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Japan Economics Weekly

Focus of the week2

Issues relating to the Trans-Pacific Partnership agreement

On November 9 the Kan cabinet began deliberations about Japan joining the

Trans-Pacific Partnership (TPP). Exports to Free Trade Agreement (FTA)

partners currently account for around 16% of total Japanese exports. Meanwhile,

according to todays Nikkei Shimbun, the Japanese government is planning to

propose that the EU start Economic Partnership Agreement (EPA)/FTA talks as

early as spring 2011. If Japan is able to participate in the TPP and conclude the

EPA/FTA talks with the EU, exports to FTA partners could jump to close to 50%,

surpassing those to South Korea.

Business cycle update 9Corporate sentiment deteriorated further

Money and credit update 16The outstanding amount of bank lending continues to shrink

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Major Economic Data

Japan Economic Forecasts

11 November 2010

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11 November 2010

Japan Economics Weekly 2

Focus of the week

Issues relating to the Trans-Pacific Partnership agreement

On 9 November, the Kan cabinet began deliberations about Japan joining the

Trans-Pacific Partnership, also known as the Trans-Pacific Strategic Economic

Partnership Agreement or TPP agreement.

According to figures published by the Cabinet Secretariat, exports to Free Trade

Agreement (FTA) partners currently account for around 16% of total Japanese

exports, well below the corresponding percentages of 36% for South Korea, 38%

for the US, and 76% for the EU (including intra-EU trade; 30% otherwise).

According to todays Nikkei Shimbun, the Japanese government is planning to

propose that the EU start Economic Partnership Agreement (EPA)/FTA talks as

early as spring 2011. If Japan is able to participate in the TPP and conclude the

EPA/FTA talks with the EU, exports to FTA partners could jump to close to 50%,

surpassing those to South Korea.

Research analysis by the Korea Institute for International Economic Policy shows

that the South Korea-EU FTA will likely boost Koreans real GDP by as much as

almost 6% for the next 15 years. It could be a good guideline when we try to

measure the economic impact of Japans participation in TPP or the conclusion

of EPA/FTA talks with the EU.

Introduction

On 9 November the Kan cabinet began deliberations about Japan joining the Trans-Pacific

Partnership, also known as the Trans-Pacific Strategic Economic Partnership Agreement

or TPP agreement. This news should have come as no surprise given that Prime Minister

Naoto Kan had already indicated his attention to participate in talks over the multilateral

free trade agreement at this month's APEC CEO Summit in Yokohama, but it should also

be noted that a final decision on whether to join TPP is to be deferred until June 2011 as

the government seeks to address internal rifts over proposed agricultural reforms and

other liberalization measures.

South Korea officially signed an FTA with the European Union (EU) last month, thereby

gaining free access to the world's largest economic bloc. South Korea is also engaged in

EPA/FTA talks with the ASEAN economies and the US, and is set to begin negotiations

with China in 2011. According to figures published by the Cabinet Secretariat, exports to

FTA partners currently account for around 16% of total Japanese exports, well below the

corresponding percentages of 36% for South Korea, 38% for the US, and 76% for the EU

(including intra-EU trade; 30% otherwise). Japan appears to have been somewhat late to

the table with respect to EPA/FTA negotiations in view of the potential for both increased

trade (scale merits) and increased investment flows between signatories, and we have

therefore taken this opportunity to look at the current state of play regarding Japan's

ongoing and imminent negotiations along with the potential advantages anddisadvantages of TPP membership.

Significance and role of the TPP agreement

Based on the January 2001 Agreement between New Zealand and Singapore on a Closer

Economic Partnership (ANZSCEP), the original TPP agreement between Brunei, Chile,

New Zealand and Singapore entered into force in May 2006 and calls for the abolition of

all trade tariffs by 2015, combining typical aspects of an FTA (such as the elimination of

tariffs on goods and technical barriers to trade in services) with various aspects of an EPA

such as cross-border movement of people, abolition of restrictions on investment,


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11 November 2010


clarification and streamlining of investment rules, maintenance of intellectual property

rights, regimes and systems, and coordination of economic policy.

Key features of the original TPP agreement include the following1: (1) its signatories are

small open economies that are highly dependent on foreign trade and investment; (2) it

can be viewed as a precursor to an Asia-Pacific Economic Cooperation (APEC) FTA in the

sense that other APEC members have been encouraged to join negotiations; (3) it seeks

to achieve 100% liberalization of trade (although Singapore was the only signatory toimmediately abolish all tariffs, with the other three nations opting for a phased elimination);

(4) the 45% value added content criterion used to determine "origin" is stricter than the

40% criterion used in other East-Asian FTAs; (5) the agreement includes auxiliary

provisions relating to environmental and employment issues; and (6) the agreement is

flexible in the sense that Brunei has been excluded from Chapter 12 (Trade in Services).

Five additional countries the US, Australia, Peru, Vietnam, and Malaysia are currently

negotiating to join the TPP. If Japan and each of these countries were to sign the

agreement and thereby create a ten-country bloc, Japan would see its exports to FTA

partners more than double as a percentage of total exports.

Japanese government's Basic Policy on Comprehensive

Economic PartnershipsOn 9 November the Kan cabinet endorsed a Basic Policy on Comprehensive Economic

Partnerships which states that " if Japans trade and investment environment becomes

less attractive than the environment in other countries, there is a possibility that future

employment opportunities will be lost. In order to achieve the 'strong economy' described

in Japan's New Growth Strategy (endorsed by the Cabinet on 18 June 2010), it is

necessary to deepen economic relationships with Asian and emerging countries whose

markets are expected to grow, and with Western and resource-rich countries. It is also

necessary to rebuild the foundation for future growth and development in Japan."

The government thus appears to be open to the possibility of joining the TPP, although at

this stage it has simply indicated that Japan will "act through gathering further information"

and initiate "consultations" with TPP member countries before reaching a decision on

whether or not to seek TPP membership in June 2011.

Exhibit 1: Exports to Major Economies (2009)Exhibit 2: Share of Exports among Major Economies(% to Global Exports)

($billion EU China US Japan

World 4587.1 1203.4 1057.1 581.6

For EU 236.5 221.3 72.6

For Chine 141.7 90.7 141.5

For the US 286.0 221.4 95.3

For Japan 50.2 98.0 51.2

Total of three 477.9 555.9 363.2 309.4

% of exports to three major economies to

total exports 10.4 46.2 34.4 53.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2Q912Q932Q952Q972Q992Q012Q032Q052Q072Q09

0.0

10.0

20.0

30.0

40.0

50.0

ChinaJapanUSEU (RHS)

(%)(%)

Note: China includes Hong Kong.Source: IMF, Credit Suisse

Source: IMF, Credit Suisse

1For further details, please refer to the following research note by Professor Koichi Ishikawa of AsiaUniversity (currently available in Japanese only):http://www.iti.or.jp/kikan81/81ishikawa.pdf


