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How to look 20 years younger: Japan's economy

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  • 1. How to Look 20 Years Younger: Japan’s Economy James Dowey, Chief Economist, 7th March 2010 Neptune Press Trip, March 2010
  • 2. Party Like its 1989: Japanese Nominal GDP Nominal GDP Japan, US and EU 1980-2009 (1980 = 100) 600 Crisis Japan US EU 500 400 300 200 100 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: IMF December 2009 2
  • 3. A Tale of Two Balance Sheets Net Annual Lending/Borrowing of Japanese Government and Corporate Sectors, 1980-2008 (% of GDP) 10% Crisis 5% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 -5% -10% Government Corporate -15% Source: Neptune calculations; Cabinet Office, Japan, data from 1980-2008 3
  • 4. No Increase in Output per Worker Since 1990 Labour Productivity (Output per Worker Per Hour) (1980=100) 200 Crisis US Japan 180 160 140 120 100 80 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: US Bureau of Labour Statistics, Japan Statistics Bureau, December 2009 4
  • 5. US 70,000,000 Japan 0 Population and UN Population Projections 1950-2050 (000’s) 450,000 Crisis Projection (United Nations) Japan US 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: United Nations, December 2009 5
  • 6. Life on the Zero Bound: Monetary Policy Unable to Revive the Economy Policy Rate and GDP Deflator 1990-2010 Bank of Japan Policy Interest Rate GDP Deflator Source: Datastream January 2010 6
  • 7. Fiscal Stimulus Worked! Sort Of… • Japanese wealth loss 1990- 2002 = 300% of 1990 GDP. 140 Equivalent to $45 trillion loss 120 in the US! 100 • Yet stagnation, not depression 80 60 • Fiscal policy supported the 40 economy 20 GDP Land price index (commercial) Topix • But without private 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 investment, no productivity growth Source: Datastream, Japan Statistics Bureau December 2009 7
  • 8. Japan’s 2002-2007 “Recovery” Was Not a Domestic One Japan Private Consumption, Investment and Exports Levels 1995 – 2009 (1995=100) Consumption Investment Exports Source: Datastream January 2010 8
  • 9. Japan and the Great Trade Crisis of 2008 Share of advanced manufacturing in GDP and Q4 2008 GDP growth Source: IMF, data for Q408 9
  • 10. Current Economic Conditions • GDP short-term rebound as world trade recovers • Continued deflation, very low interest rates • Government debt jump during 2008-2010, government revenues declining structurally, household working-savers retiring 10
  • 11. Government Borrowing and Household Lending 250% 16% Gross Government Debt, % of GDP (Left) Household Saving Rate, % of Disposable Income (Right) 14% 200% 12% 10% 150% 8% 100% 6% 4% 50% 2% 0% 0% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Source: Datastream January 2010 11
  • 12. Japanese Government Needs to Turn the “Export Dial” Yen Real and Nominal Effective Exchange Rate (Jan 2000=100) Nominal Real Y = C + I +G + (Ex - Im) Source: Datastream January 2010 12
  • 13. Investment Conclusions • Domestic consumer market shrinking, will get worse: ‒ Negative demographics ‒ Difficult to see productivity growth compensating • Interesting section of Japanese market is exporters: ‒ Rising “Asian regionalist politics” – leading to “Asian regionalist economics” ‒ Rest of OECD “turning Japanese”: slower growth, zero bound of monetary policy, high government debt, impaired banking sector. Japanese firms accustomed to these conditions ‒ Japanese government’s only option is to weaken the currency 13
  • 14. Important Information This document is issued by Neptune Investment Management Limited (“Neptune”) which is authorised and regulated by the Financial Services Authority. Details of our regulatory status and authorisation by regulators in other countries are available from us on request. The Neptune web address is www.neptunefunds.com Neptune Funds are available to any persons that may be marketed to under the Financial Services and Markets Act (Promotion of Collective Investment Schemes) (Exemptions) Order 2001. Retail Clients should consult their Independent Financial Adviser or other authorised intermediary. This communication is only intended for persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations. The provision of investment services may be restricted in certain jurisdictions. You are required to acquaint yourself with any local laws and restrictions on the availability of any services described. Please check with your professional financial adviser as to whether such products are available in the country in which you are resident. None of our products are available to residents in the United States. Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or completeness. These are the analyst’s personal recommendations and as such this document is deemed to be impartial research. We do not undertake to advise you as to any change of our views. This is not a solicitation or an offer to buy or sell. Neptune Investment Management Limited has produced this report for private circulation to Professional and Eligible Counterparties only. The material is not intended for the use of Retail Clients. All information and advice is given in good faith but without any warranty. Please remember that past performance should not be seen as a guide of future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Any past performance data that has not been shown is due to the information not being available. Neptune is not authorised to give investment advice and only provides information on Neptune products.

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