22 December 2022

Pressure cooker adjusted

Verbier
The interesting point to GREED & fear about the timing of Kamikaze Kuroda’s adjustment of yield curve control
on Tuesday, jolting traders out of their pre-Christmas revelries, was why it happened when he has guided of
late for the complete opposite.

The positive explanation is that he was taking advantage of the relative calm in fixed income markets, given
the recent rally in Treasury bonds and correction in the US dollar, to commence the long overdue normalisation
of policy. After all, in Japan it is not good to be the nail that is sticking out, and in the context of current G7
monetary policy, the BoJ governor’s stance was looking ever more extreme with the next CPI number due to
be reported on Friday. Still another explanation behind the timing of the move GREED & fear has heard is that
former BoJ deputy governor Hiroshi Nakaso, one of the two main candidates to replace Kuroda when he steps
down in April, has made it clear he would only take the job if there was a commitment to normalisation.
Interestingly, a clue to Nakaso’s current thinking is provided by a speech he delivered at an online seminar
hosted by the University of Tokyo and the IMF in November, when he argued that central banks must remove
emergency support measures once financial crises are over to avoid moral hazard (see Reuters article:
“Nakaso, a contender to lead BOJ, urges removal of emergency support”, 17 November 2022).

Probably both the above factors are behind this week’s development. What is clear is that the market action
has so far been much more orderly than if the adjustment of YCC had been triggered by escalating market
pressures in a context of surging Treasury bond yields and a surging US dollar, which was the growing threat
when Japan engaged in its first foreign exchange intervention in 24 years to support the yen when the
Japanese currency hit an intra-day low of 151.9 in October (see Exhibit 1). In this respect, this week’s move
has probably reduced the risk of a sudden de-anchoring of bond yields in Japan, which still has the potential
to trigger ripple effects globally, for example a sudden repatriation of capital into Japan. It is also the case
that, if Kuroda had stubbornly stuck to his policy all the way to his projected retirement in April, there would
likely have been intense speculation as regards an imminent adjustment of policy on the change of BoJ
governor.

Exhibit 1: Yen/US$ (inverted scale)

70
Yen/US$ (inverted scale)
80
90
100
110
120
130
140
150
160
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

Source: Bloomberg

Please see analyst certifications, important disclosure information, and information regarding the status
of non-US analysts at the end of this report. 1
*Jefferies Hong Kong Limited
Still, despite Kuroda’s stringent denial this week, in what might be viewed as the Japanese equivalent of
Custer’s last stand, the market expectation will now be for further adjustments in yield curve control if not a
complete abandonment of the policy. For the record, Kuroda said this week that “adjusting the YCC does not
signal the end of YCC or an exit strategy”.

Precisely to counter such expectations, the BoJ has been a massive buyer of 10-year JGBs in recent days. The
BoJ has bought Y5.14tn worth of JGBs so far this week, the biggest buying since June (see Exhibit 2), including
Y2.52tn of 10-year JGBs. The Bank of Japan’s total ownership of JGBs was 50.3% at the end of 3Q22 based
on the flow of funds data, and it will have increase since, raising the spectre of outright monetisation. When
Kuroda arrived at the BoJ in March 2013 it was only 11.5% (see Exhibit 3). Japan GDP per capita was
US$49,000 in 2012 before Kuroda took over and it is now US$39,000 (see Exhibit 4). In this respect, Kuroda’s
extreme policies have succeeded in impoverishing ordinary Japanese people.

Exhibit 2: Bank of Japan weekly gross outright purchases of JGBs

12,000 (Yen bn) Weekly BoJ purchases of JGBs

10,000

8,000

6,000

4,000

2,000

0
15-Oct-21
29-Oct-21

8-Jul-22

14-Oct-22
28-Oct-22
2-Apr-21

9-Jul-21
8-Jan-21

5-Feb-21

7-Jan-22
5-Mar-21

4-Feb-22

1-Apr-22
4-Mar-22
20-Aug-21

19-Aug-22

25-Nov-22
14-May-21
28-May-21

12-Nov-21
26-Nov-21

13-May-22
27-May-22

11-Nov-22
17-Sep-21

9-Dec-22
11-Jun-21
25-Jun-21

10-Jun-22
24-Jun-22

16-Sep-22
30-Sep-22
16-Apr-21
30-Apr-21

23-Jul-21

15-Apr-22
29-Apr-22

22-Jul-22
19-Mar-21

18-Mar-22
6-Aug-21

5-Aug-22
19-Feb-21

1-Oct-21

18-Feb-22

2-Sep-22
3-Sep-21

10-Dec-21
24-Dec-21

23-Dec-22
21-Jan-22
22-Jan-21

Note: Latest week = 19-21 December 2022. Source: Bloomberg, Bank of Japan

Exhibit 3: Bank of Japan holdings of JGBs

600 (¥ tn) (%) 55
50
500
45
BoJ holdings of JGBs as % of outstanding JGBs (RHS)
40
400
35
300 30
25
200
20
15
100
10
0 5
1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Note: Excluding Treasury discount bills. Source: Bank of Japan – Flow of Funds Accounts

