nomura - _10_ things we didn't know - japan

8/7/2019 Nomura - _10_ Things We Didn't Know - Japan

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MGM MirageCredit Research | United States

Global Macro StrategyGlobal FX Research | EEMEA FX and Rates

Nomura International plc.

See Disclosure Appendix A1 for the Analyst Certification and Other Important Disclosures

FIXED INCOME RESEARCH 18 MARCH 2011

SPECIAL EDITION: 10Things We Didnt Know - Japan

Contributing Strategists

Anthony Morris Jim McCormick Vasant Naik Olgay Buyukkayali Laurent Bilke Swati Aggarwal Irena Sekulska+44 (0) 20 710 29215 +44 (0) 20 710 26182 +44 (0) 20 710 22813 +44 (0) 20 710 23242 +44 (0) 20 710 30022 +44 (0) 20 710 20583 +44 (0) 20 710 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

This report can be accessed electronically via: www.nomura.com/researchor on Bloomberg (NOMR)

Topic de jour: Japan building a more balanced perspective

Today the macro strategy team has commandeered the 10 Things publication to look at many of the commonmisperceptions about Japan and its current crisis. We start with a study of Japans persistent external surpluses and itsaccumulated wealth. We then look at a few broad comparisons between conditions around the 1995 Kobe earthquake andhow Japan stacks up to these comparisons today. From a businesscycle perspective, we highlight that before last weeksdevastating earthquake, Japans real wage growth had reached a multi-year high, while orders from overseas customers hadnearly returned to pre-financial-crisis peaks. We look at some stock market metrics our equity strategy team sees real valuein Japanese stocks. We also remind you of the unique structure of holdings of Japanese financial assets more than 90% ofJGBs are domestically held and foreigners flows to the Nikkei have been very light in recent years. We note that fears ofmajor asset repatriation flows are overdone in our view, a point made compellingly by our FX strategy team (seeJPY Insights- Toshin flow: Outflow to slow, but repatriation is rare& FX Insights - Yen intervention is likely to be imminent

). Finally, we

remind ourselves Japan is one of the most innovative countries on earth at least judging by patent density levels.

Nomuras Macro Strategy Team
mailto:[email protected]:[email protected]://www.nomura.com/researchhttp://www.nomura.com/research/getpub.aspx?pid=425040http://www.nomura.com/research/getpub.aspx?pid=425040http://www.nomura.com/research/getpub.aspx?pid=425040http://www.nomura.com/research/getpub.aspx?pid=425040http://www.nomura.com/research/getpub.aspx?pid=424871http://www.nomura.com/research/getpub.aspx?pid=424871http://www.nomura.com/research/getpub.aspx?pid=424871http://www.nomura.com/research/getpub.aspx?pid=425040http://www.nomura.com/research/getpub.aspx?pid=425040http://www.nomura.com/researchmailto:[email protected]:[email protected]


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Nomura | EEMEA Strategy Daily 18 March 2011

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1) Did you know thatJapan's current account surplus has averaged $125 billion per annum in recent years?Despite all the talk about its decline and malaise since 1990, Japan has continued to run current account surpluses with therest of the world. Japan has averaged USD 125 billion in annual current account surplus, without a single negative year.

Figure 1. Japan current account surplus

Source: Nomura, IMF WEO October 2010

0

50

100

150

200

250

1990 1995 2000 2005 2010

bnUSD


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2) Did you know thatJapans trade sectoris outperforming US and EU in Asia ex Japan?Japan's economic competitiveness is especially visible in its trade with the rest of Asia. While the US and EU run currentaccount deficits with this region, Japan runs a sizeable surplus. Not what you would expect from an economy supposedly indecline.

Figure 2. Current account balance with Asia ex Japan: Japan, EU, and US

Source: Nomura, Bloomberg, US Census Bureau, ECNote: EU data is only available for the first 3 quarter of 2010 (except Indonesia -first 2 quarters) which has then been annualised. National currencies have been converted to USD at average market

exchange rate

-350

-300

-250

-200

-150

-100

-50

0

50

100

150

Japan EU US

bnUSD


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3) Did you know thatJapan is still the top global creditor, for the 19th year in a row?

Many assume official FX reserves best reflect an economy's international prowess. By that standard China seems to havesurpassed Japan. But considering the private sector in addition to the public sector, Japan is still way ahead of China.

Figure 3. Foreign assets position and official reserves Japan vs China

Source: Nomura, Bloomberg, MoF Japan, SAFE- China,Note: Net foreign assets are the difference between external assets and liabilities of the country (both public and private). External assets would typically include official reserves and other assets.Dollar values are as reported by respective authorities.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Of f icial reserves Total foreign assets Net foreign assets

trillionUSD

Japan China


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4) Did you know thatJapan net public sector debt is much lower than gross public sector debt?

