jpy (cimb) - 24 jan 2013

8/13/2019 Jpy (Cimb) - 24 Jan 2013

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January 23, 2013

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.Designed by Eight, Powered by EFA

ASIA PACIFICMACRO PULSE

Smashing the yenThe yen's day of reckoning looks likely to be a long and drawn-outaffair. The JPY/USD plummeted to a two-and-a-half-year low of 90.1,amid persistent hopes of more monetary easing measures to enddeflation and curb the yen’s appreciation. How will Asian peers copewith the impact of a weak yen on trade, investment and capital flows?Given that Japan is a major trade and investment partner of Southeast

Asian countries, we hope the rapid depreciation of the yen will not setoff competitive currency devaluation across Asia.

A weaker yen has arrived...The yen has been on a relentless downward trend since 4Q12, havingdepreciated 6.7% between Sep and Dec last year as the economy slipped into arecession on the back of external headwinds and diminishing post-tsunamireconstruction effects. The JPY/USD plummeted to a 30-month low of 90.1 inearly-Jan as newly-elected Prime Minister Shinzo Abe vowed to resuscitate theeconomy through more monetary easing and strong fiscal expansion. Theintention is to arrest the deflationary cycle via the weakening of the yen.

... but how long will it stay?

Can a self-inflicted weak yen revive the economy and end deflation? The lasttime the market saw the yen weakening on a sustained basis was in 1995-97. We think the foreign exchange market can absorb a gradual decline in the yen, but not an abrupt transition from strength to weakness, in particular a sharp20-30% devaluation, as this will bring about a big shock to Japan's neighbours.One should recall that the yen's devaluation in 1996 and collapse in 1998 hadan amplified impact on Asian economies, especially China and Korea.

How will Asian peers cope with a weaker yen? A sharply weaker yen will hurt Southeast Asian economies as Japan remains amajor trade and investment partner. The region will bear the brunt of theadjustment if the yen's collapse causes financial uncertainty. While a weak yen will definitely lead to lower imported cost of equipment for Asia, it will also

result in Japan buying less from Asia. Japan's outward investment may slow. We think competitive currency devaluation in the region is unlikely, unlessChina, which plays a dominant role in intraregional trade, counters the yen'scontinuous depreciation.

Figure 1: Performance of regional currencies against the USD and JPY between Sep2012 and mid-Jan 2013

20.9

18.9

16.8

11.9

19.117.4

23.4

19.1 18.8

-13.0

5.23.4

1.6

-2.6

3.62.1

7.3

3.6 3.4

-15

-10

-5

0

5

10

15

20

25

30

JPY THB TWD SGD IDR MYR RMB KRW PESO IDR

%

vs. USD vs. JPY SOURCES: BLOOMBERG, CIMB RESEARCH

CIMB Analysts

Lee Heng Guie T (60) 3 20849667E [email protected]

Julia Goh T (60) 3 20849698E [email protected]

“ Before our governmentcame to power, the level ofthe yen was clearly out ofline wi th Japan’s nationalcondition. Now, themarket is automatically

correcting to a moreappropriate level.”

─ Akira Amari,

Japan’s Economy Minister

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MACRO PULSEJanuary 23, 2013

2

Weaker yen is here to stay

The yen has been on a sharp downtrend over the past three months, fallingfrom the average JPY/USD of 78.14 in Sep to 83.79 in Dec 2012, whichrepresents a depreciation of 6.7%. It slipped further to a 30-month low of 90.1in mid-Jan 2013 amid market speculation that the new government under PM

Abe would pressure both the Ministry of Finance (MOF) and Bank of Japan(BOJ) to step up monetary stimulus to weaken the yen and end the deflation.