22 December 2022 2
Please see important disclosure information at the end of this report.
Exhibit 4: Japan GDP per capita (US$)
50,000 (US$) Japan GDP per capita (US$)
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Source: Japan Cabinet Office, CEIC Data, Jefferies

Technically, of course, Kuroda is correct to say that YCC has only been adjusted. The BoJ has, to be precise,
raised the target yield on the 10-year JGB from 25bp to 50bp under its six-year-old yield curve control policy,
thereby allowing up to a 50bp move above or below 0%. It had been at 25bp since March 2021. The move
comes after the Bank of Japan at its last policy meeting in late October raised its inflation forecast for this
fiscal year ending 31 March from 2.3% to 2.9%. This would be the highest annual inflation rate since FY89.
Core CPI, which includes energy in Japan, was 3.6% YoY in October, well above the central bank’s 2% target
(see Exhibit 5). The next BoJ meeting is due to be held on 17-18 January.

Exhibit 5: Japan core CPI inflation

4.0 (%YoY)
Japan core CPI inflation (excl. fresh food)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
(0.5)
(1.0)
(1.5)
(2.0)
(2.5)
1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

Source: Statistics Bureau

Meanwhile, it is also worth remembering that the Japanese government added to the inflationary pressures
by announcing in late October a Y29.1tn fiscal stimulus, a package which includes subsidising energy and gas
bills to mitigate the damage from the imported inflation triggered by Kuroda’s monetary policy, with the yen
at its worst point in October down by 32.5% against the US dollar since January 2021. The yen has since
rebounded by 15.3%, including a 3.9% appreciation on Tuesday as a result of the BoJ move (see Exhibit 1).

22 December 2022 3
Please see important disclosure information at the end of this report.
From a stock market standpoint, all of the above makes it ever more likely that Japan is exiting a deflationary
era, which means that, sooner rather than later, domestic institutions should, in theory at least, start to think
about re-allocating out of yen fixed income into Japanese equities. This is something they have not done since
the Bubble burst in 1990.

The question raised by the policy action this week is whether the latest formal adjustment of yield curve
control will be the signal that triggers such a generational switch in asset allocation. Meanwhile, the 10-year
JGB has risen by 23bp this week to 0.48%, the highest level since July 2015, which means those shorting the
10-year have finally made money. Meanwhile, the 30-year JGB yield is now 107bp above the 10-year JGB yield,
after reaching a record spread of 141bp in late October (see Exhibit 6). It should be noted that the 30-year
yield is not fixed under the YCC policy unlike the 10-year, which is where most trading volume takes place.

Exhibit 6: Japanese government bond yields

Source: Bloomberg

If the case for allocating out of yen fixed income into equities is overwhelming to GREED & fear, no one can be
sure that institutional Japan will embark on such a change until there is concrete evidence that it is actually
happening given institutional inertia, the entrenchment of the deflationary mindset and an absurd, albeit
doubtless lingering, obsession with vol-adjusted returns. As discussed here many times previously, an
allocation from fixed income to equities should long since have happened in the sense that the Topix has
already outperformed the 10-year JGB by 195% on a total return basis since November 2012 prior to the launch
of Abenomics (see Exhibit 7).

22 December 2022 4
Please see important disclosure information at the end of this report.
Exhibit 7: Topix relative to 10-year JGB (total return basis)

320 Topix relative to 10-year JGB (total return basis)

300
280
260
240
220
200
180
160
140
120
100
80
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22
Jan-14

Jan-16

Jan-18

Jan-20

Jan-21
Jan-12

Jan-13

Jan-15

Jan-17

Jan-19

Jan-22
Source: Datastream

Meanwhile, Japanese nominal wage data should be watched closely for any evidence that inflationary
pressures are not just imported, which has been the Kuroda argument all year for not adjusting policy. On this
point, average monthly scheduled cash earnings of full-time salaried employee, the most lagging indicator,
rose by 1.3% YoY in October following a 1.6% YoY rise in both August and September (see Exhibit 8). This
might not sound much. But 1.6% YoY was the largest YoY monthly wage growth since October 1997. More
important perhaps, the Japanese Trade Union Confederation (Rengo), representing about 7m workers, is
seeking an overall pay rise of 5% in the coming spring wage negotiations (shunto), the biggest increase in 28
years since 1995. This includes a 3% increase in base pay and a seniority-linked increase of roughly 2%.

Exhibit 8: Japan average monthly scheduled cash earnings growth for full-time employees

3.0 (%YoY)
Japan average monthly scheduled cash earnings (full-time employees)
2.5
2.0
1.5
1.0
0.5
0.0
(0.5)
(1.0)
(1.5)
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

Source: Ministry of Health, Labour and Welfare

Meanwhile, as previously discussed here, inflation expectations are rising in Japan, for both corporates and
households, which is significant given the long-entrenched deflationary mindset. In GREED & fear’s view, the
trend in inflation expectations in Japan is for this reason much more interesting than in the Western world.
The Bank of Japan’s 4Q22 Tankan survey, released last week, shows that Japanese companies expect
inflation to reach 2.7% in one year’s time, up from 1.1% in the 4Q21 poll, while five-year inflation expectations
rose from 1.3% in 4Q21 to 2.0% in the 4Q22 survey (see Exhibit 9). The same trend can also be seen with
households. The Cabinet office’s consumer confidence survey in November showed that 64.1% of households

22 December 2022 5
Please see important disclosure information at the end of this report.
expect prices to be rising by 5% or more in one year’s time, the highest level since the data series began in
2004 (see Exhibit 10).