It is common to hear talk of Japan's "200%+ debt/GDP ratio" as if Japan will closely follow Greece and Ireland in the path toinsolvency. This belief has multiple deficiencies, but the first is that Japan's netpublic sector debt is about half of gross debt.

Figure 4. Japan gross and net government debt

Source: Nomura, IMF WEO October 2010Note:. Net government debt is defined as gross debt minus financial assets corresponding to debt instruments. These financial assets are: monetary gold and SDRs, currency and deposits, debtsecurities, loans, insurance, pension, and standardized guarantee schemes, and other accounts receivables.

0%

50%

100%

150%

200%

250%

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

%

ofGDP

Net debt Gross debt


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5) Did you know thatNet public sector debt is only about 25% of private net worth?

Another aspect of Japan's wealth is the net worth of its private sector, which we estimate at about USD 23 trillion as of end2009. Net public debt is about 25% of private net worth. Japan does not have a "debt problem", but the Japanese governmentdoes. This is a big difference.

Figure 5. Japans net government debt and private sector net worth

Source: Nomura, IMF WEO October 2010, Economic and Social Research Institute, JapanNote:. All data refers to 2009 and has been converted at the average USD JPY exchange rate for the year. Private Sector net worth refers to the net worth of households and not-for-profitinstitutions. Net government debt is defined as gross debt minus financial assets corresponding to debt instruments. These financial assets are: monetary gold and SDRs, currency and deposits,debt securities, loans, insurance, pension, and standardized guarantee schemes, and other accounts receivables.

0

5

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15

20

25

GDP Net government debt Private sector net worth

trillionUSD


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6) Did you know thatNikkei is down 73% but Japanese financial assets up 44% in JPY and 112% in USD?

Many assume that Japan's private sector must have been wiped out because the Nikkei equity index is down almost 75%since the bubble peak. The reality is far different, as private financial assets (ignoring non-financial assets) have increased44% in JPY terms and 112% in USD terms. The Japanese are not just equity investors. Cash, bonds and FX carry tradesfeature prominently in many private portfolios and have worked well.

Figure 6. NIKKEI, private financial assets and private non-financial assets JPY-Terms USD Terms

Source: Nomura, Bloomberg, Economic and Social Research Institute, JapanNote:. All data has been converted at the average USD JPY exchange rate for the year. Private Sector financial assets refers to the financial assets of households and not-for-profit institutions.

0

5000

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15000

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45000

1 98 0 1 98 4 1 98 8 1 99 2 1 99 6 2 00 0 2 00 4 2 00 8

NikkeiIndex

73%

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1 98 0 1 98 4 1 98 8 1 99 2 1 99 6 2 00 0 2 00 4 2 00 8

Pvt.

financial

assets(trillion

Yen)

44 %

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18

1 98 0 1 98 4 1 98 8 1 99 2 1 99 6 2 00 0 2 00 4 2 00 8

Pvt.

non-financialassets(trillion

USD)

112 %


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7) Did you know thatJapanese non-financial assets (e.g. property) are down 41% in JPY but down only 14% inUSD terms?

Many hear about the decline in Japan's real estate prices and assume Japan's private sector suffered. This is closer to thetruth, as non-financial assets are down 41% in JPY terms since 1989. But in USD terms, this loss is just 14%.

Figure 7. Japanese Non-Financial Assets (e.g. property) in JPY and USD

Source: Nomura, Bloomberg, Economic and Social Research Institute, JapanNote:. All data has been converted at the average USD JPY exchange rate for the year. Private Sector non financial assets refers to the non financial assets of households and not-for-profitinstitutions.

0

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1980 1984 1988 1992 1996 2000 2004 2008

Pvt.

non-

financialassets(trillio

n

Yen)

-41 %

0

2

4

6

8

10

12

14

16

18

1980 1984 1988 1992 1996 2000 2004 2008

-14 %


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8) Did you know thatJapanese households hold a majority of their wealth in financial assets?

Private net worth in Japan is relatively liquid, mainly in financial assets. Non-financial assets are only 40%

Figure 8. Japanese householdss financial and non-financial assets

Source: Nomura, Bloomberg, Economic and Social Research Institute, Japan

Note:. All data refers to 2009 and has been converted at the average USD JPY exchange rate for the year. Private Sector assets refers to the assets of households and not-for-profit institutions

Non financial assets, 40%

Financial assets , 60%


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9) Did you know thatJapanese growth looks low according to total GDP, but Japan's GDP growth per capita is inline?

