japan: recent developments · japan’s economy is in a relatively good place -5-4-3-2-1 0 1 2 3...
TRANSCRIPT
Japan: Recent Developments
Mitsuhiro Furusawa Deputy Managing Director
International Monetary Fund
1
Global growth continues to be strong, reflecting sizeable upward revisions in many key advanced and emerging market economies
Japan’s economy is in a relatively good place
-5
-4
-3
-2
-1
0
1
2
3
2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 2017Q3
Private gross fixed investment Government spending Net exports Private consumption Private inventories (change) Real growth (qoq)
Source: Haver Analytics.
Contributions to QoQ Real Growth (SA)(In percent)
2
Driven by a supportive external environment
95
100
105
110
115
120
Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17
United States Japan
Euro Area Emerging economies
World Exports(Jan.2013=100; SA; Volumes)
Source: CPB World Trade Monitor.
Oct-1785
90
95
100
105
110
115
120
125
130
Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17
Real Exports by Destination(Jan. 2013=100; SA)
To World To USA
to Euro Area To Asia
Source: Haver Analytics.
Nov-17
3
…and fiscal and monetary support
-0.4-0.20.00.20.40.60.81.01.21.41.6
0
100
200
300
400
500
600
1/1/
2010
6/1/
2010
11/1
/201
04/
1/20
119/
1/20
112/
1/20
127/
1/20
1212
/1/2
012
5/1/
2013
10/1
/201
33/
1/20
148/
1/20
141/
1/20
156/
1/20
1511
/1/2
015
4/1/
2016
9/1/
2016
2/1/
2017
7/1/
2017
12/1
/201
7
Monetary Base (In trillionYen)10-Year JGB Yield (RHS)
10-Year JGB and Monetary Base Expansion
Source: Haver Analytics.
QQE QQE Expansion NIRP
4
But inflation and wage growth remain stubbornly low….
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17
Inflation Indicators (YoY; in percent)
Headline w/o VAT
Core (ex. fresh food) w/o VAT
Core core (ex. fresh food and energy) w/o VAT
Sources: Haver Analytics; IMF staff estimates.
Nov-17-2
-1.5
-1
-0.5
0
0.5
1
1.5
2010Q1 2011Q3 2013Q1 2014Q3 2016Q1
Total Cash Earnings(per employee; YoY; in percent)
Sources: Haver Analytics; and IMF Staff calculations.
2017Q3
5
…public debt is high….
150
200
250
-12
-10
-8
-6
-4
-2
0
2
2005 2010 2015 2020 2025 2030
Japan: Gross Public Debt1/ and Fiscal Balance(In percent of GDP)
Sources: Cabinet Office; and staff estimates and projections.1/ Gross debt of the general government including the social security fund.Withdrawal of fiscal stimulus and consumption tax increases to 10 percent in October 2019 are assumed.
Fiscal balance (LHS) Gross debt (RHS)
6
…and macro-financial challenges persist
7
Risks to the outlook
8
Growth and inflation could surprise on the upside
Loss of confidence in macro policies Geopolitical instability Low bank profitability Fiscal sustainability
Making the Most of Current Tailwinds Through Mutually Reinforcing Strategy
9
Monetary policy needs to stay the course
-1.5-1
-0.50
0.51
1.52
2.53
3.54
1986Q1 1991Q2 1996Q3 2001Q4 2007Q1 2012Q2
Japan: Natural Rate of Interest(In percent)
Actual Natural rate of interest
Sources: Bank of Japan; Haver Analytics; and Fund staff estimates. Note: The blue line is the actual real discount rate deflated by the inflation expectations estimated from an MA(4) model, and the red line marks the mean posterior estimates of the natural rate of interest from a Bayesian time-varying parameter vector autoregression (TVP-VAR) model following Lubik and Matthes (2015).
2017Q1
10
Fiscal policy should preserve near-term growth within a credible medium-term framework.
28.733.1
33.135.2
-4
0
4
8
0
15
30
45
2005 2010 2015 2022
Structural primary improvement (RHS)Total revenueExpenditure
Projection
General Government Fiscal Balance(In percent of GDP)
Sources: WEO database; and IMF staff estimates. 11
Structural reforms are central to the strategy
4.9
26.7
39.9
0
10
20
30
40
50
0
30
60
90
120
150
19
50
19
55
19
60
19
65
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
20
55
20
60
(percent)(million)
75+ 65-74 15-64 0-14 Elderly population ratio (age 65+, RHS)
Source: Cabinet Office, White Paper on Aging
Japan's Population and its Composition
12
Some final thoughts….
13
Japan faces two major challenges:
• Achieving a durable exit from deflation • Raising productivity to counter demographic headwinds
Abenomics has improved economic conditions, but has not yet achieved its objectives.
Current favorable economic environment is an opportunity to accelerate reforms
To put the economy on a durable growth path • Coordinated demand policy and income policy to boost inflation • Structural reforms to boost productivity
…………………………………………………………………………………………………………………………………………
Elephant in the Room: the Politicization of Monetary and Fiscal Policy
Alicia Ogawa Center on Japanese Economy and Business Columbia Business School New York, New York
Can Central Banks & Career Bureaucrats continue to compensate for dysfunctional governments?
1
…………………………………………………………………………………………………………………………………………
BUSINESS With Focus On Unemployment, Yellen Led Fed Through Tough Balancing Act
Yellen Has Done a Great Job on Jobs The economy has come a long way under her management.