Exhibit 9: Bank of Japan Tankan survey: Enterprises' inflation outlook (General prices)

Source: Bank of Japan

Exhibit 10: Japan consumer confidence survey: Households’ inflation expectations one-year ahead

70 (%) Go up 5% or more Go up 2-5%

60 Go up less than 2%

50

40

30

20

10

0
Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Apr-22
Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Note: Share of households expecting prices to rise one-year ahead. Households of two or more persons. Source: Japan Cabinet Office

The above pressures should lead to rising wage demands even in ultra-conformist Japan, which is why the
BoJ’s policy has been increasingly controversial given that Japanese households have been impoverished by
the weak yen and the related surge in imported inflation though that, for now at least, has peaked. An opinion
poll conducted in late October found that 55% of the respondents said the BoJ should review its monetary
policy, compared with 22% who said it should not.

Meanwhile, if Kuroda’s stated reluctance to adjust yield curve control has been because of a lack of evidence
of a pickup in nominal wage growth, there is also the unstated concern about how a de-anchoring of bond
yields could increase, dramatically, the cost of servicing Japan’s massive government debt. This issue was
referred to in a Jefferies University expert study hosted by Jefferies’ head of Japan research, Hideyasu Ban,
based on a conference call with Hiromi Yamaoka, a former Bank of Japan director-general, earlier this month
(see Jefferies University study: Prospects for Global Inflation and the Future Direction of Monetary Policy, 12
December 2022). It should be noted that Mr. Yamaoka’s published comments make it clear that he was not
expecting an imminent adjustment of monetary policy at that time.

22 December 2022 6
Please see important disclosure information at the end of this report.
On the fiscal issue, Japan’s government debt totaled a gross 262% of GDP at the end of 2021, though the net
number is a less scary 168%. In this respect, the cost of servicing government debt has remained under control
in recent years only because of ultra-low bond yields. National debt service payments, as a percentage of tax
revenues, have declined from 47.8% in FY12 to 36.7% in FY21 ended 31 March 2022 (see Exhibit 11). Yet, as
already noted, this has been at the cost of growing BoJ ownership of JGBs, thereby threatening central bank
credibility.

Meanwhile, to maintain the 10-year JGB yield at 25bp until 20 December and 50bp thereafter, the BoJ have
bought a gross Y106tn worth of JGBs so far in 2022, the biggest annual purchases since 2016 (see Exhibit
12). This, as already noted, includes purchases of Y5.14tn so far this week.

Exhibit 11: Japan national debt services as % of government tax revenue

50 (%) Japan national debt service as % of government tax revenue

45

40

35

30

25

20
FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21
Note: Fiscal years beginning 1 April. Source: Ministry of Finance, CEIC Data

Exhibit 12: Bank of Japan annual gross purchases of JGBs

120 (Yen tn)
BoJ gross purchases of JGBs

100

80

60

40

20

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Note: Data up to 20 December 2022. Source: Bloomberg, Bank of Japan

If Japanese institutional investors have not yet returned to their own stock market, there has of late been
much greater interest in international equities and, in particular, US equities as they have sought to flee a
weakening yen even as the US has entered a bear market this year. Japanese investors’ net buying of foreign
equities have totaled Y2.266tn so far in 2022 (see Exhibit 13). Yet the Topix has declined by “only” 5% in yen
terms year to date, while the S&P500 is down 8.6% in yen terms despite the strong dollar (see Exhibit 14).

22 December 2022 7
Please see important disclosure information at the end of this report.
Meanwhile, foreign investors have sold a net Y2.17tn worth of Japanese equities so far this year, though they
have bought a net Y1.35tn so far in 4Q22 (see Exhibit 15).

Exhibit 13: Cumulative Japanese net buying of foreign equities

60 (Yen tn) Cumulative Japanese net buying of foreign equities

50

40

30

20

10

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Note: Data up to the week ended 10 December 2022. Source: Ministry of Finance

Exhibit 14: Topix relative to S&P500

110
105 Topix relative to S&P500

100
95
90
85
80
75
70
65
May-20

Sep-20

May-21

Sep-21

May-22

Sep-22
Nov-21

Nov-22
Nov-20

Jul-22
Jul-20

Jul-21
Mar-20
Jan-20

Jan-21

Mar-21

Jan-22

Mar-22

Source: Bloomberg

Exhibit 15: Monthly foreign net buying of Japanese stocks

3 (¥ tn) Foreign net buying of Japanese stocks

(1)

(2)

