You are on page 1of 15

Macro Japan Economics

abc
Global Research

Japan Economic Weekly
Bank note rule appears destined for change or abolition

Bank note rule likely to be altered or abolished p2
The BoJ’s new fund for asset purchases probably poses no threat to the bank note rule. But if the BoJ continues to buy outright long-term JGBs through its normal market operation at the current pace, the bank note rule limit will be exceeded in about three years. Thus, the BoJ will probably amend or abandon its bank note rule before the limit is exceeded.

Aug core private machinery orders surprised to the upside p5
Up 10.1% m-o-m, versus consensus forecast of a 3.9% drop. Orders will grow strongly q-o-q in July-September. However, growth is likely to subside.

Outlook for JGB market

p7

If the US Fed were to adopt targets for prices or nominal GDP, the BoJ would be pressured to adopt a similar policy. However, the BoJ has just committed to a major policy easing, so it probably could not adjust this policy to match US policy. Next week, we foresee a yield range of 0.800.90% for newly issued, 10-year JGBs.

Forecasts for 18-22 October
15 October 2010
Seiji Shiraishi Economist HSBC Securities (Japan) Limited +81 3 5203 3802 seiji.shiraishi@hsbc.co.jp

p9

The index of tertiary industry activity probably increased somewhat in August, reflecting the impact of an unusually hot summer.

Weekly economic calendar Annual economic forecasts

p 10 p 11

View HSBC Global Research at: http://www.research.hsbc.com

Issuer of report:

HSBC Securities (Japan) Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

exchange-traded funds and real estate investment Source: Bloomberg 2 .5 1 0. they accounted for a growing portion of instruments purchased by the BoJ through its open-market operations. the bank note rule limit will be exceeded in about three years  Thus.Macro Japan Economics 15 October 2010 abc Bank note rule likely to be altered or abolished  BoJ’s new fund for asset purchases probably poses no threat to the bank note rule  But if the BoJ continues to buy outright long-term JGBs through its normal market operation at the current pace. the BoJ proposed to set up temporarily a new fund of JPY5 trillion to purchase financial assets. In order to avoid the perception that it was buying long-term JGBs to help fund government expenditures. the BoJ will probably amend or abandon its bank note rule before the limit is exceeded Bank note rule The bank note rule limits BoJ holdings of longterm JGBs to the amount of BoJ bank notes in circulation. Based on the logic of supplying more money in circulation. the BoJ adjusted its purchases of long-term JGBs to the changes in its bank notes outstanding. The need for some limit on these purchases was recognized in the 1990’s.5 0 Feb-89 Feb-92 Feb-95 Feb-98 Feb-01 Feb-04 Feb-07 Feb-10 Long-term JGB purchases by new fund not subject to bank note rule On 5 October. which is an internal regulation. As long-term JGB issuances Outright purchases of long-term JGBs by the BoJ increased. and to balance its long-term assets and liabilities. not one specified in the Bank of Japan Law. when the Japanese government started issuing large amounts of long-term JGBs to fund expenditures while economic growth remained depressed following the bursting of Japan’s bubble economy of the late 1980’s. commercial paper. In March 2001. (%) 2 1. the BoJ adopted a policy of quantitative easing. corporate bonds. such as government bonds. the BoJ decided to adopt the bank note rule.