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11 November 2010


Overview ofBasic Policy

Concrete action to strengthen comprehensive economic partnerships

(1) Gathering further information and commencing consultations

- Japan will increase its efforts to conclude the ongoing EPA negotiations with Peru

and Australia, resume the currently suspended Japan-Korea EPA negotiations, andactively promote bilateral EPAs with major countries/regions in the Asia-Pacific

region with which Japan has not yet started negotiations

- Establishment of "The Ministerial Meeting for Realization of a Free Trade Area in the

Asia Pacific (provisional title)"

(2) Outside the Asia-Pacific region, Japan will expedite arrangements to enter into

negotiations with the EU and make efforts to facilitate ongoing negotiations with the

Gulf Cooperation Council (GCC)

Domestic measures

(1) Agriculture

- Establishment of "The Headquarters for the Promotion of Agricultural StructuralReform (provisional title)" in order to promote high-level EPAs, improvement of

Japan's food self-sufficiency, revitalization of its agriculture industry and rural

communities, and measures aimed at fostering sustainable and strong agriculture

- The government will review tariffs and other borders measures, and consider

transitioning to a more transparent system in which taxpayers will bear the burden

(2) Movement of natural persons

- The government will consider measures to address issues relating to the movement

of natural persons from abroad, such as nurses and certified careworkers, on the

basis of its efforts to promote the "employment and human resources strategies"

described in its New Growth Strategy

(3) Regulatory reform

- The Government Revitalization Unit is to decide on a concrete plan with a view to

achieving active economic partnerships and eliminating non-tariff barriers

Potential impact of joining the TPP

So what would be the advantages of TPP membership from Japan's perspective? As

discussed above, the TPP is a multilateral EPA/FTA. Generally speaking, reducing or

eliminating tariffs via such agreements will tend to boost intra-bloc trade by stimulating

demand for imports from other bloc members at the expense of domestically

manufactured products and imports from outside the bloc. Moreover, liberalization of trade

and investment will tend to result in larger markets and higher intra-bloc direct investment,

new entry to the market and inflows of cheaper goods and services will tend to promote

intra-bloc competition, and deregulation will tend to have a positive impact on productivity.

As noted earlier, South Korea formally signed an FTA with the EU last month. While Japan

has still entered into a greater number of FTAs than South Korea's current total of seven,

South Korea's agreements with the EU and the US mean that its FTA trade ratio is

considerably higher than that of Japan. The Korea Institute for International Economic

Policy has published analysis based on a computational general equilibrium (CGE) model

indicating that the South Korea-EU FTA is likely to boost South Korean real GDP by

somewhere between 0.1% and 5.6%, with the lower estimate calculated by considering

only increased trade due to the abolition of tariffs, improved allocation of resources, and

increased domestic production, while the higher estimate reflects the productivity gains


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11 November 2010


that could be expected to result from increased competition and higher technological

investment stemming from the removal or minimization of various barriers to trade.

TPP membership would offer Japan access to a considerably larger market than a typical

bilateral agreement. Japan's current EPA/FTA partners include seven ASEAN nations,

Mexico, Chile, and Switzerland. Trade with these countries amounted to 106 trillion in

CY2009, or around 17% of Japan's 113 trillion in total trade for that year. Adding current

and prospective TPP members would see Japan's trade with EPA/FTA partners more thandouble to around 39 trillion based on current trade flow, with the actual figure likely to rise

beyond 40 trillion once tariffs are abolished.

Given that Japan has entered into most of its EPA/FTAs since autumn 2007, the global

economic and financial crisis makes it somewhat difficult to analyze the impact of these

new relationships. That said, the Japan-Mexico EPA/FTA concluded in April 2005 does

appear to have boosted trade between the two countries, with Japan's exports to Mexico

roughly jumping 80% between CY2004 and CY2008 compared with a 32% increase in

total exports. Year-on-year growth in Japan's worldwide exports averaged 11% over the

period in question, during which time exports to Mexico of transport equipment and

general machinery increased by around 30%yoy. Japan's imports from Mexico also

increased by about 90% between CY2004 and CY2007 compared with about an 80%

increase in total imports.

Looking at post-crisis trade

flows, Japan's worldwide

trade has increased at an

average pace of 25.8%yoy

through 3Q 2010, but this has

been outpaced by growth in

Japan's trade with the

ASEAN bloc (+32.5%yoy),

Mexico (+33.0%yoy), and

Chile (+45.2%yoy). The total

proportion of Japan's trade

done with EPA/FTA partners

has thus increased by a non-

trivial 1.5pp since the April

2005 conclusion of the Japan-

Mexico agreement, from

15.0% to 16.5% (Exhibit 3).

Estimates based on the Cabinet Office's Global Trade Analysis Project (GTAP)

macroeconomic model suggest that TPP membership would increase Japan's real GDP

by 0.48-0.65% from FY2008 levels (2.4 trillion-3.2 trillion) by around 2018, a somewhat

bigger boost than would be delivered by either a Japan-US (0.36%, 1.8 trillion) or a

Japan-EU (0.27%, 1.3 trillion) EPA. On the other hand, if Japan does not join the TPP

and also fails to enters into Japan-US and Japan-EU EPAs while South Korea enters into

FTAs with the US, the EU, and China, then this could be expected to subtract around

0.13-0.14% (0.6 trillion-0.7 trillion) from Japanese real GDP.

Trade liberalization may also be disadvantageous in a number of regards, however.

EPA/FTAs are of course premised on the assumption of free competition and

rationalization throughout a region or bloc, and therefore tend to be opposed by those

domestic industries and sectors that are likely to find it hardest to compete with cheaply

imported goods and services following the removal of tariffs and other trade barriers. Other

concerns that are often raised include the impact of liberalization on domestic industrial

structure, the associated impact on employment, and the potential for a massive influx of

immigrant labor. To take just one real world example, the US dairy industry is currently

seeking to have US and New Zealand dairy products removed from the scope of TPP

Exhibit 3:% of Trade Value with EPA/FTA Partners

14.0

14.5

15.0

15.5

16.0

16.5

17.0

Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

(%)

Note: % to Japan's total trade valueSource: MoF, Credit Suisse


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11 November 2010


negotiations out of concerns that it might be unable to compete with a flood of relatively

cheap imports.

According to estimates by the Ministry of Agriculture, Forestry and Fisheries focusing on

agricultural products with domestic output of at least 1 billion that are subject to tariffs of

10% or higher, removal of these tariffs would subtract around 8 trillion from Japanese

GDP, reflecting a 4.1 trillion decline in output of agricultural products and a 3.7 trillion hit

attributable to a loss of functional capacity. The Ministry of Economy, Trade and Industryhas however estimated that failure to join the TPP would depress GDP by around 10.5

trillion due to the combined impact on core industries such as motor vehicles, machinery,

and electronics, which implies that Japan would be more than 2 trillion better off in net

terms if it were to opt for TPP membership.

Opposition from domestic agricultural interests is clearly the main reason why Japan has

opted to postpone a formal decision until June of next year. While the government has

announced its intention to establish a new "Headquarters for the Promotion of Agricultural

Structural Reform", it remains to be seen whether it can move beyond mere subsidization

of farmers and find ways of boosting agricultural productivity and competitiveness by

encouraging new entry and promoting consolidation initiatives aimed at exploiting

economies of scale.