(3)
May-11

May-16

May-18

May-19
Sep-11

May-12

May-13
Sep-13

May-14

May-15

Sep-16

May-17

Sep-18

Sep-19

May-20

May-21
Sep-21

May-22
Sep-12

Sep-14

Sep-15

Sep-17

Sep-20

Sep-22
Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Note: Data up to the week ended 9 December 2022. Source: Bloomberg, Japan Exchange Group

22 December 2022 8
Please see important disclosure information at the end of this report.
In GREED & fear’s view, foreigners should be adding to Japan. From a valuation perspective Japan looks
attractive, most particularly from a foreign investor’s standpoint, with the yen until recently at its cheapest
level in real effective exchange rate terms since June 1969 (see Exhibit 16). The Topix trades on 12x 2023
IBES consensus earnings with a projected dividend yield of 2.8% and a projected RoE of 9%. That Japanese
companies view equities as cheap is reflected in the continuing surge in buybacks. Since the start of
Abenomics, annual announced buybacks have more than quadrupled in Japan, rising from Y2tn in FY3/12 to
Y8.6tn last fiscal year ended 31 March and Y5.8tn between April and August, the latest data available.

Exhibit 16: Japan real effective exchange rate

150
140
130
120
110
100
90
80
70
60 Japan real effective exchange rate
50
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Source: BIS, Bank of Japan

As for GREED & fear’s own Japan long-only portfolio, the best performing stock year to date is Resona
Holdings. Resona has risen by 65.8% in yen terms year to date on a total-return basis, compared with a 2.5%
decline in the Topix (see Exhibit 17). This is a reminder that the biggest beneficiary of a normalisation of
monetary policy, most particularly when the absurd negative rate policy is abandoned, should be the banks.
The exit from negative rates should happen immediately after Kuroda exits the stage, if not before. The deposit
facility rate is still minus 0.1%.

Exhibit 17: Resona, Japan long-only portfolio and Topix 2022 performance in yen terms (total-return basis)

170 (1/1/22=100) Resona Holdings Japan long-only portfolio Topix

160

150

140

130

120

110

100

90

80
Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22
Source: Datastream, Jefferies

22 December 2022 9
Please see important disclosure information at the end of this report.
Financials are one area of the market which most foreigners have not owned in recent years, as foreigners
investing in Japanese equities have all tended to own the good quality export-orientated growth companies,
most of which are down year to date. Thus, Resona is up 65.8% in yen terms on a total-return basis, while
Keyence and Fanuc, two longstanding foreign favourites, are down 16.2% and 27.6% despite the weak yen.
GREED & fear also has such stocks in the long-only portfolio but fortunately not only such stocks.

Anyway, this week’s policy action, and the increased likelihood of further adjustments in monetary policy,
means it makes sense to add to the financial exposure, though GREED & fear prefers domestic-orientated
financials in Japan, as no one can be sure what the big Japanese banks and insurance companies have
financed or invested in in their ongoing search for yield globally, which is the consequence of Kuroda’s extreme
policies. For example, they could be exposed to the unwinding of private credit markets in America, which
remains an obvious threat in the context of the scale of recent Fed rate hikes and the rising risk of a US
recession. Meanwhile, the weighting of the financials in the MSCI Japan is 11.5%, up from a bottom of 8.3%
at the end of 2020 and a recent high of 22.5% at the end of 2005.

Exhibit 18: MSCI Japan Financials relative to MSCI Japan

2600 MSCI Japan Financials / MSCI Japan

2300

2000

1700

1400

1100

800

500
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Source: Bloomberg

Lastly, the performance of GREED & fear’s yen equity income portfolio continues to demonstrate the point it
was set up to prove. That is, that yen income-orientated Japanese institutional investors would do much better
owning Japanese equities than Japanese fixed income. The dividend income portfolio has risen by 33.9% in
yen terms on a total-return basis since inception on 12 September 2019, compared with a 4.1% decline in the
10-year JGB (see Exhibit 19). This portfolio has also outperformed GREED & fear’s Japanese long-only
portfolio year to date, precisely because it is more domestic-focused in terms of the stock selection (see
Exhibits 33 and 34). The equity dividend income portfolio is up 12.6% in yen terms on a total-return basis year
to date, compared with a 5.3% decline in the Japan long-only equity portfolio (see Exhibit 20).

22 December 2022 10
Please see important disclosure information at the end of this report.
Exhibit 19: Japan dividend income equity portfolio relative to 10-year JGB (total-return basis)
140 (12 Sep 19 =100) Japan dividend income portfolio
130
10-year JGB
120

110

100

90

80

70

Sep-21

Sep-22
Sep-19

May-20

Sep-20

May-21

May-22
Nov-19

Nov-20

Nov-21

Nov-22
Jul-20

Jul-21

Jul-22
Mar-20

Mar-21

Mar-22
Jan-20

Jan-21

Jan-22
Note: Total-return performance in yen terms. Source: Datastream, Jefferies

Exhibit 20: Japan dividend income portfolio relative to Japan long-only equity portfolio