Yellen: Good on growth, jobs and financial stability, but not inflation
Central Banks & Social Responsibility
2
…………………………………………………………………………………………………………………………………………
Redistribution and Social Policy are no longer secondary philosophic/academic issues
● The BoJ and the US Fed may be brilliant, but monetary policy is only one tool to affect economic growth
● The failure of elected officials to react to the disequilibrium in income distribution resulting from globalization has resulted in the creation of a permanent underclass
● There has been little forward-thinking about the issue of the new “gig” economy workers in the U.S., and the rise of non-permanent workers in Japan. They hold the key to some of the mysteries of low wage growth and consumption levels.
● Disaffection and lack of trust by the population is/will be reflected in opposition to free trade (NAFTA, TPP), in growing nationalism (Brexit, Tea Party, AfD, Five Star), and growing distrust of government, firms and central banks
3
…………………………………………………………………………………………………………………………………………
Ranking of Economic Mobility (Europe and NA)
1. Finland 2. Norway 3. Australia 4. Canada 5. Germany 6. France 7. United Kingdom 8. Italy 9. Spain 10. United States
Stanford University Center on Poverty and Inequality, Feb. 2016
4
…………………………………………………………………………………………………………………………………………
Pew Research: Voter Turnout in both Japan and US is low
5
…………………………………………………………………………………………………………………………………………
I don’t trust the Japanese Government, and I REALLY don’t trust the US government!
Source: Edelman Global Trust Barometer 2018
6
…………………………………………………………………………………………………………………………………………
I don’t trust my company to “do the right thing”
Source: 2018 Edelman Trust Barometer
7
…………………………………………………………………………………………………………………………………………
US education system at the heart of many problems of economic mobility
8
…………………………………………………………………………………………………………………………………………
Japan has managed to maintain democracy of education
9
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The number of non-regular workers is rising rapidly
10
Source: Ministry of Health, Labor and Welfare, OECD.
…………………………………………………………………………………………………………………………………………
The wage gap between regular and non-regular workers is large
11
1. In June 2015, excluding overtime payments and bonuses. Source: Ministry of Health, Labor, and Welfare "Basic Survey on Wage Structure 2015".
Wage as a percentage of the average wage of regular employees1
…………………………………………………………………………………………………………………………………………
Living standards and productivity in Japan are well below leading OECD countries (Source: OECD)
12
1. Per capita GDP using 2010 prices and PPP exchange rates. Labour productivity equals GDP per hour of labour input. Source: OECD Economic Outlook: Statistics and Projections (database).
…………………………………………………………………………………………………………………………………………
Rising Rates of income Dispersion: The case of Tokyo
Source: Bloomberg
13
…………………………………………………………………………………………………………………………………………
Japan’s problem is not only income and gender inequality, but inter-generational inequality
Source: Suzuki (2014), OECD
14
Net transfers from the government as a percentage of lifetime earnings1
…………………………………………………………………………………………………………………………………………
Conclusion: Structural reform and more creative fiscal policies needed to address imbalances,
● but is the current level of political leadership up to the challenge?
15
…………………………………………………………………………………………………………………………………………
Demographic pessimism, cash hoarding, questions re:governance = undervalued Japanese business sector
16
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Productivity has diverged across Japanese firms
17
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Small firms are old, pointing to a lack of economic dynamism, as per OECD
18
…………………………………………………………………………………………………………………………………………
Firm entry and exit rates are low
19
Source: Ministry of Economy, Trade and Industry (2014), OECD.
Connecting Markets East & West
Global Markets Research
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Any authors named on this report are research
analysts unless otherwise indicated.
US Economics
February 2018
Future challenges for US monetary policy
Lewis Alexander US Chief Economist +1-212-667-9665 [email protected]
1 * Expansions spanning major wars Source: National Bureau of Economic Research (NBER) and Nomura Economics
Already a long expansion
Length of US economic expansions
■Another recession is inevitable
− The current expansion is already one of the longest in US history
■When it comes, interest rates are likely to be low
■The Fed may face many of the same problems that the BOJ has had to deal with in recent years
0 20 40 60 80 100 12018571860
1865*186918731882188718901893189518991902190719101913
1918*19201923192619291937
1945*1948
1953*19571960
1969*197319801981199020012007
2018?
Months
Cyclical Peaks
The next recession will be a challenge for the Fed
Mild recessions in 1991 and 2001 led to 5pp declines in the fed funds rate
Persistently low “neutral” rates will mean that the Fed will not have that much room next time
The Fed is already thinking about what its strategy should be
2
3 Source: Federal Reserve, Bloomberg and Nomura
The FOMC may have limited scope to lower interest rates in the next recession
FOMC funds rate target and FOMC forecasts
0
1
2
3
4
5
6
7
8
9
10
0
1
2
3
4
5
6
7
8
9
10
1985 1990 1995 2000 2005 2010 2015 2020
Percent
FOMC Forecasts
4 Source: Federal Reserve, Bloomberg and Nomura
Markets seem to agree
OIS forwards rates and the FOMC funds rate target
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fed funds target1m OIS, 3-years forward
Percent
When the next downturn comes:
The first question: How quickly should the FOMC lower rates?
Next, when (not ‘if’) they get to the lower bound, what then?
− (Odyssean) forward guidance?
− Negative rates?
− Asset purchases?
