August 2, 2010

Macro Markets
Japan

Economy Interest Rates Currency

2Q stable – slowdown visible

Unemployment remains ‘high’, deflation

ongoing

Postponement of US rate hike expectations

contributes to yen strength
Macro Markets – Japan

Japan
Economic and fiscal data 2008 2009 2010f 2011f
GDP, real CY in % -1.2% -5.2% 2.8% 2.1%
Public sector debt, % of GDP * 172.1% 189.3% 197.2% 204.3%
Private consumption, real -0.6% -1.0% 1.7% 1.1%
Capital expenditure, real 0.0% -19.2% -0.5% 5.1%
Imports, real 1.0% -16.8% 5.5% 4.2%
Exports, real 1.9% -23.4% 21.2% 8.0%
Consumer price index 1.4% -1.0% -0.5% 0.0%
Unemployment rate 4.0% 5.1% 5.0% 4.7%
Source: Erste Group Research, Datastream, * OECD

The dynamics of the Japanese economy slowed down in the second quarter, as evidenced by exports and
production. Both increased vs. the first quarter, but did not reach the March highs again, and it seems likely that
growth has slowed down now that levels are getting close to those seen prior to the crisis.

140

130

120

110

100

90

80

70

60

50
Jän.00

Jän.01

Jän.02

Jän.03

Jän.04

Jän.05

Jän.06

Jän.07

Jän.08

Jän.09

Jän.10
Jul.00

Jul.01

Jul.02

Jul.03

Jul.04

Jul.05

Jul.06

Jul.07

Jul.08

Jul.09

Industrial Production Index Export Volume Index

Source: Datastream, Erste Group Research

So far, Japan has benefited from strong Asian demand – particularly from China – that could slow down in the
second half year. Taking into account that the economy reached the bottom in 1Q09, this points to a slowdown of
y/y growth rates for the remainder of the year, as already indicated by custom exports.

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%

-40.00%

-50.00%
Q1 1996

Q1 1997

Q1 1998

Q1 1999

Q1 2000

Q1 2001

Q1 2002

Q1 2003

Q1 2004

Q1 2005

Q1 2006

Q1 2007

Q1 2008

Q1 2009

Q1 2010

Exporte aus Zoll real gerechnet j/j Exporte aus BIP j/j
Source: Datastream, Erste Group Research

Erste Group – Macro Markets Japan August 2010 Page 2

Macro Markets – Japan

Export growth has not led to significant investment activity until now, though, and a decrease vs. the previous year
is not to be ruled out. Indeed, machinery orders are still below the previous year’s level, despite a visible
improvement.

35.00%

25.00%

15.00%

5.00%

-5.00%

-15.00%

-25.00%

-35.00%
Q1 1996

Q4 1996

Q3 1997

Q2 1998

Q1 1999

Q4 1999

Q3 2000

Q2 2001

Q1 2002

Q4 2002

Q3 2003

Q2 2004

Q1 2005

Q4 2005

Q3 2006

Q2 2007

Q1 2008

Q4 2008

Q3 2009
Investments y/y Domestic Machinery orders sa (excl volatile) y/y Machinery orders sa y/y Q2 2010
Source: Datastream, Erste Group Research

Consumption should have been quite robust by Japanese standards, as retail sales figures remain positive, despite
a decline from the recently reached ten-year high of the index. This might be related to the relative stability of the
labor market, but is most likely due to government support measures.
106 1.5

104 2.5

102 3.5

100 4.5

98
5.5

96
6.5

94
15.02.2000

15.02.2001

15.02.2002

15.02.2003

15.02.2004

15.02.2005

15.02.2006

15.02.2007

15.02.2008

15.02.2009

15.02.2010

Retail sales, Index Unemployment rate, inverted (rhs)

Source: Datastream, Erste Group Research

The unemployment rate has again increased to 5.3%, but this seems above all to be a ‘normalization’ of the
situation. In the past, the future evolution of the unemployment rate could be predicted quite accurately from the
ratio of job offers per applicant, but this relationship broke down in the past year (see chart next page). Now both
indicators seem to be evolving in a more consistent way again, pointing to the unemployment rate staying between
5% and 5.5%, which might exert a dampening effect on consumption in the medium term.

Erste Group – Macro Markets Japan August 2010 Page 3

Macro Markets – Japan

0.2
6

0.4
5.5

0.6
5

0.8
4.5

4 1

3.5 1.2

3 1.4
2001-06-15

2002-06-15

2003-06-15

2004-06-15

2005-06-15

2006-06-15

2007-06-15

2008-06-15

2009-06-15

2010-06-15
Arbeitslosenrate Anzahl Stellen/Bewerber, 8M verschoben (rhs)
Source: Datastream, Erste Group Research

In consonance with that, despite a recent increase of the inflation rate (which remains in negative territory), the
earlier Tokyo-indicator points to a relapse already. We think that the labor market has to improve significantly
before final demand can pick up sufficiently for Japan to exit deflation, which would in any case take more time.

Monetary policy
There were a few news items from the BoJ. Recently, the bank mentioned worries that fiscal turbulence in the
Eurozone might harm the worldwide recovery, but raised the growth forecast at the same time, based on the strong
Asian demand. The bank could still theoretically do more to fight deflation in a more decisive way, but it is
becoming increasingly difficult to find measures that the bank has not tried so far. Similarly to the bank’s view, we
think that enhancing growth (and thus improving the employment situation) is key to stable prices, at least, but the
influence of the bank in this respect is probably quite limited.

Currency
Market interest rate hike expectations for the US have been postponed significantly in recent days, implying
decreasing yields, mainly caused by a deterioration of growth prospects and worries surrounding the labor market.
Both the increase in risk aversion as well as the lower return in US dollars should have contributed to the yen’s
strengthening to USDJPY 86. If low growth expectations persist for some time, the yen might remain at quite strong
levels for a while. We still think that a significant weakening is conditional on foreseeable rate hikes by the US Fed,
which markets do currently not anticipate before 2Q11.

145 5

4.5
135
4
125
3.5

115 3

2.5
105
2
95
1.5

85 1
15.01.2002

15.07.2002

15.01.2003

15.07.2003

15.01.2004

15.07.2004

15.01.2005

15.07.2005

15.01.2006

15.07.2006

15.01.2007

15.07.2007

15.01.2008

15.07.2008

15.01.2009

15.07.2009

15.01.2010

15.07.2010

15.01.2011

USDJPY IR Differential 10Y US-JP (rS)

Source: Datastream, Erste Group Research

Forecast
Current Sep. 10 Dec. 10 Mar. 11 Jun. 11
3-month Libor 0.25 0.25 0.25 0.25 0.25
USD/JPY 87 90 90 92 95
Erste Group – Macro Markets Japan August 2010 Page 4
Macro Markets – Japan

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Macro Markets – Japan

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