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Mr. Tohru Sasaki, Managing Director and Head of Japan Rates and FX Research, JP Morgan was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on ...

Mr. Tohru Sasaki, Managing Director and Head of Japan Rates and FX Research, JP Morgan was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on 27 April 2013. He spoke about the economic policies advocated by Japan's Prime Minister and the implication that they have to the Asian economy.

Find out more about the Asia Club:
Website: https://clubs.london.edu/asiaclub
Facebook: https://www.facebook.com/LBS.AsiaClub
Twitter: https://twitter.com/LBSAsiaClub

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Japan's Abenomics and its implication on Asian economy Japan's Abenomics and its implication on Asian economy Presentation Transcript

  • JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY London Business School, Asia Business Forum 2013, New Balance of Power in Asia STRICTLY PRIVATE AND CONFIDENTIAL April 2013 Tohru Sasaki Head of Japan Rates and FX Research Global FX Strategy tohru.sasaki@jpmorgan.com JPMorgan Chase Bank, N.A.
  • GDP : Percentage share of each country within Asian region Taiwan 2% Thailand 2% Singapore Hong Kong Philippines 1% 1% 1% Malaysia 2% JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY Indonesia 5% Korea 6% China 39% India 10% Japan 31% Source: J.P.Morgan 1
  • Nikkei index 45000 40000 JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 35000 30000 25000 20000 15000 10000 5000 0 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Source: J.P.Morgan 2 Jan-03 Jan-06 Jan-09 Jan-12
  • Japan’s Consumer Price Index (index and percent change over year ago) 106 5% CPI, 2010=100 104 4% 102 3% JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 100 2% 98 96 1% 94 0% 92 -1% 90 CPI, oya -2% 88 86 Jan-90 -3% Jan-93 Jan-96 Jan-99 Jan-02 Source: J.P.Morgan 3 Jan-05 Jan-08 Jan-11
  • The Three Arrows in Abenomics Have BoJ to introduce 2% inflation targeting JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY Bold Monetary Policy New governor Kuroda announced large scale purchase of Japanese Government Bond (JGB) Mobile & Strategic Fiscal Policy Growth Strategy which stimulates private sector investment More than ¥10 trillion of Supplemental Budget Detail will be announced in June 4
  • Uncharted monetary policy by Governor Kuroda 1) Changing the target of its monetary policy to the monetary base from the O/N call rate, with the new target being a ¥60-70 trn increase of the monetary base per year ; double the size in two years. 2) Expanding purchases of long-end JGBs, which includes purchases of 40-year JGBs, while the average maturity is extended to 7 year from current sub-3 year. JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 3) Expanding purchases of ETFs to ¥1 trn/year from the current ¥500 bn, and J-REITs to ¥30bn/year from ¥10bn. 4) Abolishment of the bank note rule. Monthly purchases of JGBs : ¥3.5 trn (Rinban: ¥1.8 trn, APP: ¥1.7 trn) ¥7.0 trn (monthly issuance is about ¥10.0 trn) 5) Integration of the APP and Rinban operation. BoJ will buy 6-10yr sector of JGB at the tune of ¥3.4 trn/month, while issuance of this sector is just ¥2.4 trn/month 6) Strengthened communication with the market. BoJ promised to increase JGB holdings by ¥50 trn/ year. JGB holdings by domestic banks : ¥83 trn (vs Central Banks’ balance sheet size (vs GDP) BoJ’s balance sheet is expected to expand from 34% of GDP (Feb.2013) to 46% of GDP (Dec.2013) and 60% of GDP (Dec.2014). On the other hand, the Fed’s balance sheet is expected to expand from 20% of GDP to only 25% of GDP by end-2013. It will most likely stay at the same level in 2014. 60% forecast 50% 40% BoJ ECB 30% FRB 20% BoE 10% SNB’s balance sheet size is 86% of GDP. Foreign currency assets consist of 87% of the SNB’s balance sheet. 5 0% Jan 01 Jan 03 Source: BoJ, FRB, ECB, BoE Jan 05 Jan 07 Jan 09 Jan 11 Jan 13