5
The Fed is already thinking about these questions
A debate over the Fed’s inflation-targeting framework has begun. Key options are:
− Raising the inflation target
− Switching to some form of price-level targeting
But this debate seems to presume that other options – negative rates and asset purchases – are not good options
6
“The problem with QE is that it works in practice, but it doesn’t work in theory.”
Ben Bernanke, January 16, 2014.
• This is a problem
7 Source: James Saft, “You must be joking, Mr. Bernanke,” Reuters, 16 January 2014 and Nomura Economics
Balance sheet and long-term interest rates
Source: Gagnon, J. (2016). Quantitative Easing: An Underappreciated Success. Peterson Institute for International Economics Policy Brief, 16; and Li, Canlin, and Min Wei. (2014) "Term structure modelling with supply factors and the Federal Reserve's Large Scale Asset Purchase programs." Finance and Economics Discussion Series 2014-07. Washington: Board of Governors of the Federal Reserve System.
■Gagnon (2016) reports results from a range of empirical studies of the impact of asset purchases on long-term interest rates
- 18 event studies
- 6 time series
- 3 structural models
■The estimates are broadly consistent and suggest that such asset purchases are effective
8
Distribution of the estimates of effects of QE bond purchases on 10yr yields
A broad range of studies suggest that central bank asset purchases were effective
0
2
4
6
8
10
12
0
2
4
6
8
10
12
0 25 50 75 100 125 150 175 200 225 250
Frequency
Yield reduction (bp)
Mean: 68Median: 54Li-Wei (2014): 57
Yield reduction (bp)
A role of the Fed assets purchases in the future
A recent paper – Kiley (2018) – argues that aggressive QE, when short-term interest rates are at their lower bound, is a good option
Kiley’s results suggest that aggressive QE generates results that are: • Better than those of a higher inflation target
• Comparable to those of “commitment strategies” like price-level targeting
Moreover, QE does not have two of the problems of “commitment” strategies
• Time inconsistency
• Communication
Kiley’s conclusions depend on the judgment that supply affects term premia
• His simulation results are based on estimates from Li and Wei (2014)
9
Source: Nomura Economics ; Kiley, Michael T. (2018). “Quantitative Easing and the “New Normal” in Monetary Policy,” Finance and Economics Discussion Series 2018-04. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2018.004.
Source: Bank of England, Bank of Japan, European Central Bank, Federal Reserve; Nomura Global Economics’ forecasts 10
Balance-sheet expansion by G4 central banks
Is the size of the Fed’s balance sheet a constraint on future asset purchases?
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
1990 1996 2002 2008 2014 2020
Bank of JapanFederal ReserveBank of EnglandEuropean Central Bank
Percent of GDP
What about Yield Curve Control?
During and directly after WWII, the Federal Reserve successfully controlled long-term interest rates, but this episode had essentially no impact on Fed thinking about monetary policy - Operation Twist was a Treasury initiative which the Fed later disowned
Standard thinking was that all the Federal Reserve had to do was control short-term interest rates and possibly use forward guidance - This reflected high neutral rates
- But also the theoretical judgment that the composition of the Fed’s assets simply did not matter
Japan’s experience with Yield Curve Control may give the Federal Reserve a reason to reassess this option
11
Source: Wallich, H. C., & Keir, P. M. (1979). “The role of operating guides in US monetary policy: a historical review.” Federal Reserve Bulletin, 65, 679; and d’Amico, S., English, W., López‐Salido, D., & Nelson, E. (2012). The Federal Reserve's Large‐scale Asset Purchase Programmes: Rationale and Effects. The Economic Journal, 122(564).
The Bank of Japan’s recent
experience is likely to be very relevant
to the challenges facing the Fed in the
next recession
12 Source: Nomura Economics
Conclusion
Appendix A-1
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7 February 2018 Financial Bureau
Japan’s Economy and Public Debt Management
534
549 550
564
460
480
500
520
540
560
580
Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ Ⅳ Ⅰ Ⅱ Ⅲ
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019(Source) (actual)Cabinet Office, Government of Japan "Quarterly Estimates of GDP", (forecast)"Fiscal 2018 Economic Outlook (Dec 2017)
(trillion yen)
(CY)
Sep. 2008
Financial Crisis Mar. 2011
The Great East Japan
Earthquake
Real GDP
Nominal GDP
Recent Economic Development and Forecast
1
(+2.5%) Forecast
GDP Growth Rate (QoQ, Annualized base) 20161Q
20162Q
20163Q
20164Q
20171Q
20172Q
20173Q
Nominal 3.8 0.4 -0.4 1.9 0.3 3.2 3.2Real 2.2 1.6 0.9 1.4 1.5 2.9 2.5
CPI
2
0.9%
0.3%
(Source) Ministry of Internal Affairs and Communications “Labour Force Survey”
Ministry of Health, Labour, and Welfare “Employment Referrals for General Workers” 3
Labor Market and Output Gap
Labor Market Output Gap
(Source) Bank of Japan
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
2001 2004 2007 2010 2013 2016
Labor input gap
Capital input gap
Output gap
(%)
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
（ratio）
Nov, 2017 1.56times
Nov, 2017 2.7％
Aug, 2009 0.42times
Jul, 2009 5.5％
Job opening-to-application ratio (rhs)
Unemployment rate (left scale)
Job opening-to-application ratio (only regular employees, rhs)
Nov, 2017 1.05times
28
30
32
34
36
38
40
98
100
102
104
106
108
110
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Seasonally adjusted wage indices（LHS） Rate of non-regular employment (RHS)
（％） （2015 average = 100）
(CY) (Source) Ministry of Health, Labour and Welfare, Ministry of Internal Affairs and Communications
(Source) Cabinet Office
Wage, Rate of Non-regular Employment and Consumption
4
Consumption
(CY, 3 month average)
Wage and Rate of Non-Regular Employment
5
*Provisional Translation by Ministry of Finance
The New Economic Policy Package (Dec. 8, 2017 Cabinet Decision)
Response to current additional fiscal demand
1.Free preschool education 2.Elimination of childcare placement waiting lists 3.Free higher education 4.Substantive free education at private high schools 5.Improvement of compensation for long-term care workers 6.Stable financial resources to realize these measures 7.Relevance to the fiscal consolidation 8.Items to be discussed continually towards next summer 9.Regulatory and institutional reforms, etc.
