Arranged for Global Interdependence Center
May 8th , 2014
(the conference in London)
Recent Development of Japanese Economy
Kozo Koide Chief Economist DIAM Co.,Ltd
Recent GDP data
GDP : Oct.-Dec. Q / ’13 was Weaker
Weaker than expected centered in net export. – Cap-ex has turned to be positive but also not so strong. – Consumption & Residential investment were solid partly because of tax-hike.
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Kozo Koide, Chief Economist DIAM
VAT Hike
VAT Hike : Last Minute Demand
Stronger than expected, but restricted reaction to decrease – Pent-up demand was supposed not to be large because of tax incentives after Lehman Shock & the Earth Quake. But it was larger in March. The propensity of consume of Household Survey in March was highest since ’77. – However 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)
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Kozo Koide, Chief Economist DIAM
Impact of VAT hike
VAT :Will it Hamper the Exit from Deflation?
Diversified opinions to compare with ’97. Not so harmful now – – – – – – – – – –
1. Large Economic Policy Package : here (now), not there (’97) 2. Financial system : stable (now), in crisis (’97) 3. Consumer sentiment : up (now), down (’97) 4. Inflation expectation : up (now), down (’97) 5. Inventory adjustment pressure : low (now), high(’97) 6. Pent-up demand : low (now) by incentives since ’08, high(’97) 7. Aging : painful or not painful by higher weight of service 8. Asset effect : higher (now), lower(’97) 9. Money illusion:possibly positive (now), presumably negative (’97) 10. Ricardian Effect or Non-Keynesian Effect » Public opinion is favorable for tax hike. Non-Keynesian effect may exit
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Kozo Koide, Chief Economist DIAM
Solid Personal Consumption
Money Illusion : Nominal Growth is Important
Opposite situation when we got into deflation – Toward ’94 : Growth of real disposable income stayed solid but the growth of nominal disposable income decelerated sharply. Positive price destruction? – The growth of nominal disposable income is supposed to be gradually accelerated with lower growth of real disposable income.
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Kozo Koide, Chief Economist DIAM
Solid Personal Consumption
Small-sized Non-manufacturing : DI > 0 !! Turned to be positive for the 1st time since Sep. ’87 – The DI is said to be closely related with personal consumption, which continued to be under watermark since the burst of the financial bubble in early ’90’s. < BOJ Tankan Survey : Business Sentiment DI (Small Non-manufacturing Sector) >
DI (Good-Bad) %pt
40 30 20
E
10 0 ▲10 ▲20 ▲30 ▲40 *Method has changed between Dec 2003 & Mar. 2004
Source : BOJ
5
14.03
12.03
10.03
08.03
06.03
04.03
02.03
00.03
98.03
96.03
94.03
92.03
90.03
88.03
86.03
84.03
82.03
▲50
80.03
DIAM Economic Research
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 Also capital slack in macro picture has been wiped out
DI (Excessive-Insufficient) 30
< 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
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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. < Return on Investment & Capital Expenditure >
％ 3.0
Cap-ex (YoY, RHS)
4Qaverage ％ 30
Expected ROI (ROA - WACC)
2.5
25
2.0
20
1.5
15
1.0
10
0.5
5
0.0
0
▲0.5
▲5
▲1.0
▲10
▲1.5
▲15
▲2.0
▲20
ROA: Operating Profits / Managerial Assets (Total Assets - Construction in Process - 'Other Investment) WACC: Equity risk premium=4%, Debt cost=Long prime rate
▲2.5
▲25
▲3.0
Source : MOF
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13.09
12.12
12.03
11.06
10.09
09.12
09.03
08.06
07.09
06.12
06.03
05.06
04.09
03.12
03.03
02.06
01.09
00.12
▲30
00.03
DIAM Economic Research
Kozo Koide, Chief Economist DIAM
Low Capital Expenditure
Cap-ex : Becoming Larger ď ľ
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.
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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.)
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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.
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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. – On the other hand the progress of value-added in export has been waned. – Regeneration of domestic capital stock with globalization is indispensable. < Export Value-added Index >
Base Year=100
140
12MMA 1.10
Export Value-added Index(A/B, right scale) Export Price Index:A Export Corporate Goods Price Index:B
135 130
1.05 1.00
125 120
0.95
115
0.90
110 105
0.85
100 95
0.80
90
0.75
85 80 13.09
12.09
11.09
10.09
09.09
08.09
07.09
06.09
05.09
04.09
03.09
02.09
01.09
00.09
99.09
98.09
97.09
96.09
95.09
94.09
0.70 93.09
Export Price Indes(MOF): Not adjusting the Quarity Differences( Base Year : 2005) Export Corporate Goods Price Index(BOJ) : Adjusted Quarity Differences(Base Year : 2010) Source:MOF, BOJ
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Kozo Koide, Chief Economist DIAM
DIAM Economic Research
Solid Personal Consumption
CPI : Inflated More than Expected
CPI (core, YoY) in Feb. = +1.3% – Besides energy costs, electronic home appliances are major drivers of push-up. – Higher labor cost in Asia, cheaper yen & tighter demand-supply situation are the reasons. < CPI(core) YoY Contribution >
< CPI(core) YoY Forecast > Inertia Foreign exchange Demand-Supply Gap
％
2.5
Rent wage Real figure
Old price Inflation expectation Estimation
2.0
Miscellaneous Education Medical Care Furniture & Household Utensils Housing Total
％
1.5
Culture & Recreation Transportaion & Communication Clothes & Footwear Fuel, Light and Water Charges Food(ex.Fresh Food)
1.5
1.0
1.0 0.5
0.5
0.0 ▲0.5
0.0
▲1.0
▲0.5
▲1.5
▲1.0
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DIAM Economic Research
Source : Ministry of Internal Affairs & Communications
Kozo Koide, Chief Economist DIAM
14.01
13.10
13.07
13.04
13.01
12.10
12.07
12.04
12.01
11.10
11.07
▲1.5 11.04
14.12
13.12
13.06
12.12
12.06
E
11.01
Source : Ministry of Internal Affairs & Communications, Cabinet Office, Misitry of Health, Labor & Welfare、Datastream
11.12
11.06
10.12
09.12
09.06
08.12
08.06
07.12
▲2.5
10.06
(note) Excluding the impact of VAT hike
14.06
▲2.0
DIAM Economic Research
Back to the 1st Arrow
Negative Real Interest Rate ď ľ
Finally real long-term interest rate hovers under zero bound – Unloosed the fetter of positive real interest rate under deflation
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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, 37Tyen (25%) cash & deposit, equivalent to 54% of total cap-ex in ’12FY would come out.
