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Outlook for Yen (GIC, Shan ghai) Jan 11, 2010 DIAM Ec onomic Research 1 Outlook for the Yen January 11 th , 2010 Arranged for Global Interdependence Center, 2010 International Conference in Shanghai DIAM Co. Ltd Chief Economist Kozo Koide

Kozo Koide Jan 1010

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DIAM Co. Ltd January 11 th , 2010ArrangedforGlobalInterdependenceCenter, 2010 International Conference in Shanghai Chief Economist Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research 1

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Page 1: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

1

Outlook for the Yen

January 11th, 2010Arranged for Global Interdependence Center, 2010 International Conference in Shanghai

DIAM Co. LtdChief Economist

Kozo Koide

Page 2: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

2

Resent Move of YEN, A Lot of Bears of YEN YEN has been depreciating after BOJ’s action on 12/1

< $/YEN Rate (Daily) >

86878889909192939495969798

09.08

.03

09.08

.10

09.08

.17

09.08

.24

09.08

.31

09.09

.07

09.09

.14

09.09

.21

09.09

.28

09.10

.05

09.10

.12

09.10

.19

09.10

.26

09.11

.02

09.11

.09

09.11

.16

09.11

.23

09.11

.30

09.12

.07

09.12

.14

09.12

.21

09.12

.28

10.01

.04

Data:Bloomberg

$/Yen

DIAM Economic Research

11/29: Fujii after Dubai Shock:"An appropriate action should be taken against abnormalmove. But we should watch & see before current situation"

8/30: Landslinding Victory of DPJ

9/24: Fujii (Minister of Finance, at themeeting with Secretary Gaithner)"FX market is a stronghold of free economy"

8/30: Landslinding Victory of DPJ

12/1: BOJ introducednew liquidity supply

1/8: Kan (Minister of Finance, at inauguration)"Cheap yen is preferable"

Page 3: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

3

YEN Pendulum in the Last Decade YEN has been appreciated due to flight to ‘quality’.

– Financial crisis invited higher risk premium upon deficit countries’ currency.– Interest rate differentials or external imbalance. Japan : Low interest rate but

has large current surplus. Capital mobility matters.

< $/YEN Rate >

859095

100105110115120125130135

00.01

00.07

01.01

01.07

02.01

02.07

03.01

03.07

04.01

04.07

05.01

05.07

06.01

06.07

07.01

07.07

08.01

08.07

09.01

09.07

10.01

Source:BOJ

\ $/

010,00020,00030,00040,00050,00060,00070,00080,000FX Intervention by Japan(RHS)

$/Yen Rate

DIAM Economic Research

Pariba Shock

Lehman Shock

Dubai Shock

100MYen

Page 4: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

4

Real Interest Rate Differentials & $/YEN Not instant sensitivity with $/Yen exchange rate, though...

– But it has become higher in about the last 5 years.< $/Yen Rate & Real Interest Rate Differentials >

▲ 5▲ 4▲ 3▲ 2▲ 1

01234567

85.01

86.01

87.01

88.01

89.01

90.01

91.01

92.01

93.01

94.01

95.01

96.01

97.01

98.01

99.01

00.01

01.01

02.01

03.01

04.01

05.01

06.01

07.01

08.01

09.01

Data:Datastream, Ministry of Internal Affairs & Communications(JPN), Department of Labor(US)

1.9

2.0

2.1

2.2

2.3

2.4

2.5Short-term real interest rate differential (3MLibor, US -- JPN)$/Yen (Monthly Average,LHS)

DIAM Economic Research

LOG10

US

> JP

NU

S <

JPN

More Sensitive

Page 5: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

5

BOJ, Took a Step Ahead BOJ has introduced new liquidity supply on Dec. 1, ’09.

– The near-term direct effect against deflation is restricted.– But affected the expectation in the market about future policy.

【O/N Call Rate ・ Reserve Account in BOJ (Monthly Average)】

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

98.04

98.10

99.04

99.10

00.04

00.10

01.04

01.10

02.04

02.10

03.04

03.10

04.04

04.10

05.04

05.10

06.04

06.10

07.04

07.10

08.04

08.10

09.04

09.10

Source : BOJ

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80BOJ Reserve Account O/N Call Rate (right scale)

DIAM Economic Research

100M\

(Note)Shadow : Target of BOJ Reserve Account

Page 6: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

6

Instant Reaction to Unemployment Rate? Peak-out of unemployment rate is a sign for rate hike?

< US : FF Rate & Unemployment Rate >

0

1

2

3

4

5

6

7

8

9

10

11

12

84.01

85.01

86.01

87.01

88.01

89.01

90.01

91.01

92.01

93.01

94.01

95.01

96.01

97.01

98.01

99.01

00.01

01.01

02.01

03.01

04.01

05.01

06.01

07.01

08.01

09.01

%1

2

3

4

5

6

7

8

9

10

11

FF Rate (monthly Average) Unemployment Rate (3MMA, RHS)

DIAM Economic Research出所:労働省、FED

Page 7: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

7

US, Taking a Breath in Sight ? The rate hikes implied in the markets in US are not so sure.