Human Resources Development Revolution
Productivity Revolution 1.Productivity revolution of SMEs and small-scale entrepreneurs 2.Productivity revolution through improved profitability and investment
promotion of corporations 3.Productivity revolution through societal implementation of Society 5.0 and
disruptive innovation
Food Supply Energy Economic Assistance Former Military Personnel Pensions Promotion of SMEs Miscellaneous Contingency Reserves
Tax and Stamp
Revenues 59.1
60.5%
Income Tax 19.0
19.5%
Corporation Tax 12.2
12.5%
Other Revenues
4.9 5.1%
Government Bond issues
33.7 34.5%
Consumption Tax 17.6
18.0%
Others 10.3
10.6%
General Account Total Revenues
97.7 （100.0%）
Special Deficit-
Financing Bonds 27.6
28.2% Construction
Bonds 6.1
6.2%
Social Security 33.0
33.7%
Local Allocation Tax Grants, etc.
15.5 15.9%
Public Works
6.0 6.1%
Education And Science
5.4 5.5%
National Defense
5.2 5.3%
Others 9.4
9.6%
Redemption of the National Debt
14.3 14.6%
Interest Payments
9.0 9.2%
National Debt Service
23.3 23.8%
Primary Expenses
74.4 76.2%
General Account Total Expenditures
97.7 (100.0%)
FY2018 Budget: Expenditure and Revenue
General Account Expenditure General Account Revenue
6
1.0 (1.0%) 0.9 (0.9%) 0.5 (0.5%)
0.3 (0.3%) 0.2 (0.2%) 6.2 (6.3%) 0.4 (0.4%)
(Unit : trillion yen)
General Expenditure* : 58.9(60.3%) (*Primary Expenses –Local Allocation Tax Grants, etc.)
(Note1) Figures may not add up to the totals due to rounding. (Note2) Social security related expenditures account for 56.0% of the general expenditure.
Fiscal consolidation has steadily advanced. (1) Achieved the three-year benchmarks for the general and social security expenditures set out in the
Fiscal Consolidation Plan (+¥1.6tn, +¥1.5tn for FY2016-18, respectively) ; (2) The amount of planned bond issuance has decreased in six consecutive years since the start of Abe
administration (FY2017: ¥34.4tn ⇒ FY2018: ¥33.7tn); (3) Primary balance in the general account has improved (FY2017: -¥10.8tn ⇒ FY2018: -¥10.4tn)
Implement measures to boost productivity that lead to sustained wage hikes and overcoming deflation. (1) Promote investments in facilities and human capital by local core enterprises and SMEs; (2) Implement tax reforms for increasing wages and improving productivity; (3) Support R&D through industry-government-academia cooperation; (4) Prioritize public investments in maintaining infrastructures which contribute to enhancing productivity
In view of the era of one hundred-year lifespans, transfer the social security system to a system oriented to all generations and expand investments in human capital.
(1) Expand the capacity of childcare facilities; (2) Raise wages for childcare and long-term nursery workers; (3) Make preschool education free of charge in a phased manner; (4) Increase the allowance provided through scholarships that do not need to be repaid, among others
FY2018 Budget: Highlights FY2018 budget, the budget for final year of the intensive reform period set in the Fiscal Consolidation Plan, continues to pursue both economic revitalization and fiscal consolidation.
Fiscal Consolidation
7
Human Resource Development Revolution
Productivity Revolution
(Note1) FY1975 - FY2016: Settled Figures; FY2017: Based on Supplementary Budget, FY2018: Based on Draft Budget (Note2) Following various bonds are excluded: Ad-hoc Special Deficit-Financing Bonds issued in FY1990 as a source of funds to support peace and reconstruction activities in the Persian Gulf Region, Tax reduction-related Special Deficit-Financing Bonds issued in FY1994 - FY1996 to make up for decline in tax revenue due to a series of income tax cuts preceding consumption tax hike from 3% to 5%, Reconstruction Bonds issued in FY2011 as a source of funds to implement measures for the Reconstruction from the Great East Japan Earthquake, Pension-related Special Deficit-Financing Bonds issued in FY2012 and FY2013 as a source of funds to achieve the targeted national contribution to one-half of basic pension. (Note3) General Account Primary Balance is calculated by subtracting Primary Expenditure from the sum of Tax Revenue and Other Revenue : It is different from the Central Government Primary Balance on SNA basis.