  • Uncharted easing-expansion of CB’s balance sheet Is BoJ still behind? – CB’s balance sheet comparison JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY According to regression analysis, USD/JPY tends to appreciate 5% for every 10% expansion of the BoJ balance sheet versus the Fed. forecast Jan. 2001=100, for BoE, May 2006=100 700 600 Assuming that the market starts pricing in a yearly 30% point faster expansion of the BoJ balance sheet versus the Fed balance sheet (which should be realized by end-2014), USD/JPY should appreciate to 104. 500 EUR/JPY tends to appreciate 1.5% for every 5% expansion of the BoJ balance sheet vs ECB. It suggests that EUR/JPY will reach 140 by early-2014. 100 BoJ 400 ECB 300 FRB BoE 200 0 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Source: BoJ, FRB, ECB, BoE Difference in the pace of B/S expansion between BoJ and ECB 30% 20% forecast BoJ's B/S oya - ECB's B/S oya Difference in the pace of B/S expansion between BoJ and FRB 35% 60% BoJ's B/S oya - Fed's B/S oya forecast 25% 40% USD/JPY, oya 10% 20% 15% 0% 0% 5% -20% -5% -40% -15% -60% -25% Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 -10% -20% EUR/JPY, oya -30% Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Source: BoJ, ECB Source: BoJ, FRB, 6
  • Uncharted easing-expansion of the monetary base In the longer-run, the correlation between the relative size of the monetary base and USD/JPY has not been strong. JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY USD/JPY did not react to Japan’s monetary base expansion between 2001 and 2006 under BoJ’s QE. Relative size of the monetary base and USD/JPY 130 160 120 140 100 130 90 BoJ will expand the monetary base to ¥200 trillion by end-2013 and to ¥270 trillion by end-2014. forecast 110 70 Expansion of the monetary base is not a significant factor for the future path of the JPY, but is still probably somewhat negative for the currency. There is no correlation between monetary base and inflation rate % 100 Japan CPI, oya Japan monetary base / US monetary base (Jan. 2000=100) 50 90 80 40 30 Jan 00 Jan 02 Source: BoJ, FRB, 70 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Difference in monetary policy increase and USD/JPY % Japan monetary base, oya 120 80 60 50 150 USD/JPY 110 % points 5 40 4 30 2 10 1 0 0 -10 -1 -20 -2 -30 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 -3 30 3 20 % 30 USD/JPY, oya 20 10 10 0 0 -10 -10 Japan monetary base, oya - US monetary base, oya -20 -30 Jan 00 Source: BoJ, Ministry of Internal Affairs and Communications -20 -30 Jan 02 Source: BoJ, FRB, 7 20 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12
  • First ignition point of BoJ’s monetary policy : inflation expectation Since Japan’s inflation expectation heightened significantly, JPY real yield declined significantly. As a result, real yield differential between USD and JPY shrank significantly. JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 0 bp 100 -20 US-JP real yield differential (using 5yr BEI) -40 USD/JPY 95 -60 90 -80 85 -100 -120 80 -140 75 -160 -180 70 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Source: Bloomberg 8 Jan-12 Jul-12 Jan-13