– Possibly the demand-supply situation in US would be relaxed toward the middle of this year.

< US : Shipment (YoY) --- Inventory (YoY) >

▲ 20

▲ 15

▲ 10

▲ 5

0

5

10

15

00.01

00.07

01.01

01.07

02.01

02.07

03.01

03.07

04.01

04.07

05.01

05.07

06.01

06.07

07.01

07.07

08.01

08.07

09.01

09.07

10.01

Data : DOC, Philadelphia FED

0

10

20

30

40

50

60

70Shipment(YoY)---Inventory(YoY), 3MMAShipmentDI --- InventoryDI (6Mahead, in Philadelphia FED, RHS)

DIAM Econoimic Research

Pt

Page 8: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

8

Current A/C Surplus & $/YEN Rate Higher Yen regardless of contraction of current surplus

< Current A/C of Japan & $/YEN Rate >

1.9

2.0

2.0

2.1

2.1

2.2

2.2

2.3

2.3

2.4

87.09

88.09

89.09

90.09

91.09

92.09

93.09

94.09

95.09

96.09

97.09

98.09

99.09

00.09

01.09

02.09

03.09

04.09

05.09

06.09

07.09

08.09

09.09

10.09

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

$/YEN RateJPN:Current Account / Nominal GDP (4QTotal %, RHS,6Qleading)

Page 9: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

9

Capital Account, Large Swing of “Others” Large swing of “other investment’ is eye-catching.

– Major part of recent inflow is ‘other investment’

【 Capital Account (12mts, Total)】

▲ 500,000▲ 450,000▲ 400,000▲ 350,000▲ 300,000▲ 250,000▲ 200,000▲ 150,000▲ 100,000▲ 50,0000

50,000100,000150,000200,000250,000300,000350,000400,000

02.01

02.04

02.07

02.10

03.01

03.04

03.07

03.10

04.01

04.04

04.07

04.10

05.01

05.04

05.07

05.10

06.01

06.04

06.07

06.10

07.01

07.04

07.07

07.10

08.01

08.04

08.07

08.10

09.01

09.04

09.07

09.10

Source:MOF

100M\Portfolio Investment Financial DerivativesOther Investment FDIOther Capital Account Capital Account

DIAM Economic Research

IN

OUT

Page 10: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

10

Unwinding of YEN Carry has been Going On A lot has been flowing back through interoffice A/C

【Other Investment ex.Trade Credits (12mts. Total) 】

▲ 400,000

▲ 300,000

▲ 200,000

▲ 100,000

0

100,000

200,000

300,000

400,000

06.01

06.04

06.07

06.10

07.01

07.04

07.07

07.10

08.01

08.04

08.07

08.10

09.01

09.04

09.07

09.10

Source:BOJ

100M\

Bank's Interoffice Account(L/T) Other L/T LoansSecurities Lending Bank's Interoffice Account(S/T)Repurchase Agreement & Others OthersCurrrency & Deposit Other Assets/LiabilitiesOther Investment (ex. Trade Credits)

DIAM Economic Research

IN

OUT

Page 11: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

11

Japanese, not Taking Much Outright FX Risk Bank & pension are using more hedging operation Growing mutual fund take more FX risk

– But the majority is going to emerging &/or high interest rate zone. 【Outward Portfolio Investment (Equity & Long/Mid-term Bond)】

▲ 100,000

▲ 50,000

0

50,000

100,000

150,000

200,000

250,000

01.09

01.12

02.03

02.06

02.09

02.12

03.03

03.06

03.09

03.12

04.03

04.06

04.09

04.12

05.03

05.06

05.09

05.12

06.03

06.06

06.09

06.12

07.03

07.06

07.09

07.12

08.03

08.06

08.09

08.12

09.03

09.06

09.09

09.12

Source:MOF

100M\Life Insurance Bank(including Banking A/C of T/B)Trust Bank (Trust A/C) Mutual FundOthers Total

DIAM Economic Research

12 mts. Total

Page 12: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

12

US$/YEN, & Effective Exchange Rate YEN, not so appreciated against ‘other’ currencies.

< Yen Exchange Rate >80

90

100

110

120

130

140

150

160

00.0

1

00.0

7

01.0

1

01.0

7

02.0

1

02.0

7

03.0

1

03.0

7

04.0

1

04.0

7

05.0

1

05.0

7

06.0

1

06.0

7

07.0

1

07.0

7

08.0

1

08.0

7

09.0

1

09.0

7

10.0

1

Source: BoJ, Bloomberg

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

US$/YENAUD$/YENNominal Effective Exchange Rate (RHS)

Jan. 1999 = 100

DIAM Economic Research

Page 13: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

13

Current A/C Surplus & $/YEN Rate If we assume a time lag for 6Qs before moving rate...