The BoJ would probably not go that far. the BoJ would have 3 . If the bank were to use the new fund to buy medium-term or long-term JGBs without limit on purchase volume and with the goal of lowering the corresponding market interest rates. the new fund will probably grow over the medium-to-long term. the BoJ will probably adhere to the bank note rule in its ordinary. about JPY1 trillion of corporate bonds with remaining maturities of 1-2 years and commercial paper. Thus. The BoJ’s greatest fear is probably that its alteration or abandonment of the bank note rule would be seen as a loss of fiscal discipline by JGB investors. Therefore. who would then demand a larger risk premium. it would essentially be supporting the prices of these JGBs and could be accused of being simply an organ of government finance. The BoJ specified that the long-term JGBs and corporate bonds it would buy have remaining maturities of 1-2 years in order to lower market interest rates of 1-2 years and to reduce risk premiums. because central banks are supposed to be neutral participants in markets for risk assets and to encourage the market mechanism and because the Japanese market for risk assets is much smaller than the market for long-term JGBs. New fund likely to grow As the BoJ target for the unsecured overnight call rate is now virtually 0% (formally 0-0. The bank note rule could lose significance if the BoJ were to purchase long-term JGBs with remaining maturities of more than 2 years through the new fund. Since these purposes differ from the purposes of regular. driving up long-term interest rates. the BoJ will probably have to maintain its current easy policy until the governments and households of the US and Europe reduce their debts enough to resume stronger consumption. Furthermore. Furthermore. However. To avoid such a market reaction. Thus. it will probably either expand the new. if the BoJ continues to buy longterm JGBs outright through its ordinary market operations at its current pace.1%).5 trillion in long-term JGBs with remaining maturities of 1-2 years and short-term government securities. open-market purchases of long-term JGBs. the balance of holdings of these longterm JGBs will probably not increase rapidly. they would not be limited by the Bank note rule.Macro Japan Economics 15 October 2010 abc trusts. if the bank has to ease policy further in the future. the BoJ will probably alter or abandon its bank note rule before that happens. long-term JGBs with remaining maturities of 1-2 years will probably comprise a growing proportion of the assets purchased through the new fund. Bank note rule likely to be altered or abolished Nonetheless. open-market purchases of long-term JGBs in the near term. the BoJ will adjust size of the fund periodically. which will not happen soon. with about JPY3. The BoJ envisioned that the new fund would reach JPY5 trillion about one year after purchases began. as needed. the balance of these holdings will exceed the balance of bank notes outstanding sometime between the second half of 2013 and early 2014 (see chart below). BoJ unlikely to buy JGBs with longer remaining maturities through the new fund A steady increase in the BoJ’s purchase of longterm JGBs with remaining maturities of 1-2 years through the new fund could be viewed as undermining the effect of the bank note rule. given their relatively short remaining maturities. and about JPY500 billion of exchange-traded funds and real estate investment trusts. Most likely. JPY5 trillion fund or diversify the assets purchased with this fund.

inflationary expectations would probably not develop and the government’s fiscal risk premium would probably not rise.Macro Japan Economics 15 October 2010 abc to make some sort of new commitment. Therefore. However. several times over the past two decades. Furthermore. open-market purchases of longterm JGBs at its current rate and that bank notes grow by 1% pa Source: Bank of Japan 4 . the BoJ has combined easy monetary policy with expansive fiscal policy. Balance of BoJ holdings of long-term JGBs in its ordinary account versus balance of bank notes in circulation. Yet deflationary expectations and very low long-term interest rates persisted during these periods of macro policy mixes. even if the BoJ were to modify or scuttle its bank note rule. and gap between the two (JPYtrn) 100 80 60 40 20 0 -20 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Difference (RHS) Banknotes JGB Holdings Note: Assuming the BoJ continues to make outright. the government’s recent commitment to a framework for achieving fiscal health in the medium term and its strategy for fiscal expenditure should reduce the risk of an adverse market reaction to the modification or abolition of the bank note rule. in effect monetising government debt.

A 272% m-o-m increase in orders from the non-ferrous metals industry lifted core private orders by 1.1% in July. led mainly by orders from manufacturers benefiting from government fiscal stimuli measures and from strong exports. especially relative to the rapid increase in industrial production. This was the third straight monthly increase of these orders. given the strong uncertainty about US economic prospects and the recent cyclical deceleration in many prominent global leading indicators. versus consensus forecast of a 3.9%. semiconductor manufacturing equipment orders and private machine tool domestic orders. increased by 16.Macro Japan Economics 15 October 2010 abc Aug core private machinery orders surprised to the upside  Up 10. Actually. the weakening of global fiscal stimuli. order growth is likely to slow hereafter. and even if these orders declined by 10% m-o-m in September. much stronger than the market consensus forecast. and persistent yen appreciation. Implications If private core orders were flat m-o-m in September. manufacturing industries marked monthly increases in August. Overseas orders declined by 3. of -3. at last.8%. declined sizably in recent months.9% drop  Orders will grow strongly q-o-q in July-September  However. the first monthly decline in four months. Facts In August.4pts. after increases of 9. but we do not believe that a strong capex trend will be sustained hereafter. 8 of 17 manufacturing industries and 8 of 12 non- 5 .1% on the month.5% m-o-m. they would still have increased by 9.9% in June and 10.9% in June and an increase of 8. The positive effects of global fiscal stimuli after the financial crisis and affluent cash flow seem to have resulted in firm capital expenditure in Japan this summer. manufacturers' orders increased by 12. Core private machinery orders had been bottoming out since Q4 2009. but the pace of bottoming had been slow until Q2 2010. suggesting that private machinery order growth has peaked.7% q-o-q. and orders through agencies.6% q-o-q in Q3. growth is likely to subside Summary Japan’s private machinery orders in August increased 10. while non-manufacturers' orders increased by 8.3% m-o-m.7% m-o-m.8% in July. both good leading indicators of core private machinery orders.1% m-o-m. but given the uncertain prospects for the US economy. these orders would have increased by 13. after a decline of 3.1% in July. following an increase of 8. August’s orders indicate that the pace of quarterly increase accelerated in Q3. which mainly represent orders from small companies.