The BOJ has weakened the yen by expanding its balance sheet to ¥101tr in 2012.The effectiveness of this move has been limited so far. Thus, the BOJannounced in a joint statement with the government more easing measures on22 Jan, introducing (1) a “price stability target” whereby the inflation target isdoubled to 2%, and (2) the “open-ended asset purchasing method” which is topurchase assets without setting any termination date under the asset purchaseprogram. Following the introduction of this method in 2014, the amount ofmonthly purchases is specified at about ¥13tr, ¥2tr of which is JGBs. Thus, thetotal size of the asset purchase program will be increased by about ¥10tr in2014 and is expected to be maintained thereafter.

This time around, the new government's strong determination to fix the fragileeconomy and arrest deflation could mean more monetary easing down the road. Will the yen bears force out the bulls?

Yen economy dichotomy

Technically, a weak economy means a weak currency, ceteris paribus. Butalthough Japan’s economy has wallowed in anaemic growth for a sustainedperiod, the yen has remained strong, defying economic logic. This is becauseJapanese businesses, households and investors believe in a strong yen and,hence, the supply of cheap yen has stayed in the country, slowing down money velocity. In short, belief in a strong yen has become a cult and market bears willeventually be weeded out. A sustained trade surplus can also provide a bufferagainst a sharp fall in the yen.

Since the onset of the global financial crisis, the yen has gained 14.1% againstthe US dollar in 2008, 10.3% in 2009, 6.8% in 2010 and 10% in 2011, beforesuccumbing to a depreciation of 0.2% in 2012. During this period, the Japaneseeconomy has been far from spectacular, contracting 0.2% p.a. in 2008-2012.The yen has remained strong because: 1) Japan's trade and current accountsurpluses act as supporting factors, and 2) it is a safe-haven currency asinvestors seek refuge in yen-denominated assets following the actions of the USFederal Reserve (Fed) and European Central Bank (ECB) to cheapen theircurrencies as well as concerns about the survival of the euro amid eurozonedebt turmoil.

Figure 2: Performance of the yen against the USD

60

65

70

75

80

85

90

95

Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13

JPY/USD (end of day)

¥/US$

-13.0% betweenend-Sep 2012 and

mid-Jan 2013

Sep 2012: BOJ asset purchase program expanded by ¥10tr; ECB introduces unlimited bond-buy ing prog ram; Fed

announces open-ended QE3 to buy US$40bn mortgage-backed securities per month

Oct 2012: BOJ asset purchase program enlarged b y ¥11tr Dec 2012: BOJ asset purchase program expanded by

¥10tr; Fed increases size of ass et purchases under QE3Jan 2013: BOJ adopts 2% inflation target and announces

an open-ended asset-purchase programme

Feb 2012: BOJ asset purchase programincreased by ¥10tr

Apr 2012: BOJ asset purchase programenlarged by ¥5tr

SOURCES: BLOOMBERG, NEWS SOURCES, CIMB RESEARCH

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Figure 5: Cross rates of regional currencies vs. the yen

0

20

40

60

80

100

120

0

10

20

30

40

50

60

70

80

90

100

Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Nov-12

JPY/MYR JPY/THB JPY/IDR (RHS) JPY/Peso JPY/SGD

Index (Jan 97 = 100) Index (Jan 97 = 100)

SOURCES: BLOOMBERG, CIMB RESEARCH

As Japan remains a major trade and investment partner, a sharply weaker yen will hurt Southeast Asian economies in terms of trade and investment flows. While a weak yen will definitely lead to lower imported cost of equipment for Asia, it will also result in Japan buying less from Asia. Japan's outwardinvestment to Asia may slow as companies have to incur higher capital cost.

Japan is Asia's third-largest trading partner, after the United States andChina/HK, with total external trade with Asia growing 6.4% p.a. in 2007-2012.The Japanese market makes up between 2.2% and 16.1% of individual Asianeconomies' export share while Asia's imports from Japan are between 2.5% and22.9% of total individual economies' imports. Japan has consistently incurred

trade deficits with most Asian economies since 2002. The exception isIndonesia and Malaysia.