Tax Revenue, Expenditure and Bond Issues in General Account
8
2.1 3.5 4.5 4.3 6.3 7.2 5.9 7.0 6.7 6.4 6.0 5.0 2.5 1.0 0.2 0.8 2.0
9.2 8.5
16.9
24.3 21.9 20.9 25.8
28.7 26.8 23.5 21.1 19.3
26.2
36.9 34.7 34.4 36.0 33.8 31.9 28.4 29.1 28.3 27.6
3.2 3.7
5.0 6.3 7.1 7.0 7.0 7.0 6.8 6.4 6.3 6.2
6.9 6.2 6.4 6.3 6.7
9.5 16.2 12.3
16.4
10.7 9.9
17.0
13.2
11.1 9.1
9.1 6.7 8.7
7.8 6.4
6.0
7.0
15.0
7.6 8.4 11.4
7.0 6.6
6.5 8.9
7.3 6.1
13.8 15.7
17.3
21.9 23.7
26.9 29.0
30.5 32.4
34.9 38.2
41.9
46.8
50.8
54.9
60.1 59.8
54.4 54.1 51.0 51.9 52.1
53.9
49.4 47.2
50.7 47.9
43.8 43.3 45.6
49.1 49.1 51.0
44.3
38.7 41.5 42.8
43.9
47.0
54.0 56.3 55.5
57.7 59.1
20.9 24.5
29.1
34.1
38.8
43.4 46.9 47.2
50.6 51.5 53.0 53.6
57.7 61.5
65.9 69.3 70.5 70.5
75.1 73.6 75.9
78.8 78.5
84.4
89.0 89.3
84.8 83.7 82.4 84.9 85.5
81.4 81.8
84.7
101.0
95.3
100.7 97.1
100.2 98.8 98.2 97.5 99.1 97.7
5.3 7.2
9.6 10.7 13.5 14.2 12.9 14.0 13.5 12.8 12.3 11.3
9.4 7.2 6.6 6.3 6.7
9.5
16.2 13.2
18.4 19.9
18.5
34.0
37.5
33.0 30.0
35.0 35.3 35.5
31.3
27.5 25.4
33.2
52.0
42.3 42.8
47.5
40.9 38.5
34.9 38.0
35.6 33.7
0
20
40
60
80
100
120
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
(tn yen)
(FY)
Total Expenditure
Tax revenue
Special Deficit-Financing Bond Issues
Construction Bond Issues
2 5 10 15 21 28 33 40 47 53 59 64 65 65 64 65 64 63 61 64 67 77 83
108 134
158 176
199
231 258
280 288 305
321
356
390 411
445
477
506
534 555
588 604
13 17 22 28 35
42 49
56 63
69 75 81 87 91 97 102 108 116
131 142
158 168
175
187
197
209 216
222
226
241
247 243 237 225
238
246 248
250
258
260
266 268
269 273
11
10
9
8
6
7
6
0 1 2 2 2 3 4 6 8 10 15 22 32 43 56
71 82
96 110
122 134 145 152 157 161 166 172 178
193 207
225 245
258
295
332
368 392
421
457
499
527 532 541 546
594
636
670
705
744
774
805 831
864 883
0
50
100
150
200
250
300
350
400
450
500
550
600
650
700
750
800
850
900
950
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
(trillion yen)
(FY)
Equivalent to 15 years of General Account Tax Revenue (Tax Revenue in FY2018 General Account Budget: ¥59 trillion)
FY2018 Government Bonds Outstanding ¥883 trillion (projected)
↓ ¥7.00 million per person
¥27.98 million per family of 4
cf. Average disposable income of a working family 1/
¥5.14 million
1/ Disposable income is based on the "FY2015 Survey of Household Economy" by the Ministry of Internal Affairs and Communications.
Reconstruction Bonds
Construction Bonds
Special Deficit-Financing Bonds
9
Accumulated Government Bonds Outstanding
(Note1) FY1975 - FY2016: Settled Figures; FY2017: Estimated Figures, FY2018: Based on Draft Budget (Note2) Special Deficit-Financing Bonds Outstanding includes refunding bonds for long-term debts transferred from JNR Settlement Corporation, the National Forest Service, etc., Ad-hoc Special Deficit-Financing Bonds, Tax reduciton-related Special Deficit-Financing Bonds and Pension-related Special Deficit-Financing Bonds. (Note3) Government Bonds Outstanding includes Reconstruction Bonds issued (FY2011: in General Account, after FY2012: in Special Account for Reconstruction from the Great East Japan Earthquake) as a source of funds to implement the measures for the reconstruction from the Great East Japan Earthquake in FY2011- FY2016 (FY2011: 10.7 trillion yen, FY2012: 10.3 trillion yen, FY2013: 9.0 trillion yen, FY2014: 8.3 trillion yen, FY2015: 5.9 trillion yen, FY2016: 6.7 trillion yen, FY2017: 6.4 trillion yen, FY2018: 5.8 trillion yen) (Note4) The estimate of FY2018 excluding front-loading issuance of refunding bonds is approximately 828 trillion yen.
10
Households Financial Assets and Aging Population
Trends of the General Government Debt and Households Financial Assets Aging Population
（Sources） Bank of Japan, Cabinet Office
-0.4
0.0
0.4
0.8
1.2
1.6
2.0
2.4
(％)
20year
30year
40year
5year
2year
10year
2013/1/22
Joint Statement
2013/4/4
QQE
2014/10/31
QQE2
2016/1/29
QQE with Negative
Interest Rate
2016/9/21
QQE with YCC
2016/7/29
Announcement of conducting
"Comprehensive Assessment"
at the next MPM
JGB Yields
11 (Source) Japan Bond Trading Co.