Agricultural issues were also a major sticking point in negotiations over the South Korea-EU FTA, with the Korea Institute for International Economic Policy estimating that while

annual manufacturing output would be boosted by an average of KRW152 million over a

15-year horizon, this would be largely offset by a 123 million decline for the farming and

fishing sectors. The Korean government has therefore opted to spend around KRW2.1

billion on a decade-long program aimed at providing financial assistance for agricultural

households while proceeding with the necessary reforms.

Which Japanese sectors are likely to benefit most from TPPmembership and which would be exposed to greater competition?

Japanese exporters could expect to benefit significantly from the removal of tariffs and the

easing of restrictions on market entry, while sectors dependent on domestic demand might

see an increase in overall productivity due to increased foreign participation (inward directinvestment), but could also suffer a loss of market share with negative ramifications for

domestic employment owing to increased demand for imported goods and services.

Exhibit 4 shows trade specialization coefficients (averages for the past five years) for

various sectors. A trade specialization coefficient may take on values between -1 and +1,

with a higher figure (closer to +1) corresponding to a higher level of international

competitiveness. Japan's transport equipment sector ranks in first place with a coefficient

of +0.78, followed by general machinery (+0.42) and electrical machinery (+0.29). Within

the electrical machinery sector, however, the electrical appliances sector saw its

coefficient turn negative in the second half of the 1990s, and its FY2009 level of -0.73

points to a high reliance on imports. The iron & steel products sector has also seen an

increase in its trade specialization coefficient over the past few years.

Japan clearly stands to benefit from the fact that whereas the EU and the US imposetariffs on motor vehicles, flat-screen TVs, and other major products exported by Japan,

Japan imposes no tariffs whatsoever on virtually all types of machinery and equipment

(Exhibit 5). Abolition of tariffs based on EPA/FTAs would therefore be likely to trigger an

increase in exports of internationally competitive products while having virtually no impact

on imports of machinery and equipment. And even if demand for Japanese products were

to show relatively little growth, abolition of tariffs should still help to mitigate some of the

aforementioned losses that are anticipated by METI (in the event that Japan fails to join

the TPP).


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11 November 2010


Exhibit 4: Trade Specialization Coefficients ofJapan's Tradable Goods

Exhibit 5: Tariff Rates on Major ManufacturedProducts

-1.2-1.0-0.8-0.6-0.4-0.2

0.00.20.40.60.81.0

Foods

RawM

aterials

MineralFuels

Chemicals

Manufactured

Industrial

Electrical

Transport

Meatstuff,

etc.

Dairy

Fishery

Grain

Fruit/vegetable

of w hich food stuff

EU US Japan

Passenger cars 10% 2.5% 0%

Trucks 25% 0%

Flat TVs 14% 9% 0%

MFP 6% 0%

Microwave 5% 0%

Bearing 9% 0%

Note: Trade specialization coefficients=(exports-imports/exports+imports.

Source: MoF, Credit Suisse

Note: MFP(Multi Function Printer).Source: METI, MoF

On a somewhat gloomier

note, trade specializationcoefficients are deep in

negative territory for most

sectors that are heavily

dependent on basic

materials, including foods

and mineral fuels. Mineral

fuels and most raw materials

(including iron ore and coal)

are currently tariff free, but

meat and other foods are

subject to rather high tariffs

(Exhibit 6). Worse still,

whereas Japan's current EPA/FTA partners account for less than 20% of Japan's

worldwide food imports, this percentage would rise beyond 50% if Japan were to enter into

agreements with the US, Australia, and New Zealand, and would reach roughly 60% for

meat and 80% for grains. It should be clear from these figures that Japan's agricultural

sector could suffer significant damage if current tariffs were to be abolished.

This should not be an

insurmountable obstacle,

however, when one

considers that Japan's

agricultural sector accounts

for less than 2% of total

output versus around 25%

for the manufacturing sector.

The number of agricultural

workers as a proportion of

total employed persons has

also declined to less than 4%,

down from around 9% in the

early 1980s. That said,

agricultural lobby groups

remain very important

sources of votes for both the

ruling Democratic Party of

Exhibit 6: Tariff Rate on Major Imported Foods

General Temporary

Meat

Beaf 50% 38.50%

Pork 5% 361/kg

Vegetables, etc.

Banana 40%

Orange 20-40%

Wheat 65/kg 65/kg

Rice 402/kg 49/kg

Source: MoF

Exhibit 7: Japan's Trades with EPA/FTA Partners

0

10

20

30

40

50

60

Current EAP/FTP TPP TPP+EU

(%)

Note: Percentage of Japan's trades with EPA/FTA parters to Japan's total trade values (five-year average. TPP includes prospective members.Source: METI, MoF, Credit Suisse


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11 November 2010


Japan and the opposition Liberal Democratic Party, and with a Lower House election likely

to be held in 2012, it is almost certain that debate over the pros and cons of TPP

membership with a view to a formal decision by June 2011, as indicated in the recently

announced Basic Policy on Comprehensive Economic Partnerships will pay particularly

close attention to the agricultural sector and its ability to survive in the event that tariff

protection is removed or reduced.

According to todays Nikkei Shimbun, the Japanese government is planning to proposethat the EU start EPA/FTA talks as early as spring 2011. While Japan is requesting that

the EU lifts or reduces tariffs on automobiles and flat TVs, the EU is insisting that Japan

should eliminate non-tariff barriers. Japans action is obviously a countermove against

South Korea, which had already concluded an FTA with the EU. As mentioned earlier,

South Korea also signed an FTA with the US last month and is trying to gain international

trade competitiveness. If Japan is able to participate in the TPP and conclude EPA/FTA

talks with the EU, exports to FTA partners could jump to close to 50%, surpassing those to

South Korea (Exhibit 7). Currently, tariffs on goods such as automobiles and flat TVs in the

EU are relatively higher than those in the US. It is probable that Japans exporters will

receive greater benefits from eliminating tariffs in the EU.

Exhibit 8: Anticipated timeline

March 2011: Government to draft regulatory reform policies aimed at eliminating non-tariff barriers

June 2011: Government to draft basic policy regarding agricultural reforms

Government to draft basic policy regarding immigration policies (including arrangements under which

foreigners would be permitted to work in Japan as nurses and careworkers)

Government to decide whether or not to join TPP (negotiations will also require agreement from each of the

individual signatories to TPP)

October 2011: Government to compile action plan regarding agricultural reforms

November 2011: APEC CEO Summit (Honolulu, US)

Source: Credit Suisse


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11 November 2010


Business cycle updateCorporate sentiment continues to fall

Corporate sentiment weakens in reaction to the natural pullback after last-

minute data before the expiration of eco-car subsidies and the hike in cigarette

taxes.

Although the pace of deterioration in consumer sentiment is slowing slightly,we must closely monitor future employment conditions.

