Session iv k koide

Arranged for Global Interdependence Center

March 10th, 2014

Recent development of Japanese Economy ～ Can ABENOMICS still be upbeating?～

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

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

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

But it would change after 18mts, typical time horizon of J-curve effect.

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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.

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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.

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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

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.

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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

Labor Market Condition is Much Tighter 

Labor Supply DI has come down below zero.

– 3rd time since ’80.



Structural unemployment has been lowered much – Hourly wage is expected to rise, different from the case in ’06 & ’07.

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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.) 11

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

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.

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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 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.



Cash & Deposit / Financial Assets of HH : Coming down – If it would be come down to the level of 2Q/’07, 74Tyen (9%) cash & deposit, equivalent to 78times of total net purchase of domestic equity in ’12FY, 5.7 times of net purchase of domestic equity by foreigners in ’12FY would come out.

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Kozo Koide, Chief Economist DIAM

Japan is Back

Tokyo to Seattle, San Diego & San Jose 

Recent new air-flights suggest competitive edges of Japan – Trips to Seattle (Boeing, Google), San Diego (UCSD), San Jose (Intel) – Leading edges especially in Meca-tronics, advanced materials & devices » » » » »

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Kozo Koide, Chief Economist DIAM

Disclaimer    

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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 (February 28th, 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