Note: Total-return performance in yen terms. Source: Datastream, Jefferies

Given the focus on Kamikaze this week, it is easy to forget that there was an extreme example last week of a
former uber dove turning seemingly ultra-hawkish. GREED & fear refers to ECB President Christine Lagarde,
who had her press conference following the December ECB meeting at the time GREED & fear was being
published. Madame Lagarde has never looked comfortable to GREED & fear in her role opining on monetary
matters, most particularly when not reading from prepared texts. Remember her ill-fated comments on being
“not here to close spreads” in March 2020 which she later retreated from. This raises the issue of why markets
should pay any attention to what she says. Still, her comments last week definitely triggered a reaction,
causing money markets’ projection of the peaking out of rates in this ECB tightening cycle, or the so-called
terminal rate, to rise from 2.8% to 3.3% (see Exhibit 21). For now, the ECB deposit facility rate has risen by
250bp from a negative 0.5% in July to a positive 2% (see Exhibit 22).

22 December 2022 11
Please see important disclosure information at the end of this report.
Exhibit 21: Eurozone money market implied policy rate for September 2023 ECB meeting
3.4 (%) Eurozone Overnight Index Swaps implied policy rate for September 2023 ECB meeting

3.2

3.0

2.8

2.6

2.4

2.2

14-Nov

21-Nov

28-Nov
3-Oct

5-Dec
7-Nov
26-Sep

10-Oct

17-Oct

24-Oct

31-Oct

12-Dec

19-Dec
Source: Bloomberg

Exhibit 22: ECB deposit facility rate

4.0 (%) ECB deposit facility rate
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
(0.5)
(1.0)
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021
Source: ECB, Bloomberg 2022

The extent of Lagarde’s sudden hawkish zeal reflects not only that the ECB has got inflation even more wrong
than the Fed but that there is, for now at least, less evidence of a slowing in inflation in the Eurozone than in
America. Thus, Eurozone inflation has only slowed from a record 10.6% YoY in October to 10.1% YoY in
November, while core inflation remains at a record 5.0% YoY (see Exhibit 23). It is also the case that inflation
expectations have surged in the Eurozone over the past 33 months, albeit from originally lower levels than in
America. The Eurozone five-year five-year forward inflation swap rate has risen from 0.72% in March 2020 to
2.36% (see Exhibit 24). It is, therefore, now higher than the level in America. The US five-year five-year forward
inflation expectation rate is now 2.22%, down from a recent high of 2.67% reached in April 2022 (see Exhibit
25).

22 December 2022 12
Please see important disclosure information at the end of this report.
Exhibit 23: Eurozone HICP inflation
12 (%YoY) Eurozone HICP inflation Core inflation (RHS) (%YoY) 6
11
10 5
9
8 4
7
6
3
5
4
3 2
2
1 1
0
(1) 0
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022
Source: Eurostat

Exhibit 24: Euro 5-year 5-year forward inflation swap rate

Source: Bloomberg

Exhibit 25: US five-year five-year forward inflation expectation rate

2.7 (%)
US 5Y 5Y forward inflation expectation rate
2.5
2.3
2.1
1.9
1.7
1.5
1.3
1.1
0.9
0.7
May-18

Sep-18

May-19

May-20
Sep-19

May-21

May-22

Sep-22
Sep-20

Sep-21
Nov-18

Nov-20

Nov-21

Nov-22
Nov-19

Jul-20

Jul-21
Jul-18

Jul-19

Jul-22
Mar-18

Mar-19

Mar-22
Jan-18

Jan-19

Jan-20
Mar-20

Jan-21
Mar-21

Jan-22

Source: Federal Reserve Bank of St. Louis

22 December 2022 13
Please see important disclosure information at the end of this report.
Meanwhile, renewed stresses in the Eurozone’s periphery bond markets are threatened by the ECB’s landmark
decision last week to commence balance sheet contraction from March, in line with its new hawkish stance.
From the beginning of March 2023, the ECB will reduce its asset purchase programme (APP) portfolio by an
average €15bn per month until the end of 2Q23 as the ECB will not reinvest all of the principal payments from
maturing securities, while the subsequent pace of reduction will be determined over time. The Italian 10-year
government bond yield has risen by 56bp to 4.43% since the ECB policy meeting last Thursday while the spread
between the Italian 10-year and the 10-year German bund yield is up 20bp over the same period to 212bp (see
Exhibit 26).

Exhibit 26: Italian 10-year government bond yield and spread over 10Y German bund yield

Source: Bloomberg

Any such disruptive outcome will then force the ECB to trigger its so-called anti-fragmentation tool, known as
the Transmission Protection Instrument (TPI), which was launched at the ECB meeting in July and discussed
here at that time (see GREED & fear - The inflation-has-peaked narrative, 28 July 2022). This would mean the
ECB resuming balance sheet expansion again, via renewed bond buying, and reconfirm the longstanding base
case here; namely that the Eurozone is on course for de facto fiscal union, funded by northern European
taxpayers and most particularly German ones. GREED & fear reiterates the point that the last benchmark
government bond GREED & fear wants to own in the world, aside perhaps from the 10-year JGB, is the German
10-year bund. The 10-year German bund yield is now 2.3%, up 265bp from a negative 0.35% when a structural
short was first recommended here in April 2020 (see Exhibit 27 and GREED & fear – “Don’t fight the Fed”!, 9
April 2020).