  • Stock indices since 2009 Jan. 2009=100 210 190 JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY Nikkei 170 NY Dow DAX 150 Hang Seng Shanghai 130 KOSPI Taiwan 110 Sensex 90 70 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Source: Bloomberg 9 Jan-12 Jul-12 Jan-13
  • J.P. Morgan Forecast GDP forecast Q2 / 2 0 1 3 Q3 / 2 0 1 3 Q4 / 2 0 1 3 Q1 / 2 0 1 4 Japan 2.2 3.2 2.5 2.9 3.4 China 6.4 8.2 8.0 8.0 8.0 Korea JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY Q1 / 2 0 1 3 3.1 2.9 4.5 4.2 4.0 India 6.4 6.5 5.3 3.6 7.6 Taiwan 4.0 4.0 4.2 4.3 3.4 Thailand 4.5 4.5 5.0 5.0 4.5 Indonesia 5.0 6.0 6.0 5.5 5.5 Malaysia 4.7 4.5 5.4 5.4 6.3 Philippines 4.5 4.9 5.3 5.3 5.3 Singapore -1.2 8.7 6.1 4.9 0.8 United States 3.1 1.5 2.0 2.5 2.0 Euro area -0.5 -0.5 0.5 1.0 1.5 UK -0.5 1.0 1.5 2.0 2.0 Global 2.3 2.7 3.0 3.2 3.3 Developed 1.4 1.1 1.6 2.0 2.1 Emerging 4.0 5.7 5.7 5.3 5.5 Source: J.P.Morgan 10
  • Japan’s Import by countries (2012 data) Japan’s Import by countries (¥trillion , % share) Japan’s Import by countries in Asia (¥trillion , % share) JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY Russia Others 3.8 1.7 5% 3% Singapore 0.7 2% Middle East 13.5 19% Philippines 0.7 3% Vietnam 1.2 4% Asia 31.3 44% EU 6.6 9% Central and South America 2.8 4% India 0.6 2% Others 4.6 15% China 15.0 48% Indonesia 2.6 8% United States 6.1 9% Malaysia 2.6 8% Oceania 4.9 7% Source: Ministry of Finance, Japan 11 Korea 3.2 10%
  • Exports to Japan Emerging Asia: share of exports to Japan % of total exports, 2012 data JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 20 15 10 5 0 PH ID MY TH CN KR Source: J.P.Morgan 12 TW SG HK IN
  • Second ignition point of BoJ’s monetary policy : sharp decline of long-term yield % % 0.9 2.2 0.85 2 JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 0.8 0.75 1.8 0.7 0.65 1.6 JGB 20yr yield JGB 10yr yield 0.6 1.4 0.55 0.5 1.2 0.45 0.4 Aug-12 1 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Source: J.P.Morgan 13 Feb-13 Mar-13 Apr-13
  • Lower long-term yield may stimulates Japanese overseas investment Japanese households still hold 55% of their financial assets in Cash/Deposit JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY Japanese institutional investors such as Life insurance companies and Pension funds may invest more in Emerging market bonds/stocks. Financial assets held by each investor (as of end-2012) JPY trillion Banks Life insurance Pension funds Households Cash/Deposit 199 3 10 854 Loan 667 45 7 0 JGB/Tbills 360 148 97 24 Municipal bonds 32 15 9 1 Corporate bonds 33 10 11 3 Stocks 17 12 31 62 Investment Trusts 7 15 7 61 Foreign securities 77 45 60 10 244 28 69 530 1,637 319 302 1,547 Others Total Assets Source: BoJ 14
  • Capital flows from Japan Japan: net portfolio outflows in bonds and notes US$bn, 2012, by recipient country JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 KR ID SG MY HK TH Source: BoJ 15 PH CN TW VN IN
  • Japan’s Foreign Direct Investment end-2005 (JPY trn) end-2011 (JPY trn) Change between 05 and 11 (amount) Change between 05 and 11 (%) JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY NonNonManufa Manufa Manufa NonManufa NonTotal manufa Total manufa Total Total cturing cturing cturing manufacturing cturing manufacturing cturing cturing Asia 10.4 7.3 3.0 20.0 12.8 7.2 9.6 5.5 4.1 93 75 136 North America 18.3 11.9 6.4 22.2 10.0 12.2 3.8 -2.0 5.8 21 -17 91 LATAM 3.9 1.0 2.9 9.5 1.9 7.6 5.6 0.9 4.7 144 92 161 Oceania 1.5 0.5 1.1 4.2 1.3 2.9 2.7 0.8 1.9 176 169 178 Europe Others 11.1 0.4 6.3 0.3 4.7 0.1 17.9 1.0 9.6 0.5 8.4 0.6 6.8 0.7 3.2 0.2 3.6 0.5 62 193 51 70 77 557 Total 45.6 27.3 18.3 74.8 35.9 38.9 29.2 8.6 20.6 64 32 113 Source: BoJ 16
