Kozo Koide Jan 1010

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research 0

Outlook for the Yen

January 11th, 2010Arranged for Global Interdependence Center,

2010 International Conference in Shanghai

DIAM Co. Ltd

Chief Economist

Kozo Koide

Outlook for Yen (GIC, Shanghai) Jan 11, 2010 DIAM Economic Research1

Resent Move of YEN, A Lot of Bears of YEN

YEN has been depreciating after BOJ’s action on 12/1

< $/YEN Rate (Daily) >

86

87

88

89

90

91

92

93

94

95

96

97

98

09.0

8.0

3

09.0

8.1

0

09.0

8.1

7

09.0

8.2

4

09.0

8.3

1

09.0

9.0

7

09.0

9.1

4

09.0

9.2

1

09.0

9.2

8

09.1

0.0

5

09.1

0.1

2

09.1

0.1

9

09.1

0.2

6

09.1

1.0

2

09.1

1.0

9

09.1

1.1

6

09.1

1.2

3

09.1

1.3

0

09.1

2.0

7

09.1

2.1

4

09.1

2.2

1

09.1

2.2

8

10.0

1.0

4

Data:Bloomberg

$/Yen

DIAM Economic Research

11/29: Fujii after Dubai Shock:

"An appropriate action should be taken against abnormal

move. But we should watch & see before current situation"

8/30: Landslinding Victory of DPJ

9/24: Fujii (Minister of Finance, at the

meeting with Secretary Gaithner)

"FX market is a stronghold of free economy"

8/30: Landslinding Victory of DPJ

12/1: BOJ introduced

new liquidity supply

1/8: Kan (Minister of Finance, at inauguration)

"Cheap yen is preferable"


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 >

85

90

95

100

105

110

115

120

125

130

135

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

\／$

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000FX Intervention by Japan(RHS)

＄/Yen Rate


Pariba Shock

Lehman Shock

Dubai Shock

100MYen


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

0

1

2

3

4

5

6

7

85.0

1

86.0

1

87.0

1

88.0

1

89.0

1

90.0

1

91.0

1

92.0

1

93.0

1

94.0

1

95.0

1

96.0

1

97.0

1

98.0

1

99.0

1

00.0

1

01.0

1

02.0

1

03.0

1

04.0

1

05.0

1

06.0

1

07.0

1

08.0

1

09.0

1

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)


LOG10

US

> J

PN

US

< J

PN

More Sensitive


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

98.0

4

98.1

0

99.0

4

99.1

0

00.0

4

00.1

0

01.0

4

01.1

0

02.0

4

02.1

0

03.0

4

03.1

0

04.0

4

04.1

0

05.0

4

05.1

0

06.0

4

06.1

0

07.0

4

07.1

0

08.0

4

08.1

0

09.0

4

09.1

0

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)


100M\

＇Note（Shadow : Target of BOJ Reserve Account

％


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

84.0

1

85.0

1

86.0

1

87.0

1

88.0

1

89.0

1

90.0

1

91.0

1

92.0

1

93.0

1

94.0

1

95.0

1

96.0

1

97.0

1

98.0

1

99.0

1

00.0

1

01.0

1

02.0

1

03.0

1

04.0

1

05.0

1

06.0

1

07.0

1

08.0

1

09.0

1

％

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


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

00.0

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

Data : DOC, Philadelphia FED

％

0

10

20

30

40

50

60

70

Shipment(YoY)---Inventory(YoY), 3MMA

ShipmentDI --- InventoryDI (6Mahead, in Philadelphia FED, RHS)

DIAM Econoimic Research

Pt


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

87.0

9

88.0

9

89.0

9

90.0

9

91.0

9

92.0

9

93.0

9

94.0

9

95.0

9

96.0

9

97.0

9

98.0

9

99.0

9

00.0

9

01.0

9

02.0

9

03.0

9

04.0

9

05.0

9

06.0

9

07.0

9

08.0

9

09.0

9

10.0

9

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

$/YEN Rate

JPN:Current Account / Nominal GDP (4QTotal %, RHS,6Qleading)


