Sample commentary

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This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
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accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
1
THE REALITY CHECK
Weekly Commentary and Analysis
Weekly 27 March 2014
 Japan’s significantlyhigherlevel ofimports ismainly caused by the weaker JPY,whereas higher
mineral fuel imports have a much smallerimpact.
 The weakerJPY has not significantlyincreasedthe competitivenessofJapanese exporters
 Cost push inflationhas ledto an increase inthe miseryindexfor the Japanese,as well as higher cost of
livingand lower real disposable income
 Withouta turnaround in the balance of payments,the BoJ will likelybe forced to increase the amount
of quantitative easing,which will leadto capital outflowsfrom the domestic investors
Abenomics: An Economic Conundrum
It has been more than15months afterthe announcementof Abenomicsandperhapsitistime toreviewthe
efficacyof the policiesof the currentJapanese administration.
Since the announcementof Abenomics andthe new debtmonetizationprogramof the BoJ,the Yen has
weakenedfromapproximatelyJPY78toroughlyJPY102 to eachUSD currently. Thisissupposedtodrive export
competitivenessinJapanandleadtoeconomicgrowth.
The followingchart plotsthe JPYagainstkeytrade and balance of paymentsstatistics,i.e., exportvolume,trade
and servicesbalance, andthe currentaccountbalance since Mar2012.

2. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
2
As youcan see,afteran initial spikeinthe volume of exportsinMarch 2013 (which wasactually due toseasonal
effects),exportsactuallydeclineddespite furtherweaknessinthe JPY. Similarly,the trade andservicesbalance
as well asthe current accountbalance have not reactedpositivelytothe debasementof the JPY. The current
account balance,the keyelementsupportingthe debtloadof Japan,isnow at a recorddeficit.
So essentially,the firstandmostimportantpartof the Abenomicshasfailed. The debasementof the JPYhasnot
lead to an export boom and instead, has resultedin a severely damaged international trade and services balance.
Thiswas forecastedbyuswhenAbenomicswasfirstannounced. Ananalysisof the trade compositionwilleasily
leadto thisconclusion.
Before the Fukushimanuclearaccidentin2011, around62% of Japan’senergyneedscame fromimported
mineral fuels. Since the closure of the nuclearplants,thisnumber soaredto88% of total energyrequirements.
Witha sharplyweakenedJPY,thiselementof the trade compositionledtosignificantlyhigherimportcosts.

3. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
3
The followingchartshowsthe amountJapanspendonmineral fuels eachmonthsince 2008. As youcan see
afterFukushimain2011, the amountspentby Japanon mineral fuel rose initiallybutremainedstabledue tothe
strongerJPY,offsettingthe costsof the mineral fuel. Thatchangeddramaticallyasthe JPY weakenedpostthe
announcementof Abenomics. The resultwasthatthe amountspentpermonthby Japanrose from aroundJPY
1.58trn in Oct 2012 to PY2.30trn in Oct 2013, representing roughly a 45% increase. As energy demand is inelastic,
the Japanese trade balance deteriorateddramatically.
The Japanese governmenthopestore-introduce nuclearpowerbacktothe country,withthe intentionof
restartinghalf of the nuclearplantsthat were closed. Basedonthe data,thismeansthat inthe mostoptimistic
situation,the relianceonexternal mineral fuel sourceswilldropfromaround88% now to 75% (approximately
the midpointbetweenpre-nuclearclosure andpost-nuclearclosure). Wouldthat have a significantimpacton
the trade balance?
Well,basedonthe above chart, thatdoesnot soundvery likely. The rise inimportsdue tothe closure of the
nuclearreactors,basedonthe stable JPYpositionduring2011, was 33%. If we assume thathalf the reactors
come back on line overthe next3 years,the bestoutcome wouldbe areductionof 16.5%. That amount
translatestoJPY477bil permonth basedon January2014 figures. The lastcurrentaccount balance was –

4. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
4
JPY1.589trn. In otherwords,evenif half of the nuclearplantswere reopened,the impactonthe current
account will be negligible.
The main driverof costsis notthe imported volumebutthe costof the importsinJPY terms. The weakJPY
wouldmore thanoff-setanyadvantage of restartingthe nuclearpowerplants,andit would leadtoat besta
verysmall improvementinthe trade balance.
Addingthatto the costs of other imports,itiseasyto see that evena small improvementfromthe lower
mineral fuel importwill be overwhelmed.
So point numberoneis this: the significantly higherlevel of imports is mainly caused by the weakerJPY,whereas
highermineral fuel imports havea much smaller impact.
On the exportside,the weakJPYissupposedtoleadtoan exportrenaissance. Lookingatthe firstchart again,
we can see that thisdidnot happen. Asmentionedinpreviousmissives,Japanese exportgrowthhasnotreally
beendependentonthe levelof the currencybutmore on the macroeconomicconditionsof itsmajortrading
partners. Since 2009, the global economyhasbeenstuckinlow geardue to the scale of deleveraging afterthe
crisis,as well asthe “kickthe can” mentalityof dealingwiththe crisis. The resulthasbeenstagnanteconomies,
and lowtrade growth.
Withthiskindof macro environment,currencydebasementhasverylittleeffect forJapan,especiallysince the
country is no longeranexporterof finishedgoodsperse,butmore intermediate products. One quicklookat
the exportvolume indexhasshownthatthe weakerJPY has notledto an exportboom(inreal terms) butonly
one innominal terms(translationfromforeigncurrencybacktoJPY). That isverytransitoryand doesnotadd to
the balance of paymentsbalancesof the country.
Andin more recenttimes(i.e., the lastfew months),the exportvolumeindex hasturneddecidedlylower,
puttingfurtherpressure onthe country.
To some extent,the socalledincrease incompetitivenessfromaweakercurrencyhasbeenoffsetbythe higher
cost of raw materialsandenergy. The cumulative change inthe coststructure of Japanese companiesisnotas
great as initiallyexpected.
Justtake a lookat the cost of electricityinJapan,asshowninthe followingchart.

5. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
5
Since 2011, the cost of electricityinJapanhasrisenby 20%, offsettingmostof the competitive edgegainedfrom
the 22% depreciationof the JPYduringthe same period. Similarly,the costsof raw materialswouldhave risen
accordingly andthe resultisthat the weakerJPYhas not materiallyimprovedthe competitivenessof Japanese
corporations.
Furthermore,asmentionedcountlesstimes before,the hollowingoutof the Japanese industrial base through
the off-shoringof manufacturingcapacityinlowercostcountrieshave furtherreducedthe efficacyof currency
debasementasacompetitive tool
This concludes pointnumbertwo:the weakerJPYhas notsignificantly increased the competitivenessof Japanese
exporters.
At the same time,Japanwantsto increase inflationinthe country. Inthisaspect,theyhave succeeded,though
not inthe right way. Prices,ingeneral,have beguntorise inJapan. There isa lageffecttothe impact of the
weakerJPYto prices.

6. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
6
The above showsthe Japanese CPIagainstthe JPY. As youcan see,there appearstobe a lag of 3-6months
before the weakerJPYstartsto affectthe CPI. Note that post2011, the change inthe CPI wasmuteddespite
higherenergycosts;thisis due to the impactof the strongercurrencyon otherimports duringthisperiod. Since
the adoptionof Abenomicsanddebtmonetization,pricesbegantomove upwardquickly. Thisis cost-pushed
inflation,andnot demand-pulled inflation. The resultisthatthe cost of livingforthe Japanese hasrisenwithout
a rise in income. Whenwe overlaythe CPIagainstwage growth,asshowninthe chart below,it becomesclear.

7. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
7
Since Mar 2013, the YOY change in householdincome (the line) hasdivergedfromthe CPI. The overall impactis
that the Japanese are now2% poorerin real terms.
It isquite likelythatthistrendwill continue. “Why?”youmay ask. Basically,if youlookat the exportschart,you
can see that Japanese corporationsare notdoingbetterinreal termsdespite the weakerJPY. Thatalsomeans
that these corporations will have adifficulttimeincreasingwages,whenthe underlyingbusinessisstagnantor
deteriorating. If theyincrease wages,itwilleatfurtherintothe competitivenessgainedfromthe weaker
currency.
Basedon the data fromthe Ministryof Internal Affairsandthe currentinflationrate,the real disposable income
of Japanese householdhasdeclinedabout1.4% in2013.
That is the keyerrormade bythe architectsof Abenomics. The assumptionthatdeflationisthe problemis
incorrect. It isthe reasonsbehinddeflation/inflationthatisthe keyto understandingandunravellingthe
problemswiththe Japanese economy. Inthe case of Japan,by assumingthatthe symptomisthe problem,they
have inadvertentlypushedthe domesticdemandintoreverse. And thatwill be anissue thatwill come backto
hauntthem,especiallywhentheyimplementthe increase insalestax.

8. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
8
The followingshowsthe Japanese MiseryIndex,calculatedasthe sumof currentinflationrate and
unemploymentrate.Asyoucansee the index hasbeen considerably highersince 2009.
Pointnumberthree is therefore:Costpush inflation hasled to an increase in the misery index forthe Japanese,as
well ashighercost of living and lower real disposableincome.
So basedonthe above 3 points,one of the keytenetsof Abenomics(the debtmonetizationof the BoJand the
debasementof the JPY) hashadthe opposite intendedeffect,leadingtoworsenedbalance of paymentsand
lowerreal income,withnovisible improvementinreal exports.
Perhaps there isa reallylonglageffectforthe debasementof the currencytohave a meaningfulimpacton
imports.(Iam reallystretchingrealityhere butlet’sbe optimistic).Basedonthe latest numbers(January2014),
howmuch wouldexportsneedtoincrease inordertoturnthe trade balance around? The basic assumption
wouldbe forhalf of the closednuclearplantstobe reopened,leadingtoamonthlyJPY477b improvementinthe
energyimportcosts,andstatic otherimports. The lasttest trade deficitfigure wasJPY2.771trn. Takingaway
JPY477bil, we still have a hefty JPY2.294trn deficit. Total exportwasworthJPY5.252trn in January. In other
words,real exports(ie stable JPY) will needtoincrease by44% inorderto bring the trade balance back to
neutral!Iwill leave ittoyouto decide if thatisevenremotelypossible.

9. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
9
One of the unknownconsequencesof BoJ’smonetarypolicywill be itseffectonthe manin the streetinJapan,
as well asthe large corporationwhoare effectively longJPY. GrantSpencer,the deputygovernorof the Reserve
Bank of NewZealand,aswell asGlennStevens,the governorof the Reserve Bankof Australia,bothholdthe
viewthatthe debtmonetizationof the JGBsbythe BoJ will leadtoa rise incapital outflow fromJapan,ala2001-
2006 whenthe BoJ performedasimilar(butsmaller) operation. Thisisnot surprisinggiventhe currentsize of
QE. Both believethatthe rise of Mrs Watanabe andthe Uridashisisforthcoming,especiallywiththe strong
certaintythatthe Bankof Japanwill be puttingmore liquidityinto the global monetarysystemthanthe Fed
afterthe next2 months.
How will thisimpactJapan? Unfortunately,if thiswastooccur,Japanese currentaccountbalance would tailspin
and quite likelyputthe country’sdebtandcurrencyintocrisismode. Whydo I say that?
In 2001 to 2006, Japan enjoyedsignificantcurrentaccountsurpluses.
Withcurrent account surplusesof overJPY1trna month,the Japanese canaffordoutflowsfromdomestic
investorswithout significantlyimpactingtheirdebtload. Also,the debtloadof the Japanese governmentwas
significantlysmall then(ataround140% of GDP versus the current 240%).

