abenomics: politics and [email protected] +81-3-6836-8400 note:...

1

Abenomics: Politics and Policy

September 2015

M O R G A N S T A N L E Y M U F G R E S E A R C H

Robert A. Feldman

Managing Director and Chief EconomistMorgan Stanley MUFG Securities Co., Ltd.

Thursday, October 1, 2015

Columbia Business School


Japan Economics


September 2015

Japan Economics

For important disclosures, refer to the Disclosures Section, located at the end of this report.

MORGAN STANLEY MUFG RESEARCH

Japan

Morgan Stanley MUFG Securities Co., Ltd.

Robert Alan Feldman, Ph.DChief Economist

[email protected]

+81-3-6836-8400

Note: Due to the nature of the fixed income market, the issuers or bonds of the issuers recommended or discussed in this report may not be continuously followed. Accordingly, investors must regard this report as providing stand-alone analysis and should not expect continuing analysis or additional reports relating to such issuers or bonds of the issuers.

Japan Economic and Market Forecasts

2014 2015e 2016e

Economy % Change

GDP CY -0.1 0.5 1.6

FY -0.9 0.9 1.9

CPI* CY 0.6 0.5 1.3

FY 0.5 0.6 1.5

Markets Year-end level

Yen/US$ 120 121 125

10yr JGB (%) 0.45 0.60 1.00

TOPIX** 1537 1740

* Excluding food, energy, and VAT.

** 1537 is current level. 1740 forecast for 3Q2016

e = Morgan Stanley Research estimates

GDP forecast as of Sep 2015

Source: Morgan Stanley Research.

0

1

2

3

4Agriculture

Medical

Energy

Education

Gov’t Reform

Labor

CorpGovernance

Tax Reform

Immigration

ElectoralReform Apr/04/2013

Sep/04/2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

9/26/2008 6/15/2009 3/21/2010 10/11/2010 9/4/2011 7/1/2012 5/26/2013 3/30/2014 2/8/2015

Cabinet Approval Rating: 2008- present

Aso Hatoyama Kan Noda Abe

What will this ….. ….. Do to this?

3


September 2015


The Weaker Yen Cannot Offset a Weak China

Source: Cabinet Office, BoJ, METI, Morgan Stanley Research

90

95

100

105

110

115

120

125

01/12 09/12 05/13 01/14 09/14 05/15

Real Exports and Imports (2010=100, to August 2015)

Real Exports Real Imports

Exports

Imports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Inbound Tourism, to July 2015

Tourism Receipts (Annualized, Y trl) 12mo MA

Source: Cabinet Office, BoJ, METI, Morgan Stanley Research

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September 2015


-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

05

/2

01

2

09

/2

01

2

01

/2

01

3

05

/2

01

3

09

/2

01

3

01

/2

01

4

05

/2

01

4

09

/2

01

4

01

/2

01

5

05

/2

01

5

Nationwide CPI, excluding C-tax impact

Overall ex FF ex FE ex FFE

Latest: July, 2015

Nationwide CPI excluding C-tax

Source: Cabinet Office, Morgan Stanley Research calculations.

Prices: Which Index to Choose?

?

The Kuroda Chart

5


September 2015


Aging → Labor Force ↓ → Unemployment ↓ …..

40

45

50

55

60

65

70

75

80

85

90

1953 1961 1969 1977 1985 1993 2001 2009

Males

Females

（％）Latest: End-2014

The rise of female participation rates across the age profile has sufficed to prevent the overall participation rate for females from falling. But Japanese female labor participation is about the same as the US now. There is not much more room for increase.

0

10

20

30

40

50

60

70

80

90

15～

19

20～

24

25～

29

30～

34

35～

39

40～

44

45～

49

50～

54

55～

59

60～

64

65～

69

70～

74

75～

Female LFPRs: Japan-US Comparison

Japan 1988 LFPRs

Japan 2012 LFPRs

USA 2011 LFPRs

(%)

Source: MIC, Labor Force Survey, and Morgan Stanley Research calculations.

Female Labor Force Participation Rates: JP-US Comparison, %

Labor Force Participation Rates, Males and Females (15+ Population, %)

Source: MIC, Labor Force Survey, and Morgan Stanley Research calculations.

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September 2015


Abenomics: Political Background Is Stable

Crisis Summer 2014

GDP slowdown Price deceleration

ResponseBoJ Second QE Autumn 2014Consumption Tax PostponementElectionCorporate Tax Cut Winter 2014-15Agricultural ReformBudget tilt to control spendingCorporate Governance Reforms

Improvement Early Spring 2015

Yen move to 120Stock market riseEconomic indicator improvement

Complacency Spring 2015

Slow/inadequate Labor ReformsGPIF Governance SpatEnergy: Moves to disadvantage solarSlowdown of Election Reform DebateSlow immigration debate

Source: http://www.tv-asahi.co.jp/hst/poll/graph_naikaku.html

Source: Morgan Stanley Research

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

-10% 0% 10% 20% 30% 40% 50% 60% 70%

Political Stability Metrics

MaximumCurvature:

CSR: 18.6, at 27%RMO: 18.5, at 2%AR: 25.0, at 53%

RMO CSR Aoki Rule

0%

10%

20%

30%

40%

50%

60%

70%

80%

9/26/2008 6/15/2009 3/21/2010 10/11/2010 9/4/2011 7/1/2012 5/26/2013 3/30/2014 2/8/2015

Cabinet Approval Rating: 2008- present

Aso Hatoyama Kan Noda Abe

Cabinet Approval Rating: 2008 - present

Source: Morgan Stanley Research calculations

CSR: Cabinet Support Rate.