  • Japan’s Foreign Direct Investment to Asia end-2005 (JPY trn) JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY Total NonManufact manufact uring uring Change between 05 and 11 Change between 05 and 11 (amount) (% ) end-2011 (JPY trn) Total NonManufact manufact uring uring Total NonManufact manufact uring uring Total NonManufact manufact uring uring China 2.9 2.2 0.7 6.5 4.8 1.7 3.6 2.6 1.0 123 116 147 HK 0.8 0.2 0.6 1.3 0.4 0.9 0.5 0.2 0.4 68 72 67 Taiwan 0.7 0.5 0.2 0.9 0.6 0.3 0.2 0.1 0.1 31 21 59 Korea 1.0 0.5 0.4 1.4 0.8 0.6 0.4 0.3 0.2 44 49 37 Singapore 1.4 0.9 0.5 2.5 1.0 1.4 1.1 0.1 1.0 77 13 200 Thailand 1.4 1.0 0.3 2.7 2.0 0.8 1.4 0.9 0.4 99 90 125 Indonesia 0.9 0.8 0.1 1.2 0.8 0.4 0.3 0.1 0.3 36 7 191 Malaysia 0.6 0.4 0.1 0.9 0.6 0.2 0.3 0.2 0.1 54 45 89 Philippines 0.4 0.3 0.1 0.8 0.5 0.3 0.4 0.2 0.2 93 52 253 India 0.2 0.2 0.0 1.2 0.8 0.4 1.0 0.6 0.4 465 312 1716 Source: BoJ 17
  • Within Global Emerging Markets, Asia dominates; within EM Asia, China dominates Global GDP (Emerging Markets) Emerging Europe EM Asia GDP Africa and Middle East Emerging Asia, ex-China and India JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY Latin America TH TW MY PH SGHK China ID Emerging Asia KR India Source: J.P.Morgan Using simple GDP weights, EM Asia makes up more than 50% of Global Emerging Markets. The skew in favor of Asia, compared to Latin America and EMEA, is even larger using purchasing power parity measures of GDP Within EM Asia, China and India alone made up over 70% of 2012 GDP (again, this share grows if PPP is used) 18
  • Outlooks for China & India central to our global growth forecast China alone, on our forecast, will have accounted for 35-40% of global growth from 2011-2013 Contribution to global nominal GDP growth JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY % , USD terms 40 China US 20 0 India Brazil -20 02 04 06 08 Source: J.P.Morgan 19 10 12
  • China & India tend to be less volatile; GDP growth in rest of EM Asia more cyclical and sensitive to DM demand EM Asia projected to grow 6.7% in 2013, with broad based gains across the region EM Asia: real GDP %-ch over 1 quarter, saar JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 12 10 China 8 India 6 4 2 EM Asia ex-China, India & Thailand EM Asia ex-China & India 0 -2 2010 2011 2012 Source: J.P.Morgan 20 2013
  • Despite soft tech exports – domestic demand has been firm in ASEAN ASEAN’s have seen greatest reliance on domestic demand in 2012 – teeing up for 2013 Emerging Asia: domestic demand and global PMI %-pt contribution to %oya GDP growth Index, sa JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 8 60 6 4 55 2 0 50 -2 ASEAN ex ID -4 Global PMI KR and TW 45 -6 -8 40 03 05 07 09 Source: J.P.Morgan 21 11
  • ASEAN has seen a clear increase in domestic demand Investment outlays rising in ASEAN, less so in North Asia Emerging Asia: shifts in domestic demand % GDP, 2012 less 2010 JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 6 Investment 3 0 Consumption -3 MY TH SG PH Source: J.P.Morgan 22 ID TW KR
  • Fixed investment – different strokes for different strokes Investment outlays rising in ASEAN, less so in North Asia Emerging Asia: shifts in domestic fixed asset investment % GDP, 2012 less 2010 JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 4 3 Transport 2 1 0 -1 -2 Construction Machinery -3 MY TH SG ID Source: J.P.Morgan 23 PH TW KR