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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
100Myen 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: BOJ
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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
Near-term Policy Issues
Near-term Agenda for Macro Policies
With supplemental Budget including corporate tax cut – After checking the economy in April – June Q and tax revenue toward the 1st week of July.
Abe government would commit the next VAT hike Further step ahead for TPP negotiation in Growth Strategy – In the next Growth Strategy would include: 1. Special Economic Zone (Labor, Medi-care, Agriculture), 2.progress of TPP, 3. GPIF’s structural change
GPIF : Structural change in asset allocation – Change of CEO with majority of board member in April, to change allocation in April – June Q. A lot of private pensions would be blind follows. – To lowed expected return from JGB to raise exposure to domestic equity, smart beta, activist fund etc
BoJ : Launch an additional QE (July 16th or later) – Provided that government will do some step for fiscal consolidation (including next VAT hike), that the confirmation of some possible downside in Tankan (7/1) and waning of CPI(core) inflation in April – June Q – Presumably centered in risker asset such as ETF, REIT & ABS 16
April 2014, 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? » Consensus was 2.8% but went into zero growth path.
– Why the majority of economists now are cautious? » Consensus is 0.8% with expected 5.5T yen additional fiscal spending. Mine is 1.3%.
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Kozo Koide, Chief Economist DIAM
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Kozo Koide, Chief Economist DIAM
Low Capital Expenditure
3rd Arrow : Do Not Discount Too Much - 1
Tax incentives for scrap & build of capital stock – Industrial Competitiveness Enhancement Law (Jan. 20), stronger measures. – Tax incentives for carve-out & joint investment by reserve for investment loss. Hitachi & Mitsubishi Heavy Industries moved(Feb. 1) right after this legislation.
– The tax incentives for cap-ex for productivity-raising. Upfront 100% depreciation or 5% of tax deduction.
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Kozo Koide, Chief Economist DIAM
Low Capital Expenditure
3rd Arrow : Do Not Discount Too Much - 2
Deregulation in labor markets move on – Labor distribution rate plummeted with soaring shares of temp. workers in 2000’s. – Worker Dispatching Act will be revised in the current Diet Session to facilitate to shift temp. staffs to regular workers inside dispatchers. » Large staffing service companies has promoting this change. They just announced 3-5% wage hike.
– Tax incentives for wage hike (10% tax credit for increase with extended period of time) – Shifting budget from subsidies for maintaining job to career changes. » FY’12:113.4 B\ for maintain, 0.24B\ for changes. FY’13: 54.5B & 30.0 B yen for changes, FY’15 : to reverse
– Large budget for expansion of childcare facilities with deregulation » Target : To wipe out waiting cue by 200,000 additional capacity within 2016
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Kozo Koide, Chief Economist DIAM
Low Capital Expenditure
3rd Arrow : Do Not Discount Too Much - 3
Important agenda in 2014 – 1. TPP (Largely agreed but hard to fix before Abe-Obama meeting on Apr. 22) – 2. Designation of National Strategic Area (Mar.) » To shake bed rock regulations in agriculture, health care and labor management.
– 3. Corporate Tax Reforms (Jun.). (Revenue neutral in what definition?)
– 4. Re-launch of nuclear power plants (ASAP. Hopefully before Jul.) – 5. Reform of GPIF (Jun. by MoHLW or LDP?) – Revise of the Guideline for Japan-US Defense Cooperation (within 2014) – The election of the Governor of Okinawa Prefecture (Nov.) 21
Kozo Koide, Chief Economist DIAM
Japan is Back
Narita to Seattle, San Diego & San Jose
Recent new flights suggest competitive edges of Japan – Trips to Seattle (Boeing, Google), San Diego (UCSD), San Jose (Intel) – Japan still has leading edges particularly in Meca-tronics & advanced materials » » » » »
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Who is producing carbon fiber for 787? Who is the key engineer for Google automatic driving project? Google purchased SCHAFT (venture by scientists at Univ. of Tokyo, won DARPA Robotics Challenge in ’13) Cyberdyne has got MDD (Medical Devices Directives) in EU. But not in Japan... Why Japanese robot makers could not produce Da Vinci-like machine?
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 (May 2nd , 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.
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Kozo Koide, Chief Economist DIAM