1 4.9 38.Macro Japan Economics 15 October 2010 abc Breakdown of rates of change in machinery orders Mar-10 Private.5 -19.0 0. SA Y-o-y% Manuf.4 1.3 9.5 17.2 22.1 -8.2 1.8 3. Orders. Production index (JPYbn) 1400 1300 1200 1100 1000 900 800 700 600 500 (2005=100) 120 110 100 90 80 70 Source: Cabinet Office 6 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Priv ate orders ex cl. 6MMA Source: Cabinet Office 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 N on-m anuf.4 129.3 1.2 Jul-10 8.6 74.5 68.2 Jun-10 1.4 13.3 1.0 -6. Mach.0 52.0 9.0 0.4 27. ESE Y-o-y% Public.2 6.4 Source: Cabinet Office Note: ESE means excluding ships and electric power Trend in private machinery orders excl.5 -19.8 10. volatile orders Trends in manufacturing and non-manufacturing orders (J PY bn) 750 700 650 600 550 500 450 400 (JPY bn) 550 500 450 400 350 300 250 200 (JPYtrn) 1.9 39.1 Apr-10 4.1 24.. Y-o-y% Non-manuf.8 15.6 -2. Mach.1 50.7 0.3 92.4 Aug-10 10.5 29.6 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Recessions Core Pr.8 1. M-o-m%.1 1. v olatile orders Production (RHS) . ESE. Orders Core Pr. Y-o-y% Total.8 0.7 24. Y-o-y% Overseas.1 -4.4 May-10 -9.9 0. ex cl.s hips & electric pow er (LHS) M anufacturing (RHS) Source: Cabinet Office Major processing industries’ orders (JPY bn) 160 140 120 100 80 60 40 20 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 General m achinery Electrical m ac hinery Autom obiles Source: Cabinet Office Core private orders vs.9 -7.2 50. Y-o-y% 5.4 1.7 -1.2 23.

expectations of a long-term future for current low interest rates would rise. which would contribute to dollar depreciation against the yen. 10-year JGBs Fed policy and BoJ policy The minutes of the FOMC meeting on 21 September revealed that the committee had considered a strategy of raising short-term inflation expectations in order to lower real shortterm interest rates and stimulate economic growth. if the Fed were to adopt targets for price levels or nominal GDP. Such a move by the Fed would probably contribute to further yen appreciation against the US dollar. it is difficult to set high monetary policy targets for the US. the impact would exceed the impact of BoJ policy to date. facile changes in monetary policy commitments are problematic for the BoJ.80-0. of maximising employment and stabilising prices. no significant economic data is scheduled for release in Japan. we foresee a yield range of 0. the BoJ would be pressured to adopt a similar policy  However. it will be difficult for it to adjust this policy to match Fed policy. so it probably could not adjust this policy to match US policy  Next week. In the US. If such targets were not met. the minutes also clarified the inflation rate target considered appropriate in order for the Federal Reserve Board to achieve its two main mandates. The BoJ has just committed to maintain a policy interest rate target of essentially 0% for a long time as part of its comprehensive easing policy to achieve its understanding of price stability over the medium-long term. Thus. If it were to commit to one or more high targets. pressuring the BoJ to adopt similar measures. The Fed’s clarification of an inflation rate consistent with its understanding of medium-to-long-term price stability would have about the same impact as the BoJ’s long-term commitment to maintain current low interest rates (a policy duration impact).Macro Japan Economics 15 October 2010 abc Outlook for JGB market  If the US Fed were to adopt targets for prices or nominal GDP. Therefore. rather than inflation rates. unless the BoJ Law is amended. Prospects for the JGB market Next week. the Fed could lose credibility. the Fed may not adopt a high target. industrial production in September and housing market statistics for October will be reported on 7 . the BoJ has just committed to a major policy easing. partly due to technical factors. However. Thus.90% for newly issued. As part of this strategy. and the Fed’s consideration of a target for nominal GDP. as such changes erode its credibility. However. the Fed’s preference for targeting price levels. before inflation expectations rose. The US government and household sector continue to hold large amounts of debt following the bursting of an unprecedented credit bubble.