General
Governmen
t
(ex Public
Pensions)
3.5
0.3%
Fiscal Loan
Fund
0.0
0.0% BOJ
445.1
40.9%
Banks,etc.
213.8
19.7%
Life and
Non-life
Insurance,e
tc.
204.5
18.8%
Public
Pensions
46.3
4.3%
Pension
Funds
30.3
2.8% Foreigners
119.7
11.0%
Households
12.2
1.1%
Others
11.7
1.1%
Breakdown by JGB and T-Bill holders (Mar.2013 → Sep.2017(Preliminary Figures)
（The end of Mar.2013） （The end of Sep.2017(Preliminary Figures))
（Unit: trillion yen）
Increased Decreased - Bank of Japan ＋317.2 trillion yen - Banks, etc. -196.5 trillion yen - Foreigners ＋ 37.7 trillion yen - Public Pensions - 22.2 trillion yen
（Unit: trillion yen）
Source: Bank of Japan “Flow of Funds Accounts (Preliminary Figures)” Note1 : “JGB” includes “FILP Bonds.” Note2 : “Banks, etc” includes “Japan Post Bank” , “Securities investment trust” and “Securities companies.” Note3 : “Life and Nonlife insurance , etc” includes “Japan Post Insurance.”
Total 1,087.1 trillion yen
General Governmen
t (ex Public Pensions)
17.5 1.8%
Fiscal Loan Fund 4.4 0.5% BOJ
127.9 13.1%
Banks,etc. 410.3 42.1%
Life and Non-life
Insurance,etc.
193.1 19.8%
Public Pensions
68.6 7.0%
Pension Funds 32.3 3.3%
Foreigners 81.9 8.4%
Households 22.9 2.3%
Others 16.1 1.6%
Total 974.8 trillion yen
12
13
JGB Issuance from the View Point of Mid- and Long-Term Market Demand
The MOF issues JGBs • Under the basic objectives of the debt management policy -Implement secure and smooth issuance of JGBs -Minimize medium to long term financing costs • Based on market demands • Through the dialogue with the market participants
Excessive response to temporary demands
More stable and predictable issuance of JGBs from the view point of mid- and long-term market demands
• Predictability of the market participants ↓
Funding cost • Distortions in the market
14
Highlights of FY2018 JGB Issuance Plan
〈Breakdown by Financing Methods〉 〈Breakdown by Legal Grounds〉 〈Market Issuance Plan by JGB types〉
＝
（trillion yen） （trillion yen） （trillion yen）
※ Non-Price Competitive Auction Ⅱ is an additional issuance for the JGB Market Special Participants after the normal auction. Additional revenue from issuance at a price above par value is also included.
Changes from
FY2017(initial)
40-Year 2.4 -0.630-Year 8.4 -1.220-Year 12.0 -10-Year 26.4 -1.25-Year 24.0 -2.42-Year 25.2 -1.2
TBs(1-year) 21.6 -2.210-Year
Inflation-Indexed1.6 -
Liquidity EnhancementAuction
12.6 1.8
Total 134.2 -7.0
FY2018Changes from
FY2017(initial)
144.1 -3.9
3.3 0.3
2.5 -0.5
149.9 -4.1Total
-7.0
Non-Price Competitive
Auction Ⅱ and others※ 9.9 3.1
Sales for Households
134.2
BOJ rollover
JGB market issuance
Market issuance bynormal auctions
FY2018Changes from
FY2017(initial)
Newly-issued bonds
(Construction Bonds and
Special Deficit-Financing
Bonds)
Reconstruction Bonds 1.0 -0.6
FILP Bonds 12.0 -
Refunding Bonds 103.2 -2.8
Total 149.9 -4.1
FY2018
33.7 -0.7
- Market issuance amount by normal auctions : 134.2 trillion yen (reduced by 7.0 trillion yen in total, in addition to above reduction) - Issuance amounts by maturity types are to be reduced in well-balanced manners,
including 30-Year and 40-Year bonds, which had increased in recent years.
- Liquidity Enhancement Auction (additional issuance of off-the-run JGBs based on market demand) is increased to 12.6 trillion yen, the largest amount since this auction introduced in FY2006.
BOJ’s Monetary Policy
Kazushige Kamiyama
The Bank of Japan
Japan's Economy
2
Potential Growth Rates
3
Short-Term Policy Interest Rates
4
Transition of BOJ's Monetary Policy
5 Source: Hiroshi Nakaso, “Evolving Monetary Policy: The Bank of Japan's Experience - Speech at the Central Banking Seminar Hosted by the Federal Reserve Bank of New York.”
Central Bank Assets
6
Source: Bloomberg.
Japan's Yield Curve 10-year Government Bond Yields in Selected Advanced Economies
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18
United States
Germany
Japan
%
Introduction of "QQE with a Negative Interest Rate"
Introduction of "QQE with Yield CurveControl"
Yield Curve
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
0 1 2 3 4 5 6 7 8 9 10 15 20 30 40
February 1, 2018end-September 2017end-September 2016July 27, 2016 (the bottom of 10-year JGB yields)
%
year residual maturity
7
QQE with Yield Curve Control
8
Natural Rate of Interest and Real Interest Rate
9
Japan's economy
10
Consumer Prices
11
Inflation Expectations
12
13
As for the conduct of monetary policy, the Bank will continue with "Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. The Bank will make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target.
BOJ’s Monetary Policy Stance
・・・
Source: The Bank of Japan, Outlook for Economic Activity and Prices (January 2018).