Figure 6: Asian economies' export share to Japan (2012) Figure 7: Asian economies' import share from Japan (2012)

7.4

7.1

6.3

11.8

16.1

4.4

10.4

2.2

0 2 4 6 8 10 12 14 16 18

China

Korea

Taiwan

Malaysia

Indonesia

Singapore

Thailand

India

Export share to Japan

% of total

9.8

12.4

17.6

10.4

12.2

6.2

22.9

2.5

0 5 10 15 20 25

China

Korea

Taiwan

Malaysia

Indonesia

Singapore

Thailand

India

Import share f rom Japan

% of total

SOURCES: CEIC, CIMB RESEARCH SOURCES: CEIC, CIMB RESEARCH

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Figure 8: Asian economies' trade balance with Japan in years 2000 and 2012

91

(11,362)

(21,735)

(3,932)

9,018

(12,778)

5,095

(850)

(26,106)

(25,501)

(28,707)

5,975

6,111

(5,547)

(24,202)

(5,772)

(35,000) (30,000) (25,000) (20,000) (15,000) (10,000) (5,000) - 5,000 10,000 15,000

China

Korea

Taiwan

Malaysia

Indonesia

Singapore

Thailand

India

2000 2012

US$ m

SOURCES: CEIC, CIMB RESEARCH

Figure 9: Malaysia's FDI source countries Figure 10: Indonesia's FDI source countries

ASEAN, 21.1%

Europe, 24.3%

US, 11.6%

China, 0.9%

Japan, 16.4%

Others, 25.6%

Source country

ranking:

1. Europe, 24.3%

2. ASEAN, 21.1%3. Japan, 16.4%4. US, 11.6%

5. China, 0.9%

ASEAN, 42.8%

Europe, 19.8%

US, 10.9%

China, 0.9%

Japan, 11.1%

Others, 14.5% Source country

ranking:

1. ASEAN, 42.8%

2. Europe, 19.8%3. Japan, 11.1%4. US, 10.9%

5. China, 0.9%


Figure 11: Thailand's FDI source countries Figure 12: Korea's FDI source countries

ASEAN, 4.1%

Europe, 7.8%

US, 5.8%

China, 4.2%

Japan, 57.0%

Others, 21.2%

Source countryranking:

1. Japan, 57.0%

2. Europe, 7.8%3. US, 5.8%4. China, 4.2%5. ASEAN, 4.1%

Europe, 28.0%

US, 17.3%

Hong Kong, 4.2%

Japan, 16.7%

Others, 33.7%

Source countryranking:

1. Europe, 28.0%

2. US, 17.3%3. Japan, 16.7%4. Hong Kong, 4.2%


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Figure 13: China's FDI source countries Figure 14: India's FDI source countries

ASEAN, 6.7%

Europe, 5.3%

US, 2.4%

Hong Kong,72.4%

Japan, 6.7%

Others, 6.5% Source country

ranking:

1. Hong Kong, 72.4%

2. Japan, 6.7%

ASEAN, 6.7%3. Europe, 5.3%4. US, 2.4%

ASEAN, 15.5%

Europe, 29.5%

US, 3.7%China, 0.2%

Japan, 11.3%

Others, 39.8%

Source country

ranking:

1. Europe, 29.5%

2. ASEAN, 15.5%

3. Japan, 11.3%4. US, 3.7%5. China, 0.2%


Our sensitivity analysis suggests that the yen's depreciation will be positive forChina, Korea, Taiwan, Malaysia, Indonesia, and Thailand, given that thesecountries import heavy machinery and equipment, including transport and vehicle parts and components, from Japan. However, there could be short-termnegative implications for exports to and slower investment from Japan. Basedon feedback from our regional analysts, the most obvious beneficiary of a weak yen is the automotive sector, albeit the auto manufacturers are still moreexposed to the US dollars because most of the ASEAN supply chain contractsare transacted in that currency.