Macro Japan Economics 15 October 2010 abc 18 October. the yield on newly issued.90%. This range reflected a steepening of the yield curve in the US. housing starts in September on the 19th. However.0. it could fall below 0. the Beige book for October on the 20th.90%. Next week. 10-year JGBs is likely to fluctuate again in the range of 0.85-0. and the Philly Fed indices for October on the 21st. the yield on newly issued.85%. since the OECD leading indicator continues to decline and the US economic data coming out next week are more likely to disappoint than to encourage.80 .90% 8 .845-0. This past week. 10-year JGBs fluctuated in the range of 0. Expected range for 18-22 October Yield on newly issued 10-year JGBs: 0. stemming from the pricing in of most expectation from additional Fed easing at the November meeting of the FOMC and the revelation that the FOMC had considered adopting a price level target at its September meeting.

4 % 3. 21 October All Industry Activity (August) 8:50 Last Median Forecast Month Year 1. In August. 9 .3% m-o-m and tertiary industry activity indices are estimated to rise 0. These effects are expected to have continued in August. reflecting the impact of an unusually hot summer Monday.6 % 1.Macro Japan Economics 15 October 2010 abc Forecasts for 18–22 October  The index of tertiary industry activity probably increased somewhat in August.4 % 2. 18 October Tertiary industry activity (August) 8:50 Last Median Forecast Thursday.7 % -0.1 % -0.9 % Monthly Year 1.1 % The index in August is estimated to have risen moderately m-o-m.3% m-o-m.1% m-o-m.3 % 2.5 % 0. industrial production fell 0. July’s firm m-o-m growth reflected the positive effects of an unusual hot summer. The all-industry activity index in August is estimated to have risen 0.1 % 4.0 % 3.1 % 0.

5% 0.1% 20.3% 2.9% Reuters tankan (October) 10/19 10/20 Tue Auction: 5-year Wed around BoJ: Speech by Kiyohiko G. September) Industrial production (September) Rate Ratio Real Y-o-y M-o-m Y-o-y 14:00 14:00 Source: HSBC 1.1% -0.3% -0. Deputy Governor at a meeting with 11:00 business leaders in Hiroshima Auction: Treasury Discount Bills (3-month) 10/21 Thu 13:30 All industry activity (August) M-o-m Y-o-y Auction: 20-year 10/22 10/25 Fri Mon 8:50 Trade balance ( September ) Trade balance 85.4% 2.0% 3.54 1.9JPYbn Y-o-y Auction: Enhanced-liquidity 10/26 Tue 8:50 Corporate service price index ( September ) M-o-m Y-o-y 10/27 Wed 14:00 Shoko Chukin Bank survey (October) Auction: Treasury Discount Bills (3-month) Auction: 2-year 10/28 Thu 8:50 8:50 Retail sales of large stores (September) Retail trade (September) BoJ: Monetary policy meeting Announcement of the Monetary Policy Meeting Decisions 15:00 15:30 10/29 Fri 8:30 Outlook for Economic Activity and Prices (October 2010.0% -0.8% 4.Macro Japan Economics 15 October 2010 abc Weekly economic calendar (18-29 October) Data Time Indicators & events Last Median HSBC 10/18 Mon 8:50 Tertiary industry activity (August) M-o-m Y-o-y 1.4% 3.7% -0.5% 15.9% -1. The Bank's View) BoJ: Governor Shirakawa's regular press conference Tokyo CPI (October) Y-o-y core Y-o-y 8:30 All Japan CPI (September) Y-o-y core Y-o-y 8:30 8:30 8:30 8:50 Unemployment rate (September) Job offers to applicant ratio (September) Household survey (All households.1% 47.5% 12.1% 0.3 index Y-o-y Y-o-y -1.7% -0.6% -1.0% Housing starts (September) Private construction orders (September) Y-o-y Y-o-y 10 .1% 4.1% -48.4% -1.1% 0.0% 5.6% 1.0% -0. Nishimura.