It is common to use total GDP growth as a proxy for economic dynamism, leading to assumptions that the US economy is themost dynamic of the major countries. But the US has also had high population growth. We believe GDP growth per capita is abetter reflection of real growth. On this basis, the US is not as impressive and Japan is pretty much in line, slightly ahead ofSwitzerland.

Figure 9. GDP growth and per-capita GDP growth

Source: Nomura

0.0%

0.5%

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UnitedStates

Canada UnitedKingdom

Germany Swi tzerland Japan

GDPgrowth(1989-2009)

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UnitedKingdom

UnitedStates

Germany Canada Japan Switzerland

Per-capitaGDPgrowth(1989-200

9)


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10) Did you know thatJapan's ratio of tax revenue to GDP is among the lowest in the G10?

Many forget that Japan's tax revenues are relatively low as a portion of GDP, about the same as that of the US, but lower thanthe UK, Germany or Sweden. Its capacity to increase taxes eventually seems ample.

Figure 10. Japanese tax revenue as proportion of GDP

Source: Nomura, OECDNote: All figures are for 2009 except Japan and Netherlands for whome latest figures available are for 2008

0%

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Sweden Italy Belgium France Netherlands Germany UK Canada Japan US

Taxrevenue(asa%

ofG

DP)


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11) Did you know thatUSD/JPY is not a very good measure of yen valuation today?Using nominal USD/JPY levels as a comparison for 1995 is a stretch from a valuation perspective. Back then, bothUSD/JPY and the yens real effective FX rate were at extremes. Today, the yens real effective FX rate is near its long -run average and more than 30% below 1995 levels.

Figure 11. Real trade-weighted JPY vs USD/JPY

Source: Nomura, BIS, Bloomberg

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190

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'90 '92 '94 '96 '98 '00 '02 '04 '06 '08

JPY Real Eff ective Exchange Rate

20-year average real effective exchange rate

USD/JPY (rhs, inverted)

BIS real eff ective exchange rate USD/JPY, inverted


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12) Did you know thatrelative policy between the US and Japan is very different than in 1995?

In 1995, the fundamental case for a strong, co-ordinated intervention to strengthen the US dollar (rather thanweaken the yen) was compelling. US monetary policy had been tightened significantly starting in early 1994, yetUSD/JPY kept falling. Today, the policy gap is growing, but small. That said, actual cycle differentials (RHS) are atreasonably elevated levels (meaning the US cycle has been outperforming Japan lately).

Figure 12. USD/JPY vs 5y US-Japan rate differential Figure 13. USD/JPY vs US-Japan business sentiment indicators (spread)

Source: Nomura, Bloomberg Source: Nomura, Bloomberg

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USDJPY 5y US-JN rate dif ferential (rhs)

%

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USDJPY

Spread between US PMI and Japan Small Business Sentiment Indicator (rhs)

USD/JPYSpread


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13) Did you know thatJapan wage growth has recently turned positive?

Weak nominal wage growth has been a defining characteristic of deflation. An improvement in 2006 wasinterrupted by the crisis but, since the beginning of 2010, both nominal and real wage growth have turned

positive in y-o-y terms, for the first time since then.

Figure 14. Real trade-weighted JPY vs USD/JPY

Source: Nomura, Japan Cabinet Office

-6.0

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Q1 1990 Q1 1992 Q1 1994 Q1 1996 Q1 1998 Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008

Nominal Wage Growth Real Wage Growth

y-o-y


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14) Did you know thatBOJ could do much more to help end deflation?

The BOJ has not played its trump card in fighting deflation: expansion of its balance sheet (or QE). If there began to be abuyers strike in the JGB market, the BOJ would start buying JGBs in size in our view. If it expanded its balance sheetroughly in the way that the Fed has (buying treasuries financed by creating excess reserves), the BOJ could go out and buyabout 250trn of JGBs tomorrow. And the BOJ, not the Fed, is the central bank with the deflation problem, so if printingmoney were to cause inflation, that would be solving Japans biggest macro problem. If it doesnt, it is a free lunch.

Figure 15. US vs Japan GDP deflator Figure 13. US vs Japan central bank balance sheet

Source: Nomura, Japanese Cabinet Office; US Bureau of Economic Analysis; Bank of Japan;Federal Reserve; Nomura Securities

Source: Nomura, Japanese Cabinet Office; US Bureau of Economic Analysis; Bank of Japan;Federal Reserve; Nomura Securities

85.0

90.0

95.0

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Mar-06 D ec-06 Sep -07 Jun-08 Mar-09 D ec-09 Sep -10

US GDP deflator

Japan GDP deflator

Index (Q1 2006=100)

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

Fed

BOJ

QE2 Forecast

Index (Q1 2006=100)


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15) Did you know thatJapanese households have rarely repatriated Toshin holdings?