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▲50,000

050,000

100,000150,000200,000250,000300,000350,000400,000

02.0

102.0

402.0

702.1

003.0

103.0

403.0

703.1

004.0

104.0

404.0

704.1

005.0

105.0

405.0

705.1

006.0

106.0

406.0

706.1

007.0

107.0

407.0

707.1

008.0

108.0

408.0

708.1

009.0

109.0

409.0

709.1

0

Source:MOF

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


I

N

O

U

T


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

06.0

1

06.0

4

06.0

7

06.1

0

07.0

1

07.0

4

07.0

7

07.1

0

08.0

1

08.0

4

08.0

7

08.1

0

09.0

1

09.0

4

09.0

7

09.1

0

Source:BOJ

100M\

Bank's Interoffice Account(L/T) Other L/T Loans

Securities Lending Bank's Interoffice Account(S/T)

Repurchase Agreement　＆ Others OthersCurrrency & Deposit Other Assets/Liabilities

Other Investment (ex. Trade Credits)


I

N

O

U

T


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

01.0

901

.12

02.0

302

.06

02.0

902

.12

03.0

3

03.0

603

.09

03.1

204

.03

04.0

6

04.0

904

.12

05.0

305

.06

05.0

9

05.1

206

.03

06.0

6

06.0

906

.12

07.0

307

.06

07.0

9

07.1

208

.03

08.0

608

.09

08.1

2

09.0

309

.06

09.0

909

.12

Source:MOF

100M\

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


12 mts. Total


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

.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, Bloomberg

40.00

50.00

60.00

70.00

80.00

90.00

100.00

110.00

120.00

US$/YEN

AUD$/YEN

Nominal Effective Exchange Rate (RHS)

Jan. 1999 = 100



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

87.0

9

88.0

9

89.0

9

90.0

9

91.0

9

92.0

9

93.0

9

94.0

9

95.0

9

96.0

9

97.0

9

98.0

9

99.0

9

00.0

9

01.0

9

02.0

9

03.0

9

04.0

9

05.0

9

06.0

9

07.0

9

08.0

9

09.0

9

10.0

9

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

$/YEN Rate

JPN:Current Account / Nominal GDP (4QTotal %, RHS,6Qleading)


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

77.1

2

78.1

2

79.1

2

80.1

2

81.1

2

82.1

2

83.1

2

84.1

2

85.1

2

86.1

2

87.1

2

88.1

2

89.1

2

90.1

2

91.1

2

92.1

2

93.1

2

94.1

2

95.1

2

96.1

2

97.1

2

98.1

2

99.1

2

00.1

2

01.1

2

02.1

2

03.1

2

04.1

2

05.1

2

06.1

2

07.1

2

08.1

2

09.1

2

Data:Datastream, Tresuary Department (US)

LOG10

0

10

20

30

40

50

60

70

80

90

100

110

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


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


Cristal Ball, with Many Colors

Current level is higher than ‘fundamental’ value, but...

– 59, 70, 98, 105, 113

< PPP Rate of $/YEN >

60

80

100

120

140

160

180

200

220

240

260

280

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(JPN), DoL(US)

$/Yen

$/YEN Rate

PPP(CGPI & PPI final goods)

PPP(CPI core)


Bull, Pushed to the Edge of a Cliff


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


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


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+

08.12

85.12

Source : Ministry of Internal Affairs & Communications,

National Research Institution of Social Welfare DIAM Economic Research


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 】

1.21.4 1.5

1.7 1.61.3 1.2 1.1

1.51.3

1.7 1.7 1.8

1.3

1.91.7

2.0

1.5 1.4

0.2

0.2

0.2 0.30.6 0.7 0.8

0.50.7

0.3 0.4 0.31.0

0.40.6

0.4

0.9 1.1

0.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Sp

ain

Ge

rma

ny

Sw

ed

en

De

nm

ark

Be

lgiu

m

Au

str

ia

Ita

ly

Cze

ch

Ca

na

da

Ja

pa

n

Fin

lan

d

UK

Fra

nc

e

Gre

ec

e

Ire

lan

d

Ne

the

rla

nd

US

Po

rtu

ga

l

Ko

rea

Source: OECD

%

Expectate Progress in Fertility Rate by Policy Enhancement

Current Level of Birthrate



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 >

0

100

200

300

400

500

600

700

800

900

1000

Japan EU US Korea China India

Source：IEEJ

Japan=100


as of 2007

Documents

Kozo Koide Jan 1010