Meanwhile, it should also be noted that the ECB’s new hawkish stance can be rationalised by the fact that it
is only projecting a technical recession of two consecutive quarters of QoQ decline in real GDP in 4Q22 and
1Q23 (see Exhibit 28), with annual real GDP expected to rise by 0.5% in 2023, down from an estimated 3.4%
in 2022. While the ECB now forecasts headline inflation to remain above 3.5% YoY in 2023, at the start of this
year it forecast an annual average of only 1.8% YoY. Eurozone inflation is now expected to slow from 10% YoY
in 4Q22 to 3.6% in 4Q23 before declining to an average of 3.4% in 2024 and 2.3% in 2025 (see Exhibit 29).

22 December 2022 14
Please see important disclosure information at the end of this report.
Exhibit 27: German 10-year bund yield
6 (%)
5 German 10Y bund yield

(1)
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022
Source: Bloomberg

Exhibit 28: Eurozone real GDP growth: December 2022 Eurosystem staff projections
2.5 (%QoQ) 2.2
2.1
Eurozone real GDP growth: December 2022 Eurosystem staff projections
2.0

1.5

0.9
1.0
0.6 0.6 0.6 0.6
0.5 0.5
0.4 0.4 0.4 0.4 0.4
0.5 0.3 0.3
0.1
(0.1)
0.0 (0.2) (0.2)

(0.5)
1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 1Q25 2Q25 3Q25 4Q25
Source: ECB

Exhibit 29: Eurozone HICP inflation: December 2022 Eurosystem staff projections
12 (%YoY) Eurozone inflation: December 2022 Eurosystem staff projections
10.0
10 9.3 9.1
8.0
8 7.3
6.1
5.6
6
4.6
3.6 3.5 3.5 3.3
4 3.2
2.8 2.8
2.3 2.0 2.0
1.8
2 1.1

0
1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23 2Q23 3Q23 4Q23 1Q24 2Q24 3Q24 4Q24 1Q25 2Q25 3Q25 4Q25
Source: ECB

22 December 2022 15
Please see important disclosure information at the end of this report.
Meanwhile, one extremely positive consequence of the ECB’s hawkish conversion remains that Eurozone
banks have now been fully liberated from the curse of negative interest rates. This, and the related growing
practice of government-guaranteed lending discussed here previously (see GREED & fear - Retreat from a
narrative, 15 September 2022), help explain why Eurozone bank lending is rising. Eurozone loan growth to the
private sector has risen from 2.7% YoY in May 2021 to 7% YoY in September and was 6.5% YoY in October
(see Exhibit 30). This, like in America, is counterintuitive given the growing recession risk. Nonetheless, it is a
reality. It also means equity investors should continue to have exposure to European banks. The Euro Stoxx
Banks Index is down only 3.9% in euro terms and 10.3% in US dollar terms year to date, compared with a 18.6%
decline in the S&P500 (see Exhibit 31). Any renewed scares in the periphery bond markets should be used as
an opportunity to add to exposure given the underlying fiscal integration dynamic.

Exhibit 30: Eurozone loans to the private sector %YoY

12 (%YoY) Eurozone loans to the private sector

10

(2)

(4)
2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022
Source: ECB

Exhibit 31: Euro Stoxx Banks Index (USD) relative to S&P500

Source: Bloomberg

22 December 2022 16
Please see important disclosure information at the end of this report.
Lastly, some changes will be made in GREED & fear’s long-only equity portfolios. The investment in Indocement
in the Asia ex-Japan long-only portfolio will be removed and replaced by an investment in Indonesia’s Bank
Central Asia. While the investment in Woodside Energy will be increased by one percentage point by shaving
the investment in Bajaj Finance (see Exhibit 32). The investment in Recruit Holdings in the Japan long-only
portfolio will be removed and replaced by an investment in Bank of Kyoto (see Exhibit 33).

As for the India long-only equity portfolio, an investment in REC Limited (formerly Rural Electrification
Corporation) will be introduced with a 4% weighting. This will be paid for by shaving the investments in HDFC
Bank, Bajaj Finance, ICICI Prudential Life Insurance, and ICICI Lombard General Insurance by one percentage
point each (see Exhibit 35).

