile orders)

10.10

115

10,000

< Machinary Orders (Core)：YoY Contribution >

120

10.07

M achine r y Or de rs (Pr ivate s e ctor e xc. *V olitile or de r s , 3M ahe ad) Capital Goods Shipm e nt （ e xc. Tr ans por tation M achine r y） , RHS

3mma, SA FY 2005=100

10.04

< Machinery Orders & Capital Goods Shipment >

10,500

10.01

(100Mil. Y en)

DIAM Economic Research

Reading of recent major economic data

Economy Watchers Survey : High Level

Apr. : Current DI 56.5 (MtM -0.8), Future DI 57.8(MtM +0.3) – Future DI marked historical high (highest since 2000).

– Real economy (such as All Industry Activity Index) will follow toward the middle of the year. < Economy Watchers Survey (DI) >

（DI ) 60

(DI) 60

55

55

50

50

< Economy Watcher's DI & All Industries' Activity Index >

％

4.0 3.0 2.0 1.0

45

45 40

0.0

40

▲1.0

35

▲2.0

30

▲3.0

35 30

▲4.0

25

▲5.0

25

20

Future

20

Current

15

15

EconomyWatcher's DI (Future)

▲6.0

All IndustryActivity Index (3mma, YoY, RHS)

▲7.0 ▲8.0

Source:Cabinet Office

23

02.01 02.07 03.01 03.07 04.01 04.07 05.01 05.07 06.01 06.07 07.01 07.07 08.01 08.07 09.01 09.07 10.01 10.07 11.01 11.07 12.01 12.07 13.01

00.01 00.07 01.01 01.07 02.01 02.07 03.01 03.07 04.01 04.07 05.01 05.07 06.01 06.07 07.01 07.07 08.01 08.07 09.01 09.07 10.01 10.07 11.01 11.07 12.01 12.07 13.01

10

DIAM Economic Research Source : Cabinet Office, METI

Kozo Koide, Chief Economist DIAM

DIAM Economic Research

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 (May 10th, 2013) 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.

24

Kozo Koide, Chief Economist DIAM