1
Japan Securities Summit February 7, 2018
Judy Marlinski President, Fidelity Institutional Asset Management®
Corporate Governance in Japan and Fidelity International’s Approach to Engagement
2
Increased focus on corporate governance & capital efficiency in Japan Prime Minister Shinzo Abe, the ministries, the stock exchanges as well as shareholders are pushing hard for positive
change in corporate governance and improving capital efficiency in Japan, leading to higher shareholder returns
Positive momentum in these reforms is tangible
What has changed? The Government Pension Investment Fund’s (GPIF)
focus on ESG integration and stewardship by external asset managers
– GPIF’s size and focus on ESG integration from external managers is having a material impact on investor stewardship and engagement with ESG
Stewardship Code (February 2014)
– improve and foster investee companies' corporate value and sustainable growth through constructive engagement
Corporate Governance Code (June 2015)
– primary purpose is to stimulate healthy corporate entrepreneurship, support sustainable corporate growth and increase corporate value over the mid to long-term
Impact of reforms More dividends and buybacks
– More than 80% increase in dividends and buybacks from 2012 to 2017
Unwinding cross-shareholdings
– mega-banks alone are on track to meet targets to unwind US$28bn of “strategic” shareholdings in 2018-21
Increasing investor engagement
– Japanese Stewardship Code had 214 signatories at end-2016
Improving board structure and performance linked compensation
– 80% of companies with at least two independent external directors in 2016 vs 22% in 2014
– 2X more companies with equity-linked compensation for CEOs in 2015-16
Source: Fidelity International. Data as of 31 March 2017..
3
Stewardship Code (responsibility of investors)
Encourage companies to achieve sustainable growth, with the aim to deliver growth in medium and long-term returns to beneficiaries Institutional investors commit to clear policies, disclosure of conflict of
interests, drive engagement with companies, disclosure of voting etc. Enacted in February 2014, revised in May 2017 214 signatories (institutional investors) as of end 2016
Corporate Governance Code (responsibility of companies)
Aims to achieve “proactive governance” by encouraging companies to make speedy and bold decisions which are transparent and fair, including the accountability to various stakeholders Disclosure of cross-shareholdings policy, appropriate disclosure of
financial and non-financial information, roles & responsibilities of board of directors, appointment of independent external board director, constructive dialogue with shareholders, development and disclosure of management strategy and business plans Applicable for listed companies since June 2015
New codes introduced to encourage change
3
Source: Fidelity International. Data as of 31 December 2017..
4
Growing profits, rising cash holdings and increasing shareholder returns
Source: company data, compiled by Fidelity. As of 31 July 2017.
Shareholder returns (TSE1 companies, consolidated base, Ytrn)
Net profits and cash holdings at Japanese companies (TSE1 companies, Ytrn)
05
1015202530354045
FY07 08 09 10 11 12 13 14 15 16 17E
18E
Net Income
0
20
40
60
80
100
120
FY07 08 09 10 11 12 13 14 15 16
Cash holdings
0
5
10
15
20
05 06 07 08 09 10 11 12 13 14 15 16 17E 18E
3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13 3/14 3/15 3/16 3/17 3/18E 3/19E
Buyback (Y tn) Dividends (Y tn)
5
5.7 6.6
5.6 4.8 5.5 5.7 6.1
7.2 8.3 9.0
3.6
4.2
3.4
0.6
1.1 1.5 1.2
1.6
3.0
4.2
0
2
4
6
8
10
12
14
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
（Ytn）
（FY） 配当総額 自己株式取得額
※TOPIX companies with 10 year data Source：The Life Insurance Association of Japan Data：as of March 21, 2017
Corporate Governance Code boost shareholder returns Dividend payout and share buybacks
Total return ratio & dividend payout ratio Shareholder returns
29% 29% 33% 34% 38% 39% 30% 31% 30% 27% 27% 30%
72%
82% 87% 88%
99%
118%
44%
57% 49%
35% 42%
51%
0%
50%
100%
150%
2010年度 2011年度 2012年度 2013年度 2014年度 2015年度
JP
※Total return ratio：Japan – TOPIX companies （includes loss making companies）, US - S&P500 companies （includes loss making, CY） ※Dividend payout ratio： Japan – TOPIX companies , US - S&P500 companies （companies with 10 year data, excludes loss making companies） Source：The Life Insurance Association of Japan Data：as of March 21, 2017
Total dividends
Share buyback costs
US total return ratio
Japan total return ratio
US Dividend payout
2010 2011 2012 2013 2014 2015 (FY)
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Disclosure of ROE/shareholder return targets
0
50
100
150
200
250
300 （no. of companies）
2014年度 2016年度 10% 15% 20% 0% 5%
Comparison of companies by ROE level
Notes：Actual, excludes loss making companies etc., all listed companies Source：eol, The Life Insurance Association of Japan Data：as of May 29, 2017
Increasing number of companies setting management goals, taking action Rise in awareness
Desirable ROE level for investors 10.9％
% of companies with ROE target
% of companies publicizing shareholder return targets
Source：The Life Insurance Association of Japan Data：as of March 21, 2017
Corporate Governance Code June 2015
20%
25%
30%
35%
40%
45%
50%
55%
60%
2010 2011 2012 2013 2014 2015 2016（FY） (FY)
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Companies Investors
FY 2014 survey
FY 2015 survey
FY 2016 survey
FY 2014 survey
CY 2015 survey
CY 2016 survey
Sales, sales growth 63.6% 58.5% 60.8% 20.9% 14.3% 16.1%
Profit, profit growth 69.6% 66.5% 64.3% 38.4% 27.4% 31.2%
ROE 39.7% 52.3% 56.9% 93.0% 79.8% 78.5%
ROA 16.1% 16.8% 17.0% 26.7% 32.1% 32.3%
ROIC 3.1% 3.5% 4.1% 29.1% 34.5% 39.8%
FCF 7.8% 8.3% 8.9% 25.6% 35.7% 29.0%
Dividend payout ratio 24.9% 29.5% 34.9% 54.7% 40.5% 40.9%
Total return ratio 3.9% 9.0% 7.8% 43.0% 48.8% 39.8%
Efforts made by companies to improve capital efficiency vs investor expectation
Source：The Life Insurance Association of Japan Data：as of March 21, 2017
While companies are making progress, a gap still exists between investors Companies vs. Investors
What companies disclose as medium-term management plan goals vs what investors consider important
Source：The Life Insurance Association of Japan Data：as of March 21, 2017
FY 2016 survey Companies Investors
Growth in business scale, market share 43.7% 6.5%
Cost reduction 57.9% 4.3%
Competitive products and services 56.5% 51.6%
Emphasis on profitability in investments 32.2% 41.9%
Select and focus （align business with management vision）
32.9% 73.1%
Use of profitability and efficiency KPIs (as management KPIs)
26.9% 48.4%
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１．Engagement counterparts Corporate executives（representative executive officers, executive officers), management
supervisors（board of directors, external directors), first point of contact is Investor Relations
Top management are able to share visions for the longer term (beyond disclosed medium-term plans) and strategic challenges
２．Important Engagement consideration Have a shared agenda and two way dialogue with investee company
３．Steps of Engagement
How Fidelity engages with potential investee companies
What is ‘Engagement’?
Share agenda Solution Share examples
Confirm outcome, monitor
progress
Confirm if the company has legitimate reason for the investor’s concern
Propose/explain the investor’s solution and expected effect, request the company to consider
• Share case studies and common solutions
• Respond to further questions • Company responsible for review and decision making
• Company conclusion can only be confirmed when publicized
• Monitor progress through publicized KPIs and actions
Source: Fidelity International. Data as of 31 December 2017..
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• This material is prepared by FIL Investments (Japan) Limited (hereafter totally called “FIJ”) based on reliable data, but FIJ is not held liable for its accuracy or completeness.
• Information in this material is good for the date and time of preparation, and is subject to change without prior notice depending on the market environments and other conditions. Also it does not guarantee nor imply future trend, value or performance etc.
• Individual stocks and company names included in this material are for reference purpose only, and are not intended to recommend their trade.
• All rights concerning this material except quotations are held by FIJ, and should by no means be used or copied partially or wholly for any purpose without permission.
• This material aims at providing information for your reference only, but does not aim to recommend or solicit funds /securities.
Important information
Optimizing the Investment Chain: How environmental, social, and governance investment could change Japan’s market and economy Japan Securities Summit 7 February 2018 Naoko Nemoto Financial Economist Asian Development Bank Institute
1. Role of environmental, social, and governance (ESG) investment in Japan’s economy
2. Development of corporate governance in Japan
Outline
2
ESG scores of Japanese corporations—low in developed markets but with great potential
3
Source: MSCI, Average score of corporations comprising All Country World Index. December 2017
0
1
2
3
4
5
6
7
8
CHN IND KOR TWN USA JPN CAN AUS GBR FRA
Average of ESG Score
0
0.5
1
1.5
2
2.5
3
3.5
4
Comparison of ESG Evaluation
Jun-17 Jun-16
Source: FTSE, Average score of corporations comprising FTSE Developed Index
As a universal asset owner with a long-term investment horizon, GPIF believes negative externalities (e.g., environmental and social issues) must be minimized ESG indices solicited by GPIF
Government Pension Investment Fund (GPIF) to deal with ESG issues in investment activities
4
Themes Index Broad ESG Index
Environment
Society MSCI Japan Empowering Women Index
Governance
FTSE Blossom Japan Index
MSCI Japan ESG Select Leaders Index
ESG investment expected to optimize investment chain, contribute to Japan’s growth strategy
5
Corporate
Improvement of Corporate Value
Boost Japan’s Potential Growth
Investors
Asset Management Co.
• GPIF • Pension fund • Insurance • Foreign Investors • Individuals
Stewardship Code
Corporate Governance
Code
High Returns
ESG—Good fit with Japan’s corporate culture
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Omi merchants—the forerunners of Japan’s large corporations in Edo era—were guided by sanpo yoshi or “benefits for all three sides”: customer, society, and vendor. Various corporations have adopted sustainability initiatives and reshaped their strategies.
Japan’s corporations lagging in return on equity Corporate governance reform to enhance board effectiveness and change management
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0
10
20
30
40
50
60
70
80
90
100
Portion of listed firms with more than 2 independent directors
2010 2011 2012 2013 2014 2015 2016 2017
0
2
4
6
8
10
12
14
16
18
2012 2013 2014 2015 2016
Comparison of ROE
Japan US UK Germany
% %
Source: S&P Capital IQ data Source: TSE
Corporate Governance Code June 2015
Naoko Nemoto [email protected] Asian Development Bank Institute (ADBI) Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008 Japan Tel: +81-(0)3-3593-5552 http://www.adbi.org
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