Exhibit 32: Asia ex-Japan long-only thematic portfolio

Themes Weight Stock picks
Australia gold mining 6% Capricorn Metals
Australia oil & gas 5% Woodside Energy
China EV battery 4% Contemporary Amperex Technology (CATL)
China e-commerce 12% JD.com (4%), Alibaba (4%), Pinduoduo (4%)
China oil & gas 6% CNOOC
Hong Kong banks 5% Standard Chartered
Hong Kong insurance 4% AIA Group
India internet 6% Reliance Industries
India life insurance 5% ICICI Prudential Life Insurance
India general insurance 4% ICICI Lombard General Insurance
India property 6% Macrotech Developers
India private sector banks 11% ICICI Bank (5%), HDFC Bank (6%)
India finance 3% Bajaj Finance
India infrastructure 4% Larsen & Toubro
Indonesia nickel mining 4% Vale Indonesia
Indonesia banks 4% Bank Central Asia
Korea tech 4% Samsung Electronics Pref
Taiwan tech 7% TSMC (4%), Silergy (3%)

Source: Jefferies

22 December 2022 17
Please see important disclosure information at the end of this report.
Exhibit 33: Japan long-only equity portfolio
Theme Weight (%) Stocks Description Weight (%)

Autos 12 Toyota Motor automaker 4

Toyota Industries auto parts maker & logistics 4
Suzuki Motor automaker 4
Machinery 17 Keyence optical-sensor maker 5
Fanuc industrial robot maker 5
Nabtesco precision gear manufacturer 3
Nidec Corp precision motor maker 4
Consumer 18 Hitachi electronic equipment maker 4
Sony consumer electronics maker 5
Fast Retailing clothing chain operator 4
Seven & I convenience store operator 5
Financials 16 SBI Holdings financial services company 5
Resona Holdings regional bank 7
Bank of Kyoto regional bank 4
Oil & gas 14 INPEX Corp oil and gas producer 6
Eneos Holdings oil refiner 4
Idemitsu Kosan oil refiner 4
Gold mining 5 Sumitomo Metal Mining gold & non-ferrous metal miner 5
Healthcare 8 Hoya optical glass maker 4
Takeda Pharmaceutical pharma company 4
Trading 5 Mitsubishi Corp general trading company 5
Telecom 5 KDDI Corp telecom carrier 5

Source: Jefferies

Exhibit 34: Japan dividend income portfolio

Stock code Stock name Sector 12MF div yld (%)
2914 JP Japan Tobacco FBT 6.4
5020 JP ENEOS Holdings Energy 5.1
7182 JP Japan Post Bank Banks 4.5
8031 JP Mitsui & Co Cap goods 3.4
7267 JP Honda Motor Auto 4.7
8410 JP Seven Bank Banks 4.2
5108 JP Bridgestone Auto 4.2
9433 JP KDDI Telecom 3.6
9432 JP NTT Telecom 3.5
7203 JP Toyota Motor Auto 3.5
9104 JP Mitsui OSK Lines Shipping 8.4
5019 JP Idemitsu Kosan Oil & gas 4.5
1605 JP INPEX Corp Oil & gas 4.9
4502 JP Takeda Pharmaceutical Pharma 4.5
Average 4.7

Source: Jefferies

22 December 2022 18
Please see important disclosure information at the end of this report.
Exhibit 35: India long-only equity portfolio
Sector Stock name Ticker weighting (%)
Financials ICICI Bank ICICIBC IN 7
HDFC Bank HDFCB IN 7
State Bank of India SBIN IN 6
Bajaj Finance BAF IN 4
ICICI Prudential Life Insurance IPRU IN 6
ICICI Lombard General Insurance ICICIGI IN 6
Computer Age Management Services CAMS IN 3
REC Limited (Rural Electrification Corp) RECL IN 4
Energy Reliance Industries RIL IN 10
Oil & Natural Gas Corp ONGC IN 10
Real Estate Godrej Properties GPL IN 4
Century Textiles CENT IN 4
DLF Limited DLFU IN 5
Macrotech Developers LODHA IN 6
Auto Maruti Suzuki India MSIL IN 5
Infrastructure Larsen & Toubro LT IN 5
Transport Adani Ports & Special Economic Zone ADSEZ IN 4
Logistics Container Corp of India CCRI IN 4

Source: Jefferies

22 December 2022 19
Please see important disclosure information at the end of this report.
Analyst Certification:
I, Christopher Wood, certify that all of the views expressed in this research report accurately reflect my personal views about the
subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed in this research report.
Registration of non-US analysts: Christopher Wood is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC
and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC,
a FINRA member firm, and therefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject
company, public appearances and trading securities held by a research analyst.
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in
this report receives compensation based in part on the overall performance of the firm, including investment banking income. We
seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry
reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's
judgement.

Investment Recommendation Record

(Article 3(1)e and Article 7 of MAR)
Recommendation Completion December 21, 2022 , 17:00 ET.
Recommendation Distributed December 21, 2022 , 17:00 ET.

Company Specific Disclosures

Ankur Pant holds a long position in HDFC Bank (HDFCB IN)
Jefferies Group LLC makes a market in the securities or ADRs of TSMC.
Jefferies Group LLC makes a market in the securities or ADRs of Sony Group Corporation.
Jefferies Group LLC makes a market in the securities or ADRs of JD.com, Inc.
Jefferies Group LLC makes a market in the securities or ADRs of Alibaba Group Holding Limited.
Jefferies Group LLC makes a market in the securities or ADRs of HDFC Bank.
Jefferies Group LLC makes a market in the securities or ADRs of ICICI Bank.
Jefferies Group LLC makes a market in the securities or ADRs of ICICI Lombard General Insurance Company Limited.
Jefferies Group LLC makes a market in the securities or ADRs of ICICI Prudential Life Insurance Company.
Jefferies Group LLC makes a market in the securities or ADRs of Pinduoduo Inc.
Jefferies Group LLC makes a market in the securities or ADRs of Standard Chartered PLC.