< Current A/C of Japan & $/YEN Rate >

1.9

2.0

2.0

2.1

2.1

2.2

2.2

2.3

2.3

2.4

87.09

88.09

89.09

90.09

91.09

92.09

93.09

94.09

95.09

96.09

97.09

98.09

99.09

00.09

01.09

02.09

03.09

04.09

05.09

06.09

07.09

08.09

09.09

10.09

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

$/YEN RateJPN:Current Account / Nominal GDP (4QTotal %, RHS,6Qleading)

Page 14: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

14

Twin Deficits of US, & $/YEN Simultaneous deterioration cast shadow upon $ denominated assets

– If US current a/c would deteriorate with the legacy of huge fiscal spending, ...– CHINA: anchor against or catalyst for high yen?

< $/YEN Rate & Foreign Researve >

1.9

2.0

2.1

2.2

2.3

2.4

2.5

77.12

78.12

79.12

80.12

81.12

82.12

83.12

84.12

85.12

86.12

87.12

88.12

89.12

90.12

91.12

92.12

93.12

94.12

95.12

96.12

97.12

98.12

99.12

00.12

01.12

02.12

03.12

04.12

05.12

06.12

07.12

08.12

09.12

Data:Datastream, Tresuary Department (US)

LOG10

0102030405060708090100110

Simultaneous Deteriaration of US Twin Deficits$/YEN RateForeign Researve(RHS)

DIAM Economic Research

Plaza Accord ('85/9)

Louvre Accord('87/2)

Clinton's Talk Up('93/4)

911 Attack ('01/9)

Lehman Shock ('08/9)(Note):Tw in Deficits:Current Account Deficit / Nominal GDP (%) Federal Government's Deficit / Nominal GDP (%) QtQ deference after 4QMA

TYen

Page 15: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

15

Cristal Ball, with Many Colors Current level is higher than ‘fundamental’ value, but...

– 59, 70, 98, 105, 113

< PPP Rate of $/YEN >

6080

100120140160180200220240260280

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

Data:Datastream, BOJ , Ministry of Internal Affairs & Tellecommunication(J PN), DoL(US)

$/Yen

$/YEN RatePPP(CGPI & PPI final goods)PPP(CPI core)

Page 16: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

16

Bull, Pushed to the Edge of a Cliff

Page 17: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

17

Demography : Front Runner in Asia All Asian counties are doomed to face rapid aging.

– The refraction points in other Asian will not so far away.– Going down with much faster speed in some countries.

【 Asia : Productive Population Ratio 】

50

55

60

65

70

75

80

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Source: UN, National Statistic Bureau (Republic of China)

%

Japan China Korea HK Singapore Taiwan

DIAM Economic Research

Estimate from CY2010Productive Population Ratio: Age 15-64 / Total population

Page 18: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

18

Higher Female Labor Participation Labor participation rate of female has becoming higher

– Centered in late 20’s, 30’s– Higher labor participation of women → Higher opportunity cost to have

children

1. Fertility rate↑

【 Labor Perticipation Rate (Female) 】

0%

10%

20%

30%

40%

50%

60%

70%

80%

15-19 20-24 25-29 30-34 34-39 40-54 55-64 65+

08.1285.12

Source : Ministry of Internal Affairs & Communications,National Research Institution of Social Welfare DIAM Economic Research

Page 19: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

19

Still We Have Hope The neck is day-care system & spending for education

– OECD estimate the fertility rate would be risen to 2.0 provided that public support for day-care and spending for education

– Japanese women still do want babies. (Not like German)

1. Fertility rate↑

【 Potential Impact of Various Policy Reforms on Total Fertility Rates 】

1.2 1.4 1.5 1.7 1.61.3 1.2 1.1

1.5 1.31.7 1.7 1.8

1.3

1.9 1.72.0

1.5 1.4

0.2

0.20.2 0.3

0.6 0.7 0.80.5 0.7

0.3 0.4 0.31.0

0.4 0.60.4

0.9 1.1

0.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Spai

n

Ger

man

y

Swed

en

Den

mar

k

Bel

gium

Aus

tria

Italy

Cze

ch

Can

ada

Japa

n

Finl

and UK

Fran

ce

Gre

ece

Irela

nd

Net

herla

nd US

Port

ugal

Kor

ea

Source: OECD

%

Expectate Progress in Fertility Rate by Policy EnhancementCurrent Level of Birthrate

DIAM Economic Research

Page 20: Kozo Koide  Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research

20

Higher Productivity : Emission Control Japan boasts of its highest energy efficiency.

– Additional cut is unfair, impossible OR good chance for innovation» Solar energy : Highest cutting edge with low growth due to a lack of initiative» Nuclear power : 3 companies out of 4 which can build & operate advanced

generator are Japanese< Unit Energy Input by Country >

0100200300400500600700800900

1000

Japan EU US Korea China India

Source IEEJ:

J apan=100

DIAM Economic Research

as of 2007