Figure 15: Key items traded with Japan

Exports % share Imports % share

China Machinery, Electrical Equipment 38.7 Machiney, Electrical Equipment 46.0

Electrical Machinery & Equipment 21.7 Electrical Machinery and Equipment 25.8

Nuclear Reactors, Machinery 17.0 Nuclear Reactors, Machinery 20.2

Korea Electric and electronic products 20.7 Machinery and Transport Equipment 35.1

Crude materials and fuels 24.8 Chemicals and Related Products 23.4

Metal goods 14.1 Manufactured Goods 21.2

Light industrial products 11.0 Miscellaneous Manufactured Articles 10.9

Taiwan Electronic Products 29.5 Electronic Products 17.5

Basic Metals and Articles 10.8 Machineries 15.6

Machineries 6.4 Basic Metals and Articles 12.4

India Mineral fuels, oils and products 45.0 Nuclear Reactors, Boilers, Machinery & Mechanical Appliances 33.0

Electrical Machinery & Equipment & Parts 12.8

Malaysia Mineral Fuels 53.6 Machinery and Transport Equipment 57.2

Machinery and Transport Equipment 21.2 Manufactured Goods 22.0

Miscellaneous Manufactured Articles 6.6 Chemicals 8.9

Indonesia Natural gas 35.7 Machinery for special industries 53.0

Crude oil 30.3 Motor vehicle 30.9

Coal 18.7 Iron & steel tubes 8.9

Thailand Electrical Machinery & Equipment 16.7 Machinery and parts 25.0

Nuclear Reactors, Machinery 14.2 Motor cars, parts & accessories 13.4

Motor cars, parts & accessories 6.7 Iron, steep & products 12.6 SOURCES: CEIC, CIMB RESEARCH

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We think competitive currency devaluation in the region is unlikely unlessChina, which plays a dominant role in intra-regional trade, counters the yen'scontinuous depreciation.

The annual exchange rate movements in the 1990s showed two distinct periodsof synchronised currency depreciation in the yen and regional currencies:during the 1998 Asian financial crisis and the 2001 global financial crisis.However, when the yen declined in 2005-07 against the US dollar, regionalcurrencies strengthened. Similarly, in 2012 when the yen fell 0.2%, regionalcurrencies recorded mixed performances.

Figure 16: Annual changes in the yen and regional currencies against the USD (%)

JPY RMB MYR IDR SGD THB PESO

1990 -4.5 -21.4 0.1 -3.9 7.7 0.4 -10.1

1991 7.3 -10.2 -1.6 -5.8 4.9 0.3 -12.0

1992 6.1 -3.5 8.0 -4.3 6.0 0.5 7.7

1993 14.2 -4.4 -1.1 -2.7 0.8 0.3 -5.8

1994 8.7 -33.1 -1.9 -3.4 5.9 0.7 2.7

1995 9.1 3.2 4.6 -3.8 7.7 0.9 2.5

1996 -14.0 0.4 -0.3 -3.6 0.5 -1.7 -1.91997 -10.1 0.2 -8.9 -15.4 -4.9 -15.3 -9.6

1998 -7.2 0.2 -29.5 -71.2 -11.3 -26.9 -28.9

1999 15.0 0.3 3.0 22.5 -1.4 8.1 4.5

2000 5.1 0.0 0.0 -6.3 -1.7 -5.6 -11.1

2001 -11.2 0.0 0.0 -18.3 -3.8 -9.9 -13.8

2002 -2.9 0.0 0.0 9.8 0.1 3.4 -1.2

2003 8.0 0.0 0.0 8.4 2.7 3.6 -4.8

2004 7.1 0.0 0.0 -3.9 3.1 3.1 -3.3

2005 -1.7 1.0 0.3 -8.0 1.6 0.1 1.8

2006 -5.5 2.8 3.3 5.8 4.8 6.3 7.4

2007 -1.1 4.8 6.7 0.3 5.4 17.7 11.4

2008 14.1 9.5 3.3 -5.1 6.5 -2.2 4.0

2009 10.3 1.7 -5.6 -6.9 -2.7 -4.1 -7.0

2010 6.8 0.9 9.5 13.9 6.7 8.3 5.6

2011 10.0 4.7 5.2 3.6 8.4 3.9 4.1

2012 -0.2 2.4 -0.9 -6.5 0.6 -1.9 2.6 Note: Pink rows denote periods when the yen weakened on a sustained basis