Investment trusts (Toshins) have consistently been net purchasers of foreign currency assets since April 2002, turningnet sellers in only seven of the 107 months during that period (7% of the time). In fact, outflows declined and onlybriefly turned negative after large risk-off events such as 9/11, the sub-prime shock of August 2007 and the collapse ofLehman Brothers in September 2008 (seeToshin flow: Outflow to slow, but repatriation is rare)

Figure 16. Toshin flow and major risk-off events

Source: MOF, Nomura.

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Bonds

Equities

total

(USD billion)

Asian crisis

(Jul '97)

LTCM

(Aug '98)9.11

(Sep '01)

Paribas shock

(Aug '08)

Lehman shock

(Sep '08)

Greece crisis

(May ' 10)
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16) Did you know thatless than 10% of Japanese government debt is held by foreign investors?

While the level of government debt to GDP is an important barometer of fiscal health, it is clearly an incomplete one.Here, we consider the distribution of government debt between foreign and domestic holders. On this metric, Japanhas the lowest share of external ownership (less than 10%) and appears well insulated from a run on the governmentdebt by foreign investors.

Figure 17. Share of government debt held by foreign investors

Source: The World Bank, IMF

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JPY CHF KRW CAD GBP CZK EUR SLK USD PLN BUL SPA ITA NOK GER HUF LVL EST NED FRA POR GRE BEL IRE LTL FIN AUS

% of to tal government debt held abroad


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18) Did you know that foreign investor shares in Nikkei are going up?

....but equity inflows to Japan are very small as proportion of GDP.

Figure 20. Proportion of Japan Equity Market Value held by Foreigners Figure 21. Net equity inflow to Japan as % of GDP

Source: Nomura, Bloomberg, EMED Source: Nomura, EMED

8000

13000

18000

23000

28000

33000

0

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30

1985 1988 1991 1994 1997 2000 2003 2006 2009

%% of Japan Equity Market Value (Listed) held by Foreigners

Nikkei Index (rhs)

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

1996 1998 2000 2002 2004 2006 2008 2010

Net Equity Flow to Japan Equity Market f rom Foreigners % GDP

N | EEMEA S D il 18 M h 2011


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19) Did you know thatJapan is 2nd in the world in patents adjusted for the size of the economy?

...only South Korea has a higher patent density and the gap between the next eight worldwide is significant USpatent density is of Japans. On the flip side, parts of periphery Europe Greece and Spain, for instance scoreamong the worst.

Figure 22. resident patent appilcations per $billion of GDP

Source: World Intellectual Property Organization

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Korea Japan China Germany USA Belarus Russia Armenia New

Zealand

Georgia Czech

Republic

Spain Greece Turkey Chile

2008 figures; resident patent appilcations per $billion of GDP

Top 10 Bottom 5

N | EEMEA St t D il 18 M h 2011


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20) Did you know thatsome estimate that 94% of Tokyo women in their 20s have a Louis Vuitton handbag?

... On a somewhat lighter note, Japan is the largest consumer of luxury goods on a per capita basis. We proxy thisdemand with 2010 revenue figures from LVMHs fashion and leather goods division (which includes the Louis Vuittonbrand), adjusted by population.

Figure 23. Population adjusted revenue for LVMH

Source: LVMH 2010 annual report

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Japan France US Europe ex France Asia

Population adjusted measure of luxury good consumption

%



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Disclosure Appendix A1

ANALYST CERTIFICATIONS

We, Anthony Morris, Jim McCormick, Vasant Naik, Olgay Buyukkayali, Laurent Bilke, Swati Aggarwal and Irena Sekulska, hereby certify (1) that the views expressed in this report accurately reflect mypersonal views about any or all of the subject securities or issuers referred to in this report, (2) no part of my compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,Nomura International plc or any other Nomura Group company.

Online availability of research and additional conflict-of-interest disclosures:

Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and THOMSON ONE ANALYTICS. For clients in Europe, Japan andelsewhere in Asia it is available on NOMURA.COM, REUTERS and BLOOMBERG.

Important disclosures may be accessed through the left hand side of the Nomura Disclosure web pagehttp://www.nomura.com/research or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for technical assistance.The analysts responsible for preparing this report have receivedcompensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities.

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