RMO: Difference of

support rates of the ruling party

and the main opposition party.

Aoki Rule: Sum of Cabinet

support rate and ruling party

support rate.

Probability of Cabinet Change within Three Months

RMO

CSR

Aoki

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September 2015


Abenomics: The Real Challenge Is Productivity Growth

Productivity growth in Japan has stemmed from several factors:

More capital stockBetter capital stockBetter quality of laborBetter technologyBetter resource use

All of these sources of productivity growth will need to be harnessed in the future as well.

Source: Nikkei NEEDS, OECD, and Morgan Stanley Research calculations

y = 0.4065x - 0.1606R² = 0.437

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1.0 2.0 3.0 4.0 5.0 6.0 7.0Prod

uctiv

ity G

row

th (%

), 20

04-1

3

Share of R&D in GDP (%), 2004-11

Japan

US

R&D Spending and Productivity Growth

Y = (Y/L) * L %Y = %(Y/L) + %L

0

20

40

60

80

100

120

140

160

180

Labo

r Pro

du

ctivity (US = 100)

Gen

. Mach

inery

Ch

emicals M

etals

Finan

ce

Tpt. Eq

uip

Co

nstru

ction

Elec. Mach

inery

Utilities

Oth

er Man

ufac

Transp

ortatio

n

Wh

olesale

・

Retail

Restau

r. Ho

tels

Source: METI, Economic White Paper 2013, Figure I-1-4-1., and Morgan Stanley Research calculations. See http://www.meti.go.jp/report/tsuhaku2013/2013honbun/i1140000.html

Industry

Value added

share, 2003-

07 Average

(%)

Productivity

Level, 2003-

07 (USA

=100)

Contribution to

Total

Productivity

Upgrade

Scenario:

Productivity

Level

Productivity

Gain

Productivity

Contribution

General Machinery 3.46 128.7 4.45 128.7 0.0% 4.45

Chemicals 3.01 120.2 3.61 120.2 0.0% 3.61

Metals 5.16 93.2 4.81 100 7.3% 5.16

Finance & Insurance 10.93 88.7 9.70 100 12.7% 10.93

Transport Equipment 4.70 84.7 3.98 100 18.1% 4.70

Construction 10.76 80.4 8.65 100 24.4% 10.76

Electric Machinery 6.27 58.6 3.67 100 70.6% 6.27

Utilities 3.38 53.5 1.81 100 86.9% 3.38

Other Manufacturing 13.04 52.5 6.85 100 90.5% 13.04

Transportation and Warehousing 10.95 45.7 5.00 100 118.8% 10.95

Wholesale and Retail 23.18 42.9 9.94 100 133.1% 23.18

Restaurants and Hospitality 5.16 26.8 1.38 100 273.1% 5.16

All Industries 100.00 63.87 59.1% 101.60

Japanese Labor Productivity, by Sector (US=100)

Source: METI, Economic White Paper 2013, Figure I-1-4-1., and Morgan Stanley calculations. See http://www.meti.go.jp/report/tsuhaku2013/2013honbun/i1140000.html

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September 2015


120

130

140

150

160

170

180

190

200

2001 2003 2005 2007 2009 2011 2013 2015

General Government

Revenue Expenditure

(Yn Trl)

Fiscal Japanification: The Key Is Social Security Cost Control

50

75

100

125

150

2002 2005 2008 2011 2014

Social Security Operational

(Y trl )

Consolidated Government: Social Security and Operational Accounts

Source: Cabinet Office, National Accounts, Morgan Stanley Research calculations

Source: Cabinet Office, National Accounts, Morgan Stanley Research calculations

Consolidated Government: Social Security and Operational Accounts (Y Trl)

General Government (Y Trl)

Fiscal Reform Choices：What do Japanese general audiences want?

The MoF Fiscal Commission says that Japan needs an extra Y60 trl of fiscal adjustment, even after the Consumption Tax is hiked to 10%. Any of the following combinations will achieve this goal. Which is best?

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

CTax: 34%SS cut 0%

CTax: 28%SS cut 12%

CTax: 22%SS cut 23%

CTax: 16%SS cut 35%

CTax: 10%SS cut 47%

Recent Japanese General Audiences (2015)

Source: Morgan Stanley Research.

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September 2015


Simplified Energy Nexus: Japan, 2013

Primary Energy Sources

Energy-Based Activities

Final Activity

Fuel

Electricity

GDP

Transport

Non-Transport

19.36EJ

1.57 EJ

11.65EJ

7.71EJ

0.39EJ

1.18EJ

12.04EJ

Loss: 9.3%

10.92EJ

3.13EJ

7.79EJ

8.89EJ Loss:

62.8%

3.31EJ

0.07EJ

3.24EJ

3.19EJ

11.03 EJ

527.4 Ytrl

14.23 EJ

EJ = Exojoules = 1018 Joules

20.93 EJ20.93

EJ14.23

EJ 14.23 EJLoss: 6.7

EJ = 32.0% Notes: (1) Thickness of lines is proportional to total primary energy

used, and paths less than 1EJ are dashed. (2) Sums may differ slightly from components, due to rounding.

Energy Delivery

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September 2015


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September 2015


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abenomics: politics and [email protected] +81-3-6836-8400 note:...

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