3 0.28 1.1 2.50 0.30 -5.9 0.6 5.3 0.1 0.3 -2.2 0.2 -1.4 -0.2 -1.4 2.1 0.1 0.7 0.2 0.5 1.9 2.30 2.2 -1.9 1.1 -0.3 -6.8 -3.3 -3.2 1.2 -0.7 -6.1 -0.6 5.4 3.8 -3.4 -0.0 20.30 0.3 -2.0 -0.5 -0.7 0.5 2.0 -4.3 1.28 1.6 0.35 1.2 2.55 1.30 0.9 -16.7 -11.6 1.1 2.4 -12.4 95 128 157 0.2 2.9 5.10 0.0 -0.3 -9.3 0.0 -0.2 0.34 -1.3 5.5 0.0 1.8 3.5 1.9 3.2 2.7 0.1 -8.4 -1.3 0.2 1.1 -6.2 -0.5 -8.8 2.1 5.00 0.4 4.1 -0.2 -14.6 0. % M2 Trade balance (% of GDP) Current account (% of GDP) ¥/$ (end period) ¥/Euro (end-period) ¥/£ (end-period) Uncollateralized overnight call rate (end-period) Lombard rate (end-period) 3 month money (end-period) Long bond (end-period) Source: HSBC -1.6 1.00 0.4 0.4 0.4 0.8 -0.1 3.5 9.5 -14.7 1.0 2.2 4.30 0.2 91 126 130 0.10 11 .10 0. where noted) Industrial production Domestic corporate goods prices Consumer prices Unemployment rate.6 -10.5 1.9 0.4 1.80 0.28 0.10 0.9 -5.4 -2.4 0.1 -0.5 0.3 -0.2 3.7 -6.3 -18.30 0.3 -1.6 95 128 157 0.9 -0.0 0.1 -3.8 93 134 150 0.3 -0.8 -0.3 -5.0 -0.2 -1.8 -3.6 1.0 0.9 1.00 0.4 0.0 -2.0 -4.4 1.1 0.00 -3.5 -1.4 0.3 5.7 1.0 -19.6 -8.9 1.8 -1.3 0.9 -0.1 -0.5 90 122 142 0.2 7.8 1.6 3.7 -1.00 0.1 9.0 -2.0 -0.4 0.9 3.1 -0.3 -4.30 0.2 -1.0 -23.3 -2.3 -1.3 0.5 5.7 3.2 25.1 2.6 10.1 -0.0 0.0 1.30 0.5 0.3 -1.6 0.2 2.8 3.2 -0.2 0.1 -8.7 0.7 -3.1 0.1 15.2 -8.2 -0.1 1.3 0.30 0.5 -11.1 -0.4 0.4 -4.2 1.28 1.5 99 131 142 0.0 -1.2 -0.9 -22.5 -2.1 0.8 1.70 0.4 -1.1 11.2 -3.1 0.6 -0.1 2.5 3.7 -0.8 1.4 -5.30 0.4 1.5 0.3 -0.2 -0.2 0.2 0.2 -0.0 0.5 4.1 1.6 0.9 3.0 1.7 -0.6 95 128 157 0.Macro Japan Economics 15 October 2010 abc Annual economic forecasts Annual economic forecasts ___________ Calendar year_____________ _____________ Fiscal year _____________ 2008 2009 2010e 2011e 2008 2009 2010e 2011e % change on previous year GDP Consumption Government consumption Investment Private non-residential Private residential Public capital formation Stockbuilding (%GDP) Domestic demand Exports of goods and services Imports of goods and services Nominal GDP % contribution to GDP Consumption Government consumption Investment Private non-residential Private residential Public capital formation Domestic demand Exports of goods and services Imports of goods and services % change on previous year (exc.3 93 126 142 0.4 0.5 0.2 -2.0 1.5 2.28 1.1 -0.0 1.0 -0.28 0.5 -0.9 -8.29 3.4 -15.0 -3.5 0.

1 1.9 1.2 10.5 -2.2 1.9 -1.5 -4.5 -0.8 -0.Macro Japan Economics 15 October 2010 abc Quarterly economic forecasts Quarterly economic forecasts ________2009 ________ 1Q 2Q 3Q 4Q ________2010 _________ ________ 2011 _________ 2012 1Q 2Q 3Qe 4Qe 1Qe 2Qe 3Qe 4Qe 1Qe % change on previous year GDP Consumption Government consumption Investment Private non-residential Private residential Public capital formation Domestic demand Exports of goods and services Imports of goods and services Nominal GDP % change on previous quarter GDP Consumption Government consumption Investment Private non-residential Private residential Public capital formation Domestic demand Exports of goods and services Imports of goods and services -8.4 Unemployment rate.2 2.7 3.6 -10.4 -4.6 -7.8 1.8 95 128 157 0.8 95 128 157 0.0 0.4 -36.1 0.0 -0.5 3.6 -3.4 -24. % 2.7 -7.2 0.0 0.1 -0.3 2.7 1.0 0.1 -0.10 0.00 0.2 0.5 95 128 157 0.2 -5.1 % change on previous year (exc.3 0.4 2.0 -3.5 6.2 -1.7 0.0 0.3 0.5 -0.5 0.7 34.9 2.0 0.00 0.5 1.35 0.3 0.0 2.8 0.2 3.9 -17.9 88 108 132 0.2 -0.8 3.4 -1.1 -0.00 0.3 1.5 -2.5 2.28 0.0 -0.1 0.9 -5.10 0.8 0.9 -20.5 -1.7 0.2 0.9 0.3 8.0 2.30 0.7 -1.2 5.5 0.2 1.0 1.5 0.5 -0.3 -10.7 0.3 1.2 4.0 1.3 -1.3 -0.0 27.7 5.1 -7.28 1.28 1.0 0.0 3.0 1.3 11.5 0.4 0.7 2.5 -17.1 2.2 -9.6 -5.5 3.8 -22.4 1.5 15.9 0.4 0.8 0.2 5.7 -1.30 0.4 -0.6 -3.30 0.8 2.0 2.9 -20.0 -5.9 -3.2 0.3 -18.3 -5.0 1.3 Consumer prices 4.1 4.3 -0.5 -7.2 -0.3 -2.9 -5.1 -9.3 -0.5 0.6 0.8 11.4 1.6 0.0 3.2 1.1 -0.9 11.6 2.0 0.9 3.3 2.5 0.3 Domestic corporate goods prices 0.3 -19.3 2.35 0.9 4.1 2.2 0.3 0.30 0.6 4.5 -4.10 0.7 -3.5 1.5 5.1 5.30 Lombard rate (end-period) 0.8 1.3 93 126 142 0.30 0.5 -18.2 3.7 0.0 0.7 0.2 -0.0 0.3 0.0 -1.0 -2.8 10.0 4.6 1.5 -3.9 0.5 3.0 0.8 0.3 1.4 5.0 0.5 -9.2 0.0 5.5 2.2 4.5 90 122 142 0.6 -14.5 1.4 -8.2 -3.4 -4.3 -6.7 2.30 0.0 -15.0 0.28 1.0 -15.8 5.3 -0.5 1.9 -3.0 0.28 1.0 0.2 1.2 0.4 0.1 -2.10 Uncollateralized overnight call rate (end-period) 0.7 0.5 7.1 1.3 -9.9 2.5 -3.8 4.4 0.5 1.7 -2.0 -1.8 3.7 -0.3 0.4 5.1 1.7 2.2 0.5 0.6 5.30 0.7 -15.30 0.5 1.6 -5. where noted) -34.0 -1.4 1.4 -22.7 7.30 0.5 5.1 3.3 0.2 2.7 -16.3 1.00 0.3 84 114 132 0.6 0.2 0.2 3.7 0.2 -1.4 1.2 3.5 9.2 0.0 0.0 0.7 1.6 -2.5 -2.9 13.3 0.9 -8.1 1.6 3.6 -29.0 2.3 0.6 -27.4 17.3 -0.6 2.3 1.8 0.5 0.5 11.4 Industrial production -1.10 0.6 1.3 1.28 0.4 1.5 -3.6 -0.5 0.5 2.8 0.0 -0.9 1.6 8.5 3.6 -4.0 1.5 Current account (% of GDP) 99 96 90 ¥/$ (end period) 131 135 131 ¥/Euro (end-period) 142 159 143 ¥/£ (end-period) 0.8 -5.7 93 134 150 0.28 1.1 0.3 0.00 0.3 1.0 0.6 -4.28 1.4 -8.0 0.00 0.5 0.5 3.4 1.7 2.2 0.10 0.4 0.2 0.9 0.3 2.5 -1.7 2.6 95 128 157 0.8 M2 2.0 -2.3 0.4 0.8 1.5 2.1 2.1 1.8 -7.0 0.8 4.0 5.5 -8.9 -13.30 0.9 0.0 1.2 0.0 0.30 0.0 0.5 4.7 22.2 2.10 0.3 0.6 -6.1 -10.5 1.5 6.30 0.28 0.2 0.6 95 128 157 0.4 0.1 -1.1 5.28 1.0 0.6 30.1 21.1 2.7 -0.28 3 month money (end-period) 1.2 -1.5 2.4 1.4 -19.9 0.2 -0.1 -1.7 5.7 1.0 0.4 0.6 1.1 3.3 Long bond (end-period) Source: HSBC 12 .6 -0.5 -24.6 0.4 -1.