Jefferies Group LLC, its affiliates or subsidiaries is acting as a manager or co-manager in the underwriting or placement of securities
for ICICI Bank or one of its affiliates.
Jefferies Group LLC, its affiliates or subsidiaries is acting as a manager or co-manager in the underwriting or placement of securities
for ICICI Lombard General Insurance Company Limited or one of its affiliates.
Jefferies Group LLC, its affiliates or subsidiaries is acting as a manager or co-manager in the underwriting or placement of securities
for ICICI Prudential Life Insurance Company or one of its affiliates.
Jefferies Group LLC, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services
from Macrotech Developers within the next three months.
Jefferies Group LLC, its affiliates or subsidiaries is acting as a manager or co-manager in the underwriting or placement of securities
for Macrotech Developers or one of its affiliates.
Within the past twelve months, Macrotech Developers has been a client of Jefferies LLC and investment banking services are being
or have been provided.
Jefferies International Ltd, its affiliates or subsidiaries has, or had, within the past 12 months an agreement to provide investment
services to Macrotech Developers.

For Important Disclosure information on companies recommended in this report, please visit our website at https://
javatar.bluematrix.com/sellside/Disclosures.action or call 212.284.2300.

Explanation of Jefferies Ratings

Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month
period.
Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within
a 12-month period.

20
Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less
within a 12-month period.
The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below
$10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold
rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is
plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below
$10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable
regulations and/or Jefferies policies.
CS - Coverage Suspended. Jefferies has suspended coverage of this company.
NC - Not covered. Jefferies does not cover this company.
Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable
securities regulations prohibit certain types of communications, including investment recommendations.
Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial
projections or opinions on the investment merits of the company are provided.
Valuation Methodology
Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and
expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are
not restricted to, analyses of market risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF),
free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/
average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.
Jefferies Franchise Picks
Jefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month
period. Stock selection is based on fundamental analysis and may take into account other factors such as analyst conviction,
differentiated analysis, a favorable risk/reward ratio and investment themes that Jefferies analysts are recommending. Jefferies
Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion.
Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired
return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P
stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent
a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment
style such as growth or value.
Risks which may impede the achievement of our Price Target
This report was prepared for general circulation and does not provide investment recommendations specific to individual investors.
As such, the financial instruments discussed in this report may not be suitable for all investors and investors must make their own
investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors
as they deem necessary. Past performance of the financial instruments recommended in this report should not be taken as an
indication or guarantee of future results. The price, value of, and income from, any of the financial instruments mentioned in this
report can rise as well as fall and may be affected by changes in economic, financial and political factors. If a financial instrument
is denominated in a currency other than the investor's home currency, a change in exchange rates may adversely affect the price of,
value of, or income derived from the financial instrument described in this report. In addition, investors in securities such as ADRs,
whose values are affected by the currency of the underlying security, effectively assume currency risk.
Other Companies Mentioned in This Report
• Adani Ports and Special Economic Zone (ADSEZ IN: INR884.15, BUY)
• AIA Group Limited (1299 HK: HK$84.65, BUY)
• Alibaba Group Holding Limited (9988 HK: HK$84.05, BUY)
• Alibaba Group Holding Limited (BABA: $85.92, BUY)
• Bajaj Finance Limited (BAF IN: INR6,642.95, HOLD)
• Bridgestone (5108 JP: ¥4,839, HOLD)
• Container Corporation of India Ltd. (CCRI IN: INR747.00, BUY)
• Contemporary Amperex Technology-A (300750 CH: CNY409.52, HOLD)
• DLF Limited (DLFU IN: INR389.40, BUY)
• ENEOS Holdings (5020 JP: ¥445, BUY)
• FANUC Corp. (6954 JP: ¥20,090, BUY)
• Godrej Consumer Products Ltd. (GCPL IN: INR894.85, BUY)
• Godrej Properties Ltd (GPL IN: INR1,276.05, BUY)

21
 • HDFC Bank (HDFCB IN: INR1,631.45, RESTRICTED)
• HDFC Bank (HDB: $73.01, RESTRICTED)
• Hitachi (6501 JP: ¥6,890, BUY)
• Honda Motor (7267 JP: ¥3,120, BUY)
• Honda Motor (HMC: $23.45, BUY)
• Hoya Corp. (7741 JP: ¥13,125, BUY)
• ICICI Bank (IBN: $22.19, BUY)
• ICICI Bank (ICICIBC IN: INR909.45, BUY)
• ICICI Lombard General Insurance Company Limited (ICICIGI IN: INR1,237.75, BUY)
• ICICI Prudential Life Insurance Company (IPRU IN: INR454.35, BUY)
• Idemitsu Kosan Co., Ltd. (5019 JP: ¥3,035, BUY)
• Japan Tobacco (2914 JP: ¥2,833, HOLD)
• JD.com, Inc. (JD: $56.42, BUY)
• JD.com, Inc. