turbulent global equity markets amidst historical highs 1 · note: nomura’s estimation is based...
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Turbulent global equity markets amidst historical highs 1
Emerging economies under stress 2
Change in US rates market conditions 3
Global economy in a cyclical slowdown phase 4
Decelerating Japanese exports and production activity of manufacturers 5
Private consumption stagnant despite favorable income conditions 6
Inflation target still a ways off 7
Summary of 2019 global economic forecast 8
Geopolitical background of US trade protectionism 9
The era of Asian economies is approaching 10
Demographic background of the era of Asian economies 11
Is the globalization of the flow of information taking a step back? 12
The emerging era of information technology 13
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Hopes and Concerns for the Era of Asian
Economies Japan in the World
Turbulent global equity markets amidst historical
highs
Source: Nomura based on Bloomberg data
Stock price index and volatility Global equity markets in 2018 experienced
several significant adjustments along with
sudden spikes in volatility, contrasting with
relatively calm and bullish markets in 2017.
2
0
5
10
15
20
25
30
35
40
45
85
95
105
115
125
135
145
155
Ja
n-1
5
Apr-
15
Ju
l-1
5
Oct-
15
Ja
n-1
6
Apr-
16
Ju
l-1
6
Oct-
16
Ja
n-1
7
Apr-
17
Ju
l-1
7
Oct-
17
Ja
n-1
8
Apr-
18
Ju
l-1
8
Oct-
18
TOPIX (LHA)
S&P500 (LHA)
VIX(S&P500) (RHA)
m/y
The beginning of 2015=100
Emerging economies under stress
Source: Nomura based on Bloomberg data
Stock index in emerging markets and USD The change in emerging markets in 2018 was
more profound than that seen in financial
markets in developed economies.
Adjustments in equity markets as well as high
yield bond markets continued throughout the
year, and capital outflow brought about
depreciation of emerging currencies.
Appreciation of the US dollar against emerging
currencies destabilized markets further, raising
concerns about a default of the foreign currency
denominated debt of emerging economies.
3
75
80
85
90
95
100
105600
700
800
900
1000
1100
1200
1300
1400
13 14 15 16 17 18
MSCI Emerging market index (LHA)
Bloomberg USD effective index (RHA)
CY
December 31, 1987 = 100
Change in US rates market conditions
Source: Nomura based on Bloomberg data
US policy rate and 10y Treasury yield One of the major reasons behind the significant
instability of global financial markets in 2018 was
a change in US rates market conditions; long
term yields shifted upwards materially as the US
Federal Reserve continued to raise rates.
4
0
1
2
3
4
5
6
7
8
00010203040506070809101112131415161718
Fed Fund Rates Target
UST10year
%
CY
Global economy in a cyclical slowdown phase
Source: Nomura based on Markit, Ltd. and Institute Supply Management data
Manufacturing PMI in major economies Higher US rates destabilized markets due to
concerns that global economic fundamentals
may not endure higher rates.
The global economy is already in a cyclical
slowdown phase and it is becoming clear that
economic activities in major economies other
than the US are losing momentum.
Even the US economy is likely to start
decelerating as it becomes difficult for the Trump
administration to maintain various fiscal
measures such as tax cuts and infrastructure
spending under the divided Congress formed
through the mid-term elections in November
2018.
5
25
30
35
40
45
50
55
60
65
05 06 07 08 09 10 11 12 13 14 15 16 17 18
Japan
Global
China
Eurozone
US (ISM Manufacturing index)
DI
CY
Decelerating Japanese exports and production
activity of manufacturers
Source: Nomura based on METI and MOF
Industrial production and export volume in Japan Deceleration in the global economy is already
casting a shadow on the Japanese economy.
Since the beginning of 2018, Japan’s exports
have been slowing down and dampening
production activity of domestic manufacturers,
which expanded rapidly in 2016 and 2017.
6
85
90
95
100
105
110
115
120
10 11 12 13 14 15 16 17 18
Industrial production
Export volume
CY
(2015＝100)
Private consumption stagnant despite favorable
income conditions
Note: Disposable income data in Q2 2018 and thereafter are estimated from employee compensation data.
Source: Nomura, based on Cabinet Office data
Disposable income and household consumption Japanese economic growth has, along with the
aging population trend, created many jobs,
thereby improving Japanese household income
conditions.
However, wages for relatively well-paid full-time
employees under the life long employment
system have failed to accelerate, preventing
steady expansion in consumption spending by
Japanese households due to the lack of
expectations for medium- to long-term income
growth.
As a result, Japanese household consumption
has been lagging behind income growth.
7
270
275
280
285
290
295
300
305
310
315
320
95 97 99 01 03 05 07 09 11 13 15 17
Disposable income
Private consumption
Annualized Yen trn.
CY
Inflation target still a ways off
Source: Nomura based on BOJ data
BOJ’s core inflation forecasts in its Outlook Reports Underlying weakness in household consumption
demand is making it difficult for Japanese
companies to pass rising material costs and labor
costs onto prices.
In addition, slowdown in the pace of improvement
in the output gap is likely to decelerate inflation
rates in fiscal years 2019 and 2020.
As the Bank of Japan maintains a 2% inflation
goal and is committed to maintaining lower short-
and long-term interest rates “for an extended
period of time,” it has less room for adjusting and
changing its monetary policy under such price
conditions.
8
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Ja
n-1
3
Apr-
13
Ju
l-1
3
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-1
4
Oct-
14
Ja
n-1
5
Apr-
15
Ju
l-1
5
Oct-
15
Ja
n-1
6
Apr-
16
Ju
l-1
6
Oct-
16
Ja
n-1
7
Apr-
17
Ju
l-1
7
Oct-
17
Ja
n-1
8
Apr-
18
Ju
l-1
8
Oct-
18
(y-y, %)
FY12
FY13
FY14
FY15
FY16
FY17
FY18 FY19
FY20
FY20
FY19
FY18
Nomura
Forecast
in Dec.
2018
(BOJ Outlook Report release dates)
Summary of 2019 global economic forecast
Note: As of 12 December 2018
Source: Nomura global research
Summary of Nomura’s global economic forecast Nomura expects that global economic growth will
slow down, including growth in the US economy,
which has hitherto been robust.
On the other hand, peaking US rates have the
potential to stabilize asset markets such as
equities, which would likely generate a wealth
effect to a certain extent and support overall
growth in global demand.
As such, we believe that the global economy can
avoid a typical recession-like economic downturn.
9
Real GDP
CPI
y-y, %
y-y, %
2018 2019 2020 2018 2019 2020
World 3.9 3.6 3.5 3.0 2.7 2.8
Developed countries 2.2 1.9 1.5 2.0 1.5 2.0
Japan 0.7 0.8 0.3 1.0 1.0 1.2
US 2.9 2.4 1.7 2.4 1.6 2.5
Eurozone 1.9 1.5 1.4 1.8 1.5 1.5
Emerging countries 5.2 4.9 5.0 3.8 3.6 3.4
China 6.6 6.0 6.0 2.2 1.9 2.0
Geopolitical background of US trade protectionism
Source: Nomura based on US Census Bureau
Outline of US-China tariff war We should be concerned that the destabilization
of financial markets in 2018 may reflect the
negative impact arising from the Trump
administration’s protectionist trade policy.
The US has already imposed retaliatory tariffs on
more than half of its imports from China and is
threatening further retaliatory measures.
The background for such measures is the US’s
geopolitical strategy of containing China’s
ambition of becoming a military, economic, and
technological superpower.
10
50 50
60
200
0
100
200
300
400
500
600
US exports to China US imports from China
USD billion
25% retaliatory tariff
(Imposed on 23 August 2018)
10% retaliatory tariff
(Imposed on 24 Sept. 2018)
(Possibly raised to 25% on 1 March 2019)
5-10% retaliatory tariff
(Imposed on 24 Sept. 2018)
25% retaliatory tariff
(Imposed on 23 August 2018)
(Trade data are as of 2017)
The era of Asian economies is approaching
Note: Nomura’s estimation is based on GDP outlook of IMF from 2017 to 2023 and from 2024 and beyond, on an
assumption where growth rate of each region will be the same as most recent 5 years average.
Source: Nomura based on IMF data
Estimated composition of world GDP The hostile stance that the US has taken towards
China is emblematic of its position against the
rapid expansion of economic power amongst
Asian countries as whole, not just China.
By 2050, Asian countries could account for more
than half of the world GDP, assuming that each
region maintains the growth rate it achieved in
the five years through 2017.