economist(s). This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. financial situation and needs. Certain investment products mentioned in this document may not be eligible for sale in some states or countries. Past performance of a particular investment product is not indicative of future results. 13 . is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Seiji Shiraishi Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons. If necessary. or other factors. * HSBC Legal Entities are listed in the Disclaimer below. certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was. before acting on the advice. The value of and the income produced by the investment products mentioned in this document may fluctuate.Macro Japan Economics 15 October 2010 abc Disclosure appendix Analyst Certification The following analyst(s). HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. financial situation or needs of any particular investor. consider the appropriateness of the advice. For disclosures in respect of any company mentioned in this report. given it has been prepared without taking account of the objectives. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. whether through the press or by other means. Analysts. Advice in this document is general and should not be construed as personal advice.hsbcnet.com/research. seek professional investment and tax advice. economists. Value and income from investment products may be adversely affected by exchange rates. financial situation or particular needs before making a commitment to purchase investment products. so that an investor may get back less than originally invested. interest rates. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. please see the most recently published report on that company available at www. Accordingly. having regard to their objectives. and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. Additional disclosures 1 2 This report is dated as at 15 October 2010. and/or strategist(s) who is(are) primarily responsible for this report. investors should. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives. and they may not be suitable for all types of investors.

or otherwise. HSBC and its affiliates and/or their officers. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. HSBC France. The Hongkong and Shanghai Banking Corporation Limited. London. Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited.E.Macro Japan Economics 15 October 2010 abc Disclaimer * Legal entities as at 31 January 2010 Issuer of report 'UAE' HSBC Bank Middle East Limited. Past performance is not necessarily a guide to future performance. Singapore branch. representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Milan.A. Seoul Branch. HSBC México. HSBC Building HSBC Bank. HSBC Securities (USA) Inc. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. recording. in the United States and not with its non-US foreign affiliate.A.Banco Múltiplo. Mumbai. Paris branch. on any form or by any means. 'DE' HSBC Trinkaus & Burkhardt AG. this research is distributed by HSBC Bank Australia Limited (AFSL No. The decision and responsibility on whether or not to invest must be taken by the reader. this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. HSBC Bank Brasil S. without the prior written permission of HSBC Securities (Japan) Limited. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. photocopying. HSBC Securities (South Africa) (Pty) Ltd. In Australia. 000 HSBC Bank 11-1 Nihonbashi 3-Chome (RR).. Tel Aviv. AFSL 301737) for the general information of its “wholesale” customers (as defined in the Corporations Act 2001). The value of any investment or income may go down as well as up and you may not get back the full amount invested. This publication is not a prospectus as defined in the FSCMA. the issuer of this report. HSBC Securities (Japan) Limited Hong Kong. New York. HSBC Saudi Arabia Limited. All U. changes in the exchange rates may have an adverse effect on the value. 'US' HSBC Securities (USA) Inc. this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970. ALL RIGHTS RESERVED. Chuo-ku. Moscow. This publication is not a prospectus as defined in the SFA. financial situation or particular needs of any recipient. Where distributed to retail customers. directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). No part of this publication may be reproduced. In Korea.com Pantelakis Securities S. electronic. The information and opinions contained within the research reports are based upon publicly available information and rates of taxation applicable at the time of publication which are subject to change from time to time. 'EG' HSBC Securities Egypt S. its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. 'CN' HSBC Investment Bank Asia Limited. this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. 'HK' The Hongkong and Shanghai Banking Corporation Limited. Tokyo. 'JP' HSBC Securities (Japan) Limited. In Singapore. 'IN' HSBC Securities and Capital Markets (India) Private Limited. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed.. HSBC Securities (Japan) Limited is regulated by the Financial Services Agency of Japan and the Japan Securities Dealers Association... or in connection with this report. In Hong Kong. Stockholm. S. These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law.A. HSBC Bank Australia Limited. . Cairo. 'CA' HSBC Securities (Canada) Inc. Dusseldorf. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited.A. Toronto. 232595).research. Institución de Banca Múltiple. Dubai. price or income of that investment.S. it is not intended for and should not be distributed to retail customers in Hong Kong. Where an investment is denominated in a currency other than the local currency of the recipient of the research report. or transmitted. No consideration has been given to the particular investment objectives.S. It may not be further distributed in whole or in part for any purpose. HSBC Yatirim Menkul Degerler A. Japan Beijing Representative Office. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. Madrid. 'TW' HSBC Securities (Taiwan) Corporation Limited.. This document has been issued by HSBC Securities (Japan) Limited ("HSBC") for the information of its customers only. Istanbul. mechanical.A. Tokyo 103-0027. Seoul Securities Branch. Athens. this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers. HSBC Bank Argentina S. Johannesburg. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented on the supervisory board or any other committee of those companies. If it is received by a customer of an affiliate of HSBC. HSBC makes no guarantee. Grupo Financiero HSBC. stored in a retrieval system. HSBC Securities (Japan) Limited 2010.hsbc. 'GR' HSBC Website: www. HSBC and its affiliates may have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments). The Hongkong and Shanghai Fax: +81 3 5203 3699 Banking Corporation Limited. HSBC Bank plc. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. MICA (P) 142/06/2010 and MICA (P) 193/04/2010 14 . Singapore Branch" representative in respect of any matters arising from. Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (“FSCMA”). Where research is published in translation the original version shall be deemed to be the official publication for record purposes. The Telephone: +81 3 5203 3111 Hongkong and Shanghai Banking Corporation Limited. It may not be further distributed in whole or in part for any purpose. Copyright. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law.