SOURCES: BLOOMBERG, CIMB RESEARCH

With China's dominance in intra-regional trade as well as the increasing usageof the renminbi (Rmb) as the currency for trade settlement, regional currencieshave demonstrated a strong and positive correlation with Rmb while theirrelationship with the yen has weakened and turned negative. China, as Asia'sproduction hub, also supports these empirical findings. This suggests China'sincreasing influence in the region even as Japan's dominance appears to be waning compared with the 1980s and 1990s.

Figure 17: Correlation between the yen and renminbi against regional currencies

RMB IDR INR JPY KRW MYR PESO SGD THB

RMB 0.94 0.95 -0.78 0.59 0.70 0.94 -0.66 0.68

JPY -0.78 -0.79 -0.83 -0.51 -0.52 -0.72 0.90 -0.45 SOURCES: BLOOMBERG, CIMB RESEARCH

The yen alone does not influence regional currencies as long as the market believes its weakness is unsustainable. Other pull factors, including the influx ofcapital induced by the flood of global liquidity due to an extended period ofmonetary stimulus, also play a big part, causing erratic exchange-rate

movements in regional foreign-exchange markets. This presents a challenge forregional central banks as they decide how best to manage their respectivecurrencies, which could be volatile as a result of abrupt capital reversals.

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This publication is strictly confidential and is for private circulation only to clients of CIMBS. This publication is being supplied to you strictly on the basis that it will remain confidential. Nopart of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other personin whole or in part, for any purpose without the prior written consent of CIMBS.

United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing au thorities or governmental agencies in theUnited Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority orgovernmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided toany person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale ofinvestments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory of the United Arab Emirates.

United Kingdom and Europe: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited (“CIMB UK”). CIMB UK is

authorised and regulated by the Financial Services Authority and its registered office is at 27 Knightsbridge, London, SW1X 7YB. This report is for distribution only to, and is solelydirected at, selected persons on the basis that those persons: (a) are persons that are eligible counterparties and professional clients of CIMB UK; (b) have professional experience inmatters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Order”); (c) are personsfalling within Article 49 (2) (a) to (d) (“high net worth companies, unincorporated associations etc”) of the Order; (d) are outside the United Kingdom; or (e) are persons to whom an invitationor inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with any investments to which this reportrelates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This report is directed only at relevantpersons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevantpersons and will be engaged in only with relevant persons.

Only where this report is labelled as non-independent, it does not provide an impartial or objective assessment of the subject matter and does not constitute independent "investmentresearch" under the applicable rules of the Financial Services Authority in the UK. Consequently, any such non-independent report will not have been prepared in accordance with legalrequirements designed to promote the independence of investment research and will not subject to any prohibition on dealing ahead of the dissemination of investment research.

United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S.-registered broker-dealer and a related company of CIMB ResearchPte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand) Co. Ltd, CIMB Securities Limited, and is distributed solely to persons who qualify as"U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors whose ordinary businessactivities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not a U.S.Institutional Investor or Major Institutional Investor must not rely on this communication. The delivery of this research report to any person in the United States of America is not a

recommendation to effect any transactions in the securities discussed herein, or an endorsement of any opinion expressed herein. CIMB Securities (USA) Inc, is a FINRA/SIPC memberand takes responsibility for the content of this report. For further information or to place an order in any o f the above-mentioned securities please contact a registered representative ofCIMB Securities (USA) Inc.

Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investorsas defined in the laws and regulations of such jurisdictions.

CIMB Research Pte Ltd (Co. Reg. No. 198701620M)

jpy (cimb) - 24 jan 2013

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