  • Strong fixed investment rise in ASEAN – less so in Japan, Korea and Taiwan Promise in the Philippines Secular decline continues Japan and Korea: fixed investment Philippines and Taiwan: fixed investment % GDP, sa, both scales % GDP, sa, both scales 32 Korea 24 26 Taiwan Philippines 30 24 28 22 JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 35 28 30 26 25 22 26 20 24 00 02 04 06 08 10 18 22 18 20 20 Japan 16 12 15 10 00 02 04 06 Indonesia rising as India slows 12 Malaysia and Thailand: fixed investment % GDP, sa, both scales 10 Rip-roaring in Malaysia India and Indonesia: fixed investment 08 % GDP, sa 36 26 28 34 32 26 24 India Malaysia 24 30 22 28 22 26 20 20 Indonesia 24 Thailand 22 18 00 02 Source: J.P.Morgan 04 06 08 10 18 12 00 24 02 04 06 08 10 12
  • Indicators also suggest dichotomy in domestic demand Leading to narrowing in trade balance in ASEAN Capital goods demand has surged in ASEAN EM Asia: capital goods imports Emerging Asia: trade balance Index 2005=100, sa, 3mma US$ bn, 3mma, sa 250 12 ASEAN 10 200 8 6 150 JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY ASEAN 4 Korea and Taiwan 100 2 Korea and Taiwan 0 -2 50 00 02 04 06 08 10 00 12 02 04 06 08 10 12 Indonesia is the ASEAN leader North Asia has seen a slowing in investment imports since 4Q11 ASEAN: capital goods imports ASEAN has seen the opposite Index 2005=100, sa, 3mma 600 Suggests that commodity income effects and other factors could be at play ID 500 Overall credit has risen notably in ASEAN relative to North Asia 400 TH 300 This is a relatively recent dynamic fuelled by 200 1. Rising credit MY 100 2. Fiscal impulse PH 0 3. Rising incomes 00 25 Source: J.P.Morgan 02 04 06 08 10 12
  • ASEAN has seen a clear increase in consumer durables as well Striking rise in car sales in Indonesia and Thailand Asia: motor vehicle sales % change, 4Q12 from 4Q10 JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY 100 75 50 25 0 -25 TH ID JP IN PH Source: J.P.Morgan 26 CN MY KR TW SG
  • EM Asia central banks easing only a drip feed Compared to other parts of the world, EM Asia slow to cut policy rates in 2011 & 2012, and this will continue in 2013 EM Asia slow to cut rates Global policy rates Change from pre-Lehman peak, bp JAPAN'S ABENOMICS AND ITS IMPLICATION ON ASIAN ECONOMY EM Asia has a range of other tools available, including fiscal policy, so rate cuts have not been the focus 0 -100 In 2012, for EM Asia region as a whole, policy rates cut only 49bp -200 In 2013, trickle of rate cuts to almost stop completely. Only countries where rate cuts are expected are India and Korea EM Asia -400 -300 DM EMEA -500 -600 Latam 2008 2009 2010 2011 2012 2013 2011 Official interest rates, % p.a., end-period China 1-year working capital Hong Kong Discount window base Taiwan Official discount rate Korea Base rate India Repo rate Indonesia BI rate Malaysia Overnight policy rate Philippines Reverse repo rate Thailand 1-day repo rate 2012 2013 2Q12 3Q12 4Q12 Current 1Q13 2Q13 3Q13 4Q13 6.56 0.50 1.875 3.25 8.50 6.00 3.00 4.50 3.25 6.00 0.50 1.875 2.75 8.00 5.75 3.00 3.50 2.75 6.00 0.50 1.875 2.50 7.75 5.75 3.00 3.50 2.75 6.31 0.50 1.875 3.25 8.00 5.75 3.00 4.00 3.00 6.00 0.50 1.875 3.00 8.00 5.75 3.00 3.75 3.00 6.00 0.50 1.875 2.75 8.00 5.75 3.00 3.50 2.75 6.00 0.50 1.875 2.75 7.75 5.75 3.00 3.50 2.75 6.00 0.50 1.875 2.50 7.75 5.75 3.00 3.50 2.75 6.00 0.50 1.875 2.50 7.75 5.75 3.00 3.50 2.75 6.00 0.50 1.875 2.50 7.75 5.75 3.00 3.50 2.75 Source: J.P.Morgan 27 6.00 0.50 1.875 2.75 8.00 5.75 3.00 3.50 2.75
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