10. Disclaimer
This presentation is intended to facilitate your discussion with One Tree Partners Pte. Ltd. about the services available to our clients. The material provided herein is for
informational purposes only. It is not intended as an offer, or a solicitation of an offer, to buy or sell any investment or other specific product. Although all information and
opinions expressed in this document were obtained from sources believed to be reliable and in good faith, no representation or warranty, express or implied, is made as to its
accuracy or completeness. All information and opinions as well as any prices indicated are subject to change without notice and the asset classes, the asset allocation and the
investment instruments are only indicative. No part of this material may be: 1) copied, photocopied or duplicated in any form by any means; or 2) redistributed without prior
written consent from One Tree Partners Pte. Ltd.
10
Withthe currentnegative trade balance andthe extremelyhighdebttoGDP,anyfurthercapital outflowfrom
the domesticinvestorswill have adramaticimpacton the JGBs. Withno capital inflow (fromthe current
account) to supportnewdeficits,andwithcapital outflowsreducingdomesticholdingsof JGBs,the impactwill
be disastrousonthe yieldsof JGBs. With the debtloadat 240%, as rise in interestrateswill have amajorimpact
on the sustainabilityof governmentfinance. The onlywayto suppressyieldswill be forthe Bankof Japanto
completelyabandonanysortof restraintandgo intofull debtmonetizationalaWeimarandZimbabwe. Thiswill
leadto a viciouscycle of monetizationandcapital outflow,resultingeventuallyinthe collapse of the JPYandthe
hyperinflationinJapan. Thisisthe so calledhyperinflationspiral thathasbeenvoicedbythe likesof Kyle Bass
and George Soros’sformerJapanfundmanagerFujimaki.
As the Japanese currentaccountbalance continuestosinkgreaterintonegative,the riskof thiseventoccurring
rises. Withouta turnaroundinthe balance of payments,the BoJwill likelybe forcedtoincrease the amountof
quantitative easing,which,inthe eyesof the AustralianandNew Zealandcentral bankgovernors,will leadto
capital outflowsfromthe domesticinvestors.
Thisis the conundrumthat Abenomicsfaces. Withthe failure toincrease real exports,andthe ongoing
destructionof domesticdemandthroughcontractionsinreal disposable income,evenatthe mostoptimistic
scenarioof the returnof nuclearpower,the likelyoutcome will be higherQEand domesticcapital flight.
There isone last elementthatputsthe nail inJapan’seconomiccoffin:demographics. Japanisanaging country
withthe medianage of Japan of 45. Andover the nextdecade,the populationof Japanandthe workforce of
Japanare expectedtoshrink significantly by10%. These demographicsare notconducive forstrongdomestic
demandgrowth. Furthermore,withoutayouthful workforce,the costof productionislikelytoincrease,further
damagingJapanese competitiveness. Withthe agingpopulation,pensionfundsinJapanare nolongergrowing
insize. Redemptionsnowexceedcontributions. Those dynamicsspell disasterfora countrywith240% debtto
GDP. Withoutsignificantinfluxof immigrants,whichrequiresacomplete turnaroundinJapanese culture,there
isno possibilityof aturnaroundinthe workingpopulationinthe nextdecade. Thisisone of the greatest
challengesthatface Japanandunfortunately,giventhe currentgovernment’snationalisticstance,itisunlikely
that we will see significantreformsonlabourimmigration.
Perhapsthatis whyAbe soundslike usedcarsalesmaninthe latestCreditSuisse AICconference inHongKong.
All he couldsay was“This isthe buyingopportunityof the decade inJapan”. Whenone looksunderthe hoodof
whathe ishawking,itisclearthat it isa lemonof epicproportions.
TimothyTan
SeniorPortfolioStrategist.