Foreign demand (Exhibits 9-14)

According to BoJs real trade index, real exports dropped quarter-on-quarter for the first

time in six quarters by 0.4% in July-September. While real imports continued to rise for the

six consecutive quarters, a rate of increase was the smallest in three quarters, rising only

by 1.1%. Meanwhile, trade volume indices calculated by Cabinet Office showed that

export volume dropped 2.6%qoq for the same period. Exports to the US (+6.2%) and EU

(+2.0%) continued to rise, but those to Asia dropped for the first time in six quarters by

2.7%. However, the USs ISM New Orders Index and Chinas PMI New Orders Index,

leading indicators for exports, are beginning to show signs that exports have bottomed out.

Industrial production (Exhibits 15-18)

Industrial production has entered an adjustment phase in Japan. Production dropped by

1.9%mom in September for the fourth consecutive monthly decrease, much weaker than

the market consensus expectation of a 0.6% decline according to a Bloomberg survey.

Production dropped 1.9%qoq in July-September, the first quarterly decrease in six

quarters. In addition to the decline in exports resulting from the slowdown in global

manufacturing activities, a large drop in auto sales after the end of the tax incentive

scheme for purchasing environment-friendly cars has started to affect production.

Corporate sentiment (Exhibits 19-20)

The September BoJ Tankan survey reported that companies DI for business conditions

improved for the sixth straight quarter for both manufacturers (+1 to +8) and non-

manufacturers (-5 to 2) due to the effect of an unseasonably hot summer and the impact oflast-minute demand. The October Economy Watchers Survey showed that the corporate

activity-related DI fell 2.3pts mom to 39.1. This is the third month in a row that the index

undercut the previous months levels, and the negative margin also expanded over the

previous month (-1.3pts). Corporate sentiment is apparently under pressure from the

natural pullback after last-minute demand before the expiration of eco-car subsidies and

the hike in tobacco taxes.

Corporate capex (Exhibits 21-24)

In the BoJ Tankan survey, capital spending for FY10 on an all-firms basis was revised

upward 1.3pp compared to the June survey, to a 1.0%yoy decline. However, this is a

modest upward revision compared to past capital spending recoveries, and suggests that

companies are maintaining their cautious stance on capital spending. Core machinery

orders for August jumped 10.1%mom, but, taken as a three-month moving average, the

total value of orders was still just 80% of its pre-crisis level, leaving it near the lowest

levels seen during each of Japan's three previous economic downturns. Moreover,

whereas machinery orders and corporate capex tend to be relatively closely correlated

when the latter is in correction mode, the correlation is generally much weaker during

recovery phases, making it difficult to know whether the recent surge in machinery orders

not particularly unusual in view of historical month-to-month volatility will ultimately

translate into higher levels of capital investment.

The USs ISM New

Orders Index and

Chinas PMI index,

leading indicators for

exports, offer hopeful

signs

Industrial production

has entered an

adjustment phase

Corporate activity-

related DI worsens for

third straight month

FY10 capital spending

plans are revised

upward only slightly


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11 November 2010


Employment (Exhibits 25-29)

The September employed population statistic (including the self-employed) rose

significantly by +410K mom, compared with a 10K decline in August). According to MIC,

the employed population was inflated by about 100K in September due to temporary

employment for the senses survey. On a quarter-over-quarter basis, employment rose

290K in July-September for the first quarterly increase in two quarters (April-June: -540

qoq, January-March: +370 qoq), suggesting that the job market may have finally bottomedout. However, industrial production seems to have entered an adjustment phase and this

presents a risk that the job recovery will remain weak or even stall early next year.

Consumer sentiment (Exhibits 30-32)

Although consumer sentiment has been deteriorating, the pace seems to be slowing

somewhat. The October Economy Watchers Survey reported that the household activity-

related DI fell 0.3pts mom to 39.2, down for the third straight month. However, although

the DIs in the retail-related and housing-related sectors worsened over the previous month,

DIs in the food and beverage-related and service-related sectors both improved for the

first time in three months. The household activity-related DI for future economic conditions

rose 0.4pts mom to 41.7, marking the second straight month of improvements. The

Consumer Confidence Survey for the same month showed that the Consumer Confidence

Index had fallen for the fourth straight month to 40.9, but the negative margin was 0.3pts,narrowing 0.8pts from the previous month. Of the four indicators making up the index

(overall livelihood, income growth, employment, and willingness to buy durable goods),

consumer perceptions of income growth was unchanged over the previous month, while

the perception of employment improved 0.1pt. With production corrections expected to

continue for the near future, we do not expect the employment and income environment to

improve on a full scale, and believe that these improvements are likely to be no more than

a temporary reaction after the dramatic deterioration thus far.

Consumer spending (Exhibits 33-34)

Real household consumption fell -0.4%mom in September according to the Household

Survey (Family Income and Expenditure Survey, seasonally adjusted), while it expanded

2.1%qoq in July-September. Real retail sales lost -3.0%mom in September (+1.6%mom in

July), reflecting a negative rebound due to the termination of the eco car incentivescheme. On a quarterly basis, real retail sales recovered +1.1%, indicating that real GDP

private consumption also archived positive growth in the quarter. Meanwhile, new

passenger car sales dropped 26.7%yoy in October for the largest year-on-year decline

since April, 2009 as an incentive scheme for purchasing environment-friendly car ended in

early September.

Residential investment (Exhibits 35-36)

New housing starts rose 17.1%yoy in September higher than the market consensus

(+15.3%yoy). Houses for sales jumped 58.9%yoy led by condominiums for sales

(+124.8%yoy), while housing for rent slowed down to 2.2%yoy from 16.9%yoy in August.

On seasonally adjusted base, the housing starts rose for the fourth consecutive month by

1.0%mom. The level of the starts still remains very low at 0.837 million units compared

with an average 1.1 million since 2000, but is likely to have bottomed out at least. An

introduction of eco-point system to housing investment, decline in house prices, and lower

mortgage rates seem to be supporting this moderate recovery in housing markets.

The job market has

bottomed out, but the

outlook has become

even gloomier

Pace of deterioration in

consumer sentiment

slows slightly

Real consumer

spending rose for the

fourth consecutive

quarter in July-September

Housing starts rose for

the fourth consecutive

month in September,

indicating that the

housing investment

has bottomed out


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11 November 2010


Public demand (Exhibit 37)

Real public works spending rose 9.3% in FY2009, for the first time in 15 years, thanks to

the formulation of a large-scale supplemental budget and the decision to bring forward the

public works budget as an additional stimulus measure. However, the DPJ government

froze about 3tn worth of projects in the first supplementary budget, and the second

supplementary budget for fiscal 2009 consists almost entirely of financing support for

SMEs and employment measures. Public works spending amounts to only 500bn forregional infrastructure development. On a GDP basis, real public works spending has

fallen quarter on quarter since last autumn.

Wage and price indicators (Exhibits 38-40)

Total cash earnings rose for the seventh consecutive month by 0.9%yoy in September.

