Madrid koide

Arranged for the Program of

May 12th , 2015

GIC (Global Interdependence Center) in Madrid

Recent Development in Japanese Economy & Markets

Kozo Koide Chief Economist DIAM Co.,Ltd

Recent GDP data

GDP : Oct.-Dec. Q Turned to be positive 

Real GDP QoQ : +0.4% (AR +1.5%). Positive after two Qs’ minus – ３ components weaker than expected in 2Qs’ minus growth after VAT hike, still weaker : Personal consumption (+0.5←+0.3%）、Net Export (+0.2←+0.1%pt）、Cap-ex (-0.1← -0.2%） – Real GDP growth : ’14FY : estimated to be -0.7% but +1.9% for ’15FY » ’14CY -0.5%, ’15CY +1.2% (IMF +0.8%, Oct. ’14), ’15FY : +1.8%, Cabinet Office +1.5%, BOJ +2.1%.

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Kozo Koide, Chief Economist DIAM

The 3 components of unexpected slow recovery after VAT hike (1: Personal consumption)

Retirees: Saving has been Tapered 

Large cut in relatively lower/elder income households : Stabilized – % of those elder than 60 years : 1st quintile (78%), 2nd quintile (67%). Total 73% – Large cut centered including non-durables (food etc) is not sustainable.

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Kozo Koide, Chief Economist DIAM

The 3 components of unexpected slow recovery after VAT hike (1: Personal consumption)

Employment of Elder Person : Elevated 

Generation elder than 65 : Major labor supply w/ higher participation – ’12/12-’15/3, (after 12MMA) : Employed person + 0.90M, (elder than 65, +1.02M)

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Kozo Koide, Chief Economist DIAM

The 3 components of unexpected slow recovery after VAT hike (1: Personal consumption)

Real Wage: Start to Increase in Spring ď ľ

Real wage (YoY) is expected to be positive again in this spring – Solid growth in scheduled payment, highest growth since 2000.

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Kozo Koide, Chief Economist DIAM

The 3 components of unexpected slow recovery after VAT hike (1: Personal consumption)

Propensity to Consume : Skyrocketed in Mar. 

Propensity to consume (’14 March) : Highest since 1977 – Money Illusion. Correlation with nominal income is more important.

– To increase in spring with growth of real income with nominal growth.

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Kozo Koide, Chief Economist DIAM

The 3 components of unexpected slow recovery after VAT hike (2: Export)

Export : Should have been Much Larger 

Real export : Remain almost flat after Tsunami – If the structure of export before Lehman Shock remains, 50% larger.

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Kozo Koide, Chief Economist DIAM

The 3 components of unexpected slow recovery after VAT hike (2: Export)

Export : Restrained without Cutting Price ď ľ

Export price in contractual currencies has little changed – Exporters have not cut their prices in local currencies to boost competitiveness, until quite recently.

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Kozo Koide, Chief Economist DIAM

The 3 reason of unexpected slow recovery after VAT hike (2: Export)

Export : Aiming for Higher Value-added ď ľ

Export value-added resume to be elevated again – Quality un-adjusted export price start to getting higher than adjusted price

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Kozo Koide, Chief Economist DIAM

The 3 reason of unexpected slow recovery after VAT hike (3: Capital expenditure)

RoI is Getting Higher but Cap-ex Restrained 

Expected RoI (RoA – WACC)

, but

the cap-ex growth is sluggish

– Reason : Shut-down of nuclear reactors, tax regime, TPP, FDI(sunk cost, hysteresis ),Or Inertia

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Kozo Koide, Chief Economist DIAM

The 3 components of unexpected slow recovery after VAT hike (3: Capital expenditure)

Cash : Piled Up to be Used 

Tighter corporate governance will catalyze efficient use of cash – “Stewardship Cord” (’14/2/27), 184 institution have endorsed till ’15/2 – Growth of cap-ex plan : higher than the year before

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Kozo Koide, Chief Economist DIAM

Inflation

CPI(core):Decelerated by Lower Energy Price 

CPI (core, YoY) in Mar. = +2.2% (excluding VAT effect, 0.2%) – Core in Japan excluding fresh food but including energy & non-fresh food.

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Kozo Koide, Chief Economist DIAM

Inflation

Inflation Expectation : Well Maintained 

Inflation expectation : centered around 2% – Correlation with CPI (core) : stably high, although US type core has been elevated – BOJ : Estimated to set 70$/B of oil (’16/3) to push down CPI (core) by 0.7-0.8%pt at peak – BOJ : Expected to launch QQE3 from Jul.to Oct. if oil price will start to be deflate again

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Kozo Koide, Chief Economist DIAM

Nikkei Estimation

Equity Market : Back to Normal 

Nikkei 225 : To be governed by environment in inflation – Old Normal (1st half of 1980’s) : Governed by earning and interest rate – Current level : 19,560yen (March 20th )

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Kozo Koide, Chief Economist DIAM

Back to the 1st Arrow

Negative Real Interest Rate ď ľ

Finally real long-term interest rate is lowered to negative territory – Unloosed the fetter of positive real interest rate under deflation

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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 8 th , 2015) 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