com. South America ex-Brazil +54 11 4344 8144 javier.tani@hsbc.br constantin.com Murat Ulgen +90 212 376 4619 Simon Williams +971 4 507 7614 Liz Martins +971 4 423 6928 muratulgen@hsbc.com.au Song Yi Kim +852 2822 4870 Donna Kwok +852 2996 6621 Sherman Chan +852 2996 6975 Wellian Wiranto +65 6230 2879 Seiji Shiraishi +81 3 5203 3802 Yukiko Tani +81 3 5203 3827 Sun Junwei Associate Sophia Ma Associate songyikim@hsbc.fr stuart1.de jorge.schilo@hsbcib.com.morgenstern@hsbc.com Emerging Europe. Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 hongbinqu@hsbc.morozov@hsbc.hk Paul Bloxham Chief Economist.com.hk Frederic Neumann Managing Direct.henry@hsbcib.wang@us.com.lemoine@hsbc.sg seiji.hessler@hsbctrinkaus. Co-head Asian Economics Research +852 2822 4556 fredericneumann@hsbc.jp .com.tr simon.com.mx Asia Pacific Qu Hongbin Managing Direct.jha@hsbcib.com.ar mathilde.com Astrid Schilo +44 20 7991 6708 Germany Lothar Hessler +49 21 1910 2906 France Mathilde Lemoine +33 1 4070 3266 United Kingdom Stuart Green +44 20 7991 6718 Andrew Grantham +44 20 7991 2170 astrid.c.finkman@hsbc.com.king@hsbcib.hk donnahjkwok@hsbc.grantham@hsbcib.hsbc.br North America Kevin Logan +1 212 525 3195 Ryan Wang +1 212 525 3181 Stewart Hall +1 416 868 7523 kevin.r.jancso@hsbc.com. Middle East and Africa Alexander Morozov +7 495 783 8855 alexander.com Europe Janet Henry Chief European Economist +44 20 7991 6711 janet. Australia and New Zealand +61 2925 52635 paulbloxham@hsbc.loes@hsbc.hk shermanwkchan@hsbc.com andrew.williams@hsbc.martins@hsbc.ar Ramiro D Blazquez Senior Economist +54 11 4348 5759 Jorge Morgenstern Economist +54 11 4130 9229 Brazil Andre Loes Chief Economist +55 11 3371 8184 Constantin Jancso Senior Economist +55 11 3371 8183 Mexico Sergio Martin Chief Economist +52 55 5721 2164 Central America Lorena Dominguez Economist +52 55 5721 2172 ramiro.com liz.hsbc.com Latin America Argentina Javier Finkman Chief Economist.co.hk wellianwiranto@hsbc.com.ward@hsbcib.com stewart_hall@hsbc.com.com andre.ar lothar.shiraishi@hsbc.martinm@hsbc.dominguez@hsbc.green@hsbcib.co.com Karen Ward Senior Global Economist +44 20 7991 3692 karen.blazquez@hsbc.com.logan@us.com.com.abc Global Economics Research Team Global Stephen King Global Head of Economics +44 20 7991 6700 stephen.mx lorena.com ryan.com Madhur Jha +44 20 7991 6755 madhur.a.ca sergio.jp yukiko.