11
0
10
20
30
40
50
60
70
80
90
100
2000 2010 2017 2020 2030 2040 2050
Other emergingcountries
Other developedcountries
EU
US
Other emergingAsian economies
India
China
Other developedAsian economies
Japan
%
CY
Nomura's estimation
Demographic background of the era of Asian
economies
Note: Estimate after 2015 onward is based on median forecast in the UN population outlook revision in 2017.
Source: Nomura based on the United Nations data
Forecasts for world population and working age population In Asia, the overall population will continue to
grow and the high share of the working age
population will be sustained, even in China,
which will likely face rapid decline and an aging
population due to its previous one-child policy.
These demographics will continue to support the
relatively strong growth of Asian economies.
12
0
10
20
30
40
50
60
0
1
2
3
4
5
6
7
8
9
10
1950 60 70 80 90 2000 10 20 30 40 50
Rest of theworld
Other asianregions
Japan
India
China
World
ASIA
Japan
Ratio of working
age population
(RHA)
Billion %
CY
Population
(LHA)
UN estimate
Is the globalization of the flow of information taking a
step back?
Note: Market capitalization share refers to each companies’ share against MSCI World market capitalization.
Source: Nomura based on Bloomberg data
Market capitalization share of giant ICT companies The problem is that the US is beginning to
challenge the rise in Asian economies through
various means such as trade protectionism.
There are particularly strong concerns that such
US initiatives will constrain and cut off the flow of
information as well as the goods trade and
capital flows. Currently, one of the major forces
driving the global economy is rapid expansion in
the profits of giant ICT companies, which utilize
information as a core business resource.
Deglobalization of information flows stemming
from escalated US protectionism could pose a
material risk to global economic growth.
13
0
2
4
6
8
10
12
15
/01
15
/04
15
/07
15
/10
16
/01
16
/04
16
/07
16
/10
17
/01
17
/04
17
/07
17
/10
18
/01
18
/04
18
/07
18
/10
Tensent (騰訊)
Alibaba (阿里巴巴)
Baidu (百度)
Apple
Amazon
Alphabet (Google)
%
yy/m
The emerging era of information technology
Source: Nomura based on Cabinet Office data
Composition of private capex in Japan Nomura believes that the globalization of the flow
of information flow is irreversible and that even
the US-China conflict cannot reverse the trend.
Accordingly, we are very likely to see an
accelerated trend in which those that control the
flow of information come out as winners in the
global economy and markets.
Japanese companies should go beyond their
previous efforts to allocate more resources to this
area.
14
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
200001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Buildings and Structures
Machinery and equipment
Intellectual PropertyProductsPrivate capital expenditure
y-y, %
CY
Source: Nomura 15
Biography
Takashi Miwa is the Chief Japan Economist of Nomura Securities Co. Ltd. He provides in-depth
analysis and forecasts of the Japanese economy, based on interregional analysis of the macro
economy and financial market analysis across various asset classes. He has a particular strength in
analysing the macro economy from legal and administrative perspectives. Since joining Nomura
Research Institute in 1990, he has engaged in macroeconomic analysis and financial market
forecasting for various regions. In 1994-96, he moved to the Fixed Income Department of Nomura
Securities and analysed the macro economy from more market-oriented perspectives while engaging
in forecasting monetary policy and interest rates. He also made feasibility studies and conducted
investment strategy planning with a view to the start of European Monetary Union in 1999.
He received his master’s degree in Law from the University of Tokyo in 2001 and his bachelor’s degree
in Liberal Arts and Science from the University of Tokyo in 1990. While in the graduate school of law,
he studied contract law, corporate law and bankruptcy law, and made an analysis of financial contracts
and corporate behaviour from the perspectives of ‘Law and Economics’. This experience proved useful
in analysing banking behaviour, administrative responses and price reactions of fixed income and other
securities during Japan’s financial turmoil through 2003 and the global financial crisis after the collapse
of Lehman Brothers in 2008.
From 2001, he provided economic analysis and investment ideas for major regional financial
institutions including regional banks in Japan and gained an extremely good reputation among the top
management of those clients. He moved to Nomura Securities in 2004. After belonging to the
Economic Research, Investment Research, and Investment Research and Investor Services
departments, he took his current position in May 2016.
He has authored several textbooks on economics and finance for beginners that are popular among
university students and young graduates starting careers in financial institutions.
Takashi Miwa Chief Japan Economist
Appendix A-1
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