Increases in overtime working hours in the manufacturing and the wholesale/retail sales

industries, etc. contributed to the increase. But, hourly wage dropped 1.3%yoy after falling

1.6% in August. The lack of response by retail prices to the shrinking negative output gap

over the past four quarters suggests to us that the level of the output gap matters more

than its direction. September core core CPI (CPI excluding food and energy) was in line

with consensus expectations according to a Bloomberg survey, declining -1.5%yoy. On a

seasonally adjusted basis, September core core CPI remained weak, recording a

0.0%mom statistic. On a quarterly basis, core core CPI declined -0.2%qoq, the eighthconsecutive quarter of non-positive changes. Meanwhile, October Tokyo core core CPI

was +0.6%mom, reflecting the tobacco tax hike and the coordinated hikes of accident

insurance premiums by major non-life insurance companies. This statistic suggests that

nationwide core core CPI in October may show a one shot rise of the same magnitude, in

our view. It is unlikely that core core CPI will turn positive during FY2011. The corporate

goods price index (CGPI) dropped 0.1%yoy for the first year-on-year decline in two

months. Softer international commodity prices, yen appreciation and weak demand/supply

conditions in the domestic market are weighing on corporate good prices.

Second supplementary

budget consists

primarily of financing

support for SMEs and

employment measures

The level of the output

gap matters more than

its direction


12/23

11 November 2010


Exhibit 9: US Manuf. ISM Survey New Order Index Exhibit 10: Manufacturing Survey New Order Index

20

30

40

50

60

70

80

Oct-

01

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

-50.0

-40.0

-30.0

-20.0-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

NY Fed Manufact uring Survey

Philadelphia Fed Business Outlook Surv ey

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse Source: NY Fed, Philadelphia Fed, Credit Suisse

Exhibit 11: China PMI Manuf. Survey Exhibit 12: Real Trade Indices

20

25

30

35

40

45

50

55

60

65

70

Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10

New orders

Imports

60

70

80

90

100

110

120

130

140

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Real Exports

Real Imports

(2005=100)

Source: Thomson Reuters DataStream, Credit Suisse Source: BoJ, Credit Suisse

Exhibit 13: Customs-Cleared Trade Indices Exhibit 14: Current Account Balance

-50

-40

-30

-20

-10

0

10

20

30

40

50

Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10

Exports (mom)

Imports (mom)

Exports (yoy )

Imports (yoy )0

5

10

15

20

25

30

35

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

-80

-60

-40

-20

0

2040

60

80

100

Current Account (LHS)

YoY (3MMA, RHS)

(trillion y en) (%)

Source:MoF, Credit Suisse Source: BoJ, Credit Suisse

Exhibit 15: Industrial Production and Shipments Exhibit 16: Industrial Production and Shipments (2)

60

70

80

90

100

110

120

Nov-

01

Nov-

02

Nov-

03

Nov-

04

Nov-

05

Nov-

06

Nov-

07

Nov-

08

Nov-

09

Nov-

10

Production

Shipments

(2005=100)

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Oct-

06

Apr-

07

Oct-

07

Apr-

08

Oct-

08

Apr-

09

Oct-

09

Apr-

10

Oct-

10

Production (mom % chg)

Shipments (mom % chg)

Production (yoy % chg)

Shipments (y oy % chg)

(%)

Note Production data in Sep and Oct are METI's forecasts.

Source: METI, Credit Suisse



13/23

11 November 2010


Exhibit 17: Industrial Inventory Index and Inventory toShipment Ratio Exhibit 18: Industrial Inventory Changes

80

90

100

110

120

130

140

150

160

Jul-

01

Jul-

02

Jul-

03

Jul-

04

Jul-

05

Jul-

06

Jul-

07

Jul-

08

Jul-

09

Jul-

10

Inv entory index

Inv entory t o shipment ratio index

(2005=100)

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Jul-

10

Seasonally adjusted mom % chg

YoY % chg

(%)

Source: METI, Credit Suisse Source: METI, Credit Suisse

Exhibit 19: BoJ TankanSurvey (BusinessConditions DI)

Exhibit 20: Business Watchers Survey forManufacturers and the Nomura PMI

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10

Large manufact urers

Large non-manuf acturers

("good""bad"%points

0

10

20

30

40

50

60

Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10

Future condition DI

Nomura/J MMA Manuf acture PMI

(%)

Source: BoJ, Credit Suisse Source: Cabinet Office, the BLOOMBERG PROFESSIONAL service

Exhibit 21: Core Machinery Orders (1) Exhibit 22: Core Machinery Orders (2)

600

700

800

900

1000

11001200

1300

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

(billion y en)

-50

-40

-30

-20

-10

0

10

20

30



YoY % chg

(%)

Source: Cabinet Office, Credit Suisse Source: Cabinet Office, Credit Suisse

Exhibit 23: Floor Area of Construction Started (non-residential) Exhibit 24: Average Office Vacancy Rates

-60

-40

-20

0

20

40

60

80


0

1000

2000

3000

4000

5000

6000

7000

8000

9000

(%) 1000)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10

Tokyo

Nagoy a

Osaka

(%)

Source: MLIT, Credit Suisse Source: Miki Shoji, Credit Suisse


14/23

11 November 2010


Exhibit 25: Changes in the Number of Workers Exhibit 26: Changes in the Non-Farm Payroll Number

-3

-2.5

-2

-1.5-1

-0.5

0

0.5

1

1.5



YoY % chg

(%)

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2



yoy % chg

Source: MIC, Credit Suisse Source: MIC, Credit Suisse

Exhibit 27: Unemployment Rate Exhibit 28: Job Offers to Applicants Ratio

3

3.5

4

4.5

5

5.5

6


220

240

260

280

300

320

340

360

380No. of unemployed (RHS)

Unemployment Rate (LSH)

(%) (10 thousand)

0.4

0.5

0.6

0.70.8

0.9

1

1.1

1.2

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

(X)

Source: MIC, Credit Suisse Source: MLHS, Credit Suisse

Exhibit 29: New Job Offers (Including Part-TimeEmployees) Exhibit 30: Consumer Sentiment Index

-40

-30

-20

-10

0

10

20

30



yoy % chg

(%)

20

25

30

35

40

45

50

55

Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10

(%)

Source: MHLW, Credit Suisse Note: Data before April 2004 use old base.

Source: Cabinet Office, Credit Suisse

Exhibit 31: Business Watchers Survey CurrentBusiness Conditions for Households (1)

Exhibit 32: Business Watchers Survey CurrentBusiness Conditions for Households (2)

10

15

20

25

30

35

40

45

50

55

60

Oct-

01

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

Household activ ity -related

(Retail)

(%)

0

10

20

30

40

50

60

70

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

Food and beverageServices

Housing

(%)

Source: Cabinet Office, Credit Suisse Source: Cabinet Office, Credit Suisse


15/23

11 November 2010


Exhibit 33: Real Household Spending Exhibit 34: Retail Sales

-8

-6

-4

-2

0

2

4

6

8



yoy % chg

(%)

-8

-6

-4

-2

0

2

4

6



yoy % chg

(%)

Source: MIC, Credit Suisse Note: Retail sales indices, % mom chg.


Exhibit 35: New Housing Started Exhibit 36: New Housing Started (2)

50

60

70

80

90

100

110

120

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

4

5

6

7

8

9

10

Units (LHS)

Square meters (RHS)

1000 units million

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

Sep-

06

Mar-

07

Sep-

07

Mar-

08

Sep-

08

Mar-

09

Sep-

09

Mar-

10

Sep-

10

Units (mom % chg)

Square meter (mom % chg)

Units (yoy % chg)

Square meter (yoy % chg)

(%)

Source: MLIT, Credit Suisse Source: MLIT, Credit Suisse

Exhibit 37: Construction Orders from Public Sector Exhibit 38: Corporate Prices

-80

-60

-40

-20

0

20

40

60

80

J ul-07 J an-08 J ul-08 J an-09 J ul-09 J an-10 J ul-10

Orders f rom central government

Orders f rom local government

yoy %

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Oct-

01

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

CGPI

CSPI

YoY %

Note: Quarterly base, but monthly base for 2009.

Source: MLIT, Credit Suisse

Source: BoJ, Credit Suisse

Exhibit 39: CPI Exhibit 40: Nominal Wage Indices

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Core CPI

Core core CPI

YoY%

-8-7

-6-5

-4-3

-2-1

01

23

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Total Cash Earnings

Scheduled Earnings

YoY%

Source: MIC, Credit Suisse Source: MHLW, Credit Suisse


16/23

11 November 2010


Money and credit update

Monetary base showed a double-digit growth for the first time inthree months in October

Balance of bank loans undercuts year-on-year growth for the eleventh straight

month in October.

The Bank of Japan decided to ease terms and conditions for CPs and corporate bonds it is

purchasing at its regular Monetary Policy Meeting last month. The Bank also set the

guideline of the asset-purchase program (purchases of ETFs and J-REITs) at todays

meeting. The Bank seems positioned to emphasize its credit risk taking for the moment.

BoJ current account and monetary base (Exhibit 41)

Growth in the monetary base reaccelerated for the second consecutive month to 6.4%yoy

in October. While current account balances at the BJ slowed down to 38.0%yoy from

38.4% in September, banknotes in circulation reaccelerated to 1.5%yoy, the largest year-

on-year increase sine January, 2008. On a seasonally adjusted basis, the monetary base

continued to rise by an annualized 12.0%mom. The BoJ decided to lower policy rate target

from 0.1% to 0-0.1% at the MPC meeting last month. However, an average overnight call

rate has remained at around the upper end of the target range during the most of time in

October. We expect that overnight call rate will start to fall further gradually as the BoJ

starts purchasing assets somewhat more aggressively going forward, which will likely

contribute to increase current account at balances at the BoJ.

Money stock (Exhibit 42)

M2 rose 2.7%yoy in October, 0.1pt slower over the previous month. On a seasonally adjusted

annualized basis, M2 increased 2.7%mom for the second straight month of lower growth.

Although M1 rose 2.9%yoy for the fourth consecutive month of stronger growth, quasi-money

increased 0.3% to mark the twelfth straight month of declining growth. It seems that, while

peoples actions to avoid risk accelerated the growth of cash currency in circulation and deposit

money, sluggish demand for loans in the private sector seems to have slowed the growth of

quasi-money. Broadly defined liquidity was unchanged from the previous month at 0.4%yoygrowth, but it was up 3.0%mom saa for the second straight month of positive growth. Risk

assets continued to decline, with investment trusts down 0.4%yoy and foreign bonds down

2.3%. In addition, Japanese government bonds continued to record heavy negative growth,

down 20.4%yoy as investors were put off by the low yields.

Bank lending (Exhibits 43-45)

The September Principal Figures of Financial Institutions reported a 2.0%yoy decline in

banks average loan balances, with the negative margin expanding again (down 1.8% in

September). The balance of loans at regional banks and Tier 2 regional banks was up

0.4% for the third straight month of stronger growth, but city banks loan balances dropped

4.3%yoy, 0.4pts worse than in the previous month. In seasonally adjusted terms, the loan

balance of banks overall was down for the third straight month, albeit to a modest extent.

Although regional banks loan balances increased 0.2%yoy sa for the ninth straight monthof (moderate) growth, city banks lending decreased 0.4% for the third straight month of

declines.

Credit markets (Exhibits 46-48)

Credit markets continued to ease on receding financial market concerns and expectations

of economic recovery. While LIBOR rates have declined slowly, they have undercut levels

recorded before the Lehman shock and have narrowed to November 2007 levels. Term

rates also fell further, reflecting the BoJs decision on additional monetary easing

measures on 5 October. In corporate bond markets, credit spreads continued to fall

reflecting the recent BoJ announcement of the creation of an asset purchase program as

part of additional monetary easing.

Overnight call rate will l

ikely fall further as the

BoJ starts purchasing

assets somewhat more

aggressively


17/23

11 November 2010


Exhibit 41: Monetary Base Exhibit 42: Money Stock (M2)

0

20

40

60

80

100

120

Oct-

01

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

BOJ current account balances

Monetary base

(trn yen)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Oct-

01

Oct-

02

Oct-

03

Oct-

04

Oct-

05

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

YoY%

Source: BoJ, Credit Suisse Source: BoJ, Credit Suisse

Exhibit 43: Average Outstanding Bank Lending(Banks and Shinkin Banks)

Exhibit 44: Outstanding Bank Lending (DomesticBanking Accounts)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.03.0

4.0

5.0

6.0

Oc t-04 Oc t-05 Oc t-06 Oc t-07 Oc t-08 Oc t-09 Oc t-10

Banks

Banks special fact or adjusted

yoy%

-6

-4

-2

0

2

4

6

Aug-96 Aug-98 Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10

(YoY,%)

Source: BoJ, Credit Suisse Source: BoJ, Credit Suisse

Exhibit 45: CP Underwritten by Banks Exhibit 46: LIBOR-OIS Spread (3-month)

-40

-30

-20

-10

0

10

20

Oc t-04 Oc t-05 Oc t-06 Oc t-07 Oc t-08 Oc t-09 Oc t-10

(YoY %)

0.00

0.10

0.20

0.30

0.40

0.50

0.600.70

0.80

0.90

Nov-

08

Feb-

09

May -

09

Aug-

09

Nov-

09

Feb-

10

May -

10

Aug-

10

Nov-

10

(pp)

Source: BoJ, Credit Suisse Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse

Exhibit 47: Money Market Rates Exhibit 48: Credit Spreads

-0.2

0

0.2

0.4

0.6

0.8

1

Nov-

01

Nov-

02

Nov-

03

Nov-

04

Nov-

05

Nov-

06

Nov-

07

Nov-

08

Nov-

09

Nov-

10

O/N call rate

TIBOR3M

TIBOR6M

(%)

0

10

20

30

40

50

60

70

80

90

100

Nov -04 Nov -05 Nov -06 Nov -07 Nov -08 Nov -09 Nov -10

Aa, Spread

A, Spread

Baa, Spread

Source: the BLOOMBERG PROFESSIONAL service , Credit Suisse Note: Credit spreads are calculated using the Bloomberg Fair Market Value index and JGB5Y yields.

Source: the BLOOMBERG PROFESSIONAL service, Credit Suisse


18/23

11 November 2010


Upcoming Indicators/Events

July-September GDP 1st prelim: Monday 15 November

Previous (April-June real GDP, qoq annualized): 1.5%

Credit Suisse forecast (July-September real GDP, qoq annualized): 2.0%

Having digested the

implications of economic

data for the July-September

quarter, we remain of the

view that first preliminary

GDP estimates for 3Q 2010

(due 15 September) will

show an acceleration of real

growth to +2.0%qoq

annualized (up from +1.5% in

2Q), thereby marking a thirdconsecutive quarter of

positive growth. We also still

expect the economy to

experience a mild correction

from 4Q 2010 through spring

next year. While a domestic economic recovery appears likely to be delayed by a

temporary retrenchment of domestic demand as well as the negative impact of a strong

yen on corporate earnings, the recent improvements in US and Chinese economic data

are of course to be welcomed.

Upcoming IndicatorsPrior

Nov 15 (Mon) 8:50 GDP (Jul - Sep, 1st prelim) Real GDP (qoq%, annualized) 1.5

8:50 Input-Output Price Index of MFG (Oct) Output / Input (yoy%) 2.3 / -0.5

Nov 16 (Tue) 8:50 Tertiary Industry Index (Sep) (mom%) -0.2

Nov 17 (Wed) 14:00 Indexes of Business Conditions (Sep, final) Leading CI 98.9

Coincident CI 102.0

Nov 19 (Fr i) 8:50 Minutes of the Monetary Policy Meeting (Oct)

13:30 All Industry Activity Index (Sep) (mom%) -0.4

Indicator

Source: BoJ, Cabinet Office, Ministry of Public Management, Home Affairs, Posts and Telecommunications, MoF, METI, MHLW, MLIT, Credit Suisse

Exhibit 49: Real GDP Growth

-6

-4

-2

0

2

4

6

3Q09 1Q10 3Q10 1Q11 3Q11 1Q12

QoQ annualized

YoY

(%)

Credit Suisse forecasts

Source: Cabinet Office, Credit Suisse


19/23

JapanEconomicsWeekly

19

Major Economic DataFeb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

Consumption-related indicators

Real spending by all households YoY % -0.5 4.4 -0.7 -0.7 0.5 1.1

Real spending by wage-earners YoY % -2.2 3.6 -2.3 -3.4 0.3 1.0

Real disposable income YoY % 1.5 0.3 0.8 -5.3 7.4 -0.3

Average propensity to consume YoY % 72.2 78.1 72.7 72.8 71.0 76.1

Department store sales YoY % -7.1 -5.1 -5.8 -3.9 -7.4 -3.0

Super store sales YoY % -2.0 -6.7 -5.5 -6.2 -3.5 -3.3Convenience store sales YoY % -2.0 -2.6 -1.4 -1.1 0.9 2.6

Household activity-related DI YoY pts 19.1 16.5 12.5 9.0 3.8 8.0

Consumer sentiment index YoY pts 13.1 12.0 9.6 7.1 5.9 3.9

Monthly wages YoY % -0.7 1.0 1.6 0.1 1.8 1.4

Real monthly wages YoY % 0.6 2.2 3.0 1.1 2.7 2.4

Labor market conditions

Unemployment rate s.a. % 4.9 5.0 5.1 5.2 5.3 5.2

# of workers s.a, MoM 10k -25 -5 -28 -24 4 21

# of unemployed s.a, MoM 10k -7 10 8 1 7 -6

# of non-labor force s.a, MoM 10k 26 -8 25 30 -8 -17

Job offers to applicants ratio s.a. 0.47 0.49 0.48 0.50 0.52 0.53

Job offers s.a. MoM 1.5 2.7 -1.0 3.5 2.7 1.3

Job seekers s.a. MoM -1.9 0.4 -0.5 -0.2 -1.2 -0.6

New job seekers s.a. MoM -0.4 5.6 0.9 -1.3 5.8 -1.7Corporate-related indicators

Industrial production

Production s.a. MoM % -0.6 1.2 1.3 0.1 -1.1 -0.2

Production YoY % 31.3 31.8 25.9 20.4 17.3 14.2

Shipments YoY % 29.0 29.9 27.1 21.0 18.1 14.7

Inventory YoY % -7.5 -6.0 -3.4 -0.8 1.2 1.3

Inventory to sales ratio s.a.(2005=100) 108.3 102.3 103.5 108.5 106.7 108.2

Manufacturers' operating ratio s.a.(2005=100) 90.1 90.6 90.6 91.3 89.4 89.1

Machinery orders

Core machinery orders s.a. MoM % -3.8 5.4 4.0 -9.1 1.6 8.8

YoY % -7.1 1.2 9.4 4.3 -2.2 15.9

Foreign demands s.a. MoM % 3.0 3.9 -3.7 2.7 2.4 2.6

YoY % 137.3 52.4 92.5 129.5 74.7 50.2

New housing starts YoY % -9.3 -2.4 0.6 -4.6 0.6 4.3s.a. annualized, 10k 79.4 85.4 79.3 73.7 75.0 77.2

Construction starts (floor) YoY % -15.9 8.1 4.4 14.7 -1.4 7.8

s.a. MoM % 7.3 23.7 -32.8 8.2 -0.9 10.3

* Contracted rate is the number of contracts sold divided by the number of units for sale.Source: MIAC, Department Store Assoc., Chain Store Assoc. Convenience Store Assoc., Cabinet Office, MHLW, METI, MLIT, MoF, BoJ, JREI, Credit Suisse


20/23

JapanEconomicsWeekly

20

Major Economic Data (continued)Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10

Contracted rate for condominiums

Tokyo metropolitan area % 70.7 82.8 79.9 77.0 83.9 78.2

Kinki area % 63.2 64.6 72.3 76.0 76.9 70.2

Prices

Nationwide core CPI YoY % -1.2 -1.2 -1.5 -1.2 -1.0 -1.1

Tokyo core CPI YoY % -1.8 -1.8 -1.9 -1.5 -1.3 -1.3

Domestic CGPI YoY % -1.6 -1.3 -0.2 0.5 0.4 -0.1Raw materials YoY % 17.4 13.6 23.8 31.2 19.0 10.5

Intermediate goods YoY % -1.3 -1.2 1.0 2.0 1.9 1.0

Final goods YoY % -0.6 -1.0 -1.1 -1.2 -1.7 -1.8

CSPI YoY % -1.3 -1.2 -1.0 -0.7 -1.0 -1.1

External demand

Trade balance billion yen 647.3 949.9 734.9 316.0 682.2 799.2

Exports YoY % 45.4 43.5 40.3 32.1 27.7 23.5

Imports YoY % 30.1 21.1 24.8 34.2 26.2 15.8

Trade volume

Exports YoY % 46.1 43.7 39.6 31.9 27.5 25.5

Imports YoY % 23.0 16.9 17.7 22.5 18.1 13.8

Real trade balance s.a. MoM % -1.4 25.8 14.9 -15.0 -2.4 12.2

Exports s.a. MoM % 1.0 2.8 6.6 1.0 -0.3 2.4

Imports s.a. MoM % 1.8 -3.8 3.0 7.4 1.1 -0.8Balance of payments

Current account balance billion yen 1,593.3 2,556.4 1,331.2 1,222.6 1,057.8 1,675.9

Current account balance s.a. billion yen 1,184.6 1,784.5 1,481.7 917.8 1,377.1 1,463.6

Trade and services billion yen 712.3 1,099.5 474.6 368.9 670.2 738.3

Trade balance billion yen 785.3 1,089.0 871.1 402.7 762.0 916.1

Service balance billion yen -73.0 10.5 -396.4 -33.7 -91.8 -177.8

Income accounts billion yen 961.9 1,667.6 986.2 925.9 460.7 1,021.8

Capital and financial balance billion yen -1,542.0 -3,694.5 345.0 -1,238.6 -752.9 -2,182.3

Financial account billion yen -1,518.5 -3,616.5 368.7 -1,191.3 -754.6 -2,128.7

Direct investment billion yen -1,124.8 -153.7 -113.2 -466.1 -458.4 9.6

Portfolio investment billion yen -1,297.0 -9,784.0 6,604.5 1,780.7 -7,788.1 -323.9

Changes in reserve assets billion yen -29.7 181.6 -214.5 -91.0 -407.5 -103.8

Business conditions indices

Coincident CI MoM % 0.2 1.3 0.6 0.7 0.4 0.6

Leading CI MoM % 1.3 4.0 0.2 -2.5 0.7 -0.3

* Contracted rate is the number of contracts sold divided by the number of units for sale.Source: MIAC, Department Store Assoc., Chain Store Assoc. Convenience Store Assoc., Cabinet Office, MHLW, METI, MLIT, MoF, BoJ, JREI, Credit Suisse


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11 November 2010


Japan Economic Forecasts

As of 11 November 2010

Q1 Q2 Q3 Q4 Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E 07 08 09E 10E 11E 08 09E 10E 11E

Real GDP -16.4 9.7 -0.3 3.4 5.0 1.5 2.0 -0.8 -0.1 0.5 1.8 1.9 1.8 -3.7 -1.9 2.0 0.8 -1.2 -5.2 2.9 0.6

Private consumption -5.5 5.2 2.5 2.7 2.2 0.0 3.0 -0.4 0.4 0.8 0.8 0.8 0.9 -1.8 0.7 1.4 0.7 -0.7 -1.0 2.0 0.7

Private residential investment -25.9 -33.2 -25.8 -11.0 1 .2 -5 .1 3 .2 0 .8 0.8 2 .0 2 .8 3 .2 -13.5 -3 .7 -18.5 -3 .7 2 .1 -8 .1 -14.2 -8 .6 1 .4

Private non-residential investment -30.9 -19.2 -6.7 6.8 3.2 6.2 4.0 0.0 1.2 1.6 2.4 2.4 2.1 -6.8 -15.3 3.3 1.8 0.1 -19.2 1.4 1.9

Private inventory (c ontribution) -5.3 0.6 -0.8 -1.6 0.5 -0.2 0.2 -0.2 0.0 0.0 0.0 0.0 0.1 -0.1 -0.5 -0.2 0.0 -0.4 -0.4 -0.2 0.0

Public investment 14.6 39.0 -4.8 -4.9 -3.5 -10.3 -3.9 -3.9 -18.5 -18.5 -5.0 -5.0 -6.3 -6.6 9.3 -6.6 -11.0 -8.5 7.4 -3.2 -11.2

Net exports (c ontribution) -3.0 8.5 0.9 2.4 2.4 1.4 -0.4 -0.3 0.1 0.3 0.9 1.1 1.3 -1.2 0.4 1.3 0.4 0.1 -1.3 2.1 0.3

Exports -68.1 48.6 38.4 24 .8 31 .0 25 .8 -0 .2 0 .0 2 .0 4 .1 8 .2 10 .4 9 .3 -10.4 -9 .5 16.7 4 .8 1 .6 - 23 .9 23.8 4 .3

Imports -53.8 -18.3 27.6 6 .1 12.6 17.4 4 .0 2 .8 2 .4 3 .2 3 .2 4 .9 1 .7 -4 .0 -11.8 10.1 3 .5 1 .0 - 16 .7 10.0 4 .0

Nominal GDP (yoy%) -8.6 -6.3 -5.8 -3.8 1.8 0.7 1.8 0.9 -1.1 -0.8 -0.7 0.3 0.9 -4.2 -3.6 0.6 -0.1 -2.0 -6.1 1.3 -0.6

Industrial production (yoy% ) -34.6 -27.4 -19.4 -4.3 27.5 20.9 13.7 4.5 2.7 -12.7 -8.9 8.5 0.8 -3.4 -21.9 16.1 -1.1

CPI (core, yoy%) 0 .0 -0 .9 -2 .3 -1 .7 -1 .2 -1 .2 -1 .1 -0 .6 -0.6 -0 .5 -0 .4 -0 .5 0 .3 1 .2 -1 .6 -1 .0 -0 .5 1 .5 -1.3 -0 .8 -0 .5

CPI (excluding food and energy, yoy%) -0 .2 -0 .5 -0 .9 -1 .1 -1 .1 -1 .6 -1 .5 -1 .0 -0.9 -0 .6 -0 .5 -0 .8 -0 .2 0 .0 -0 .9 -1 .3 -0 .7 0 .0 -0.7 -1 .2 -0 .7

Unemployment rate (%) 4.6 5.2 5.4 5.2 4.9 5.2 5.2 5.4 5.4 5.1 4.8 4.8 3.8 4.1 5.2 5.2 5.0 4.0 5.1 5.3 4.9

Current account balance to GDP (%) 1.8 3.0 3.1 3.3 3.9 3.1 3.3 3.3 4.8 2.5 3.3 3.3 3.4 3.2 2.8 3.4 3.5

Overnight call rate (%) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.5 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

5yr JGB yields 0.8 0.7 0.6 0.6 0.6 0.4 0.4 0.3 0.3 0.7 0.8 0.6 0.3 -- 0.7 0.6 0.3 --

10yr JGB yields 1.4 1.4 1.3 1.3 1.4 1.1 1.2 0.9 0.9 1.3 1.4 1.4 0.9 -- 1.2 1.3 0.9 --USD/JPY 99 96 90 93 93 89 86 86 89 93 100 99 93 89 -- 91 93 86 --

Notes: 1. q/q percentage changes at annualized rates

2. IP grow th is calculated by using non-seasonally adjusted actual figures, w hile forecast f igures are calculated based on seasonally adjusted figures

3. Current account balance as a percentage of GDP

4. Policy rate and JGB yields are end of period data

2010 2011 FY CY2009

Source: Cabinet Office, MoF, METI, Statistics Bureau, Credit Suisse estimates


22/23

FIXED INCOME RESEARCH > ECONOMICS RESEARCH > DEVELOPED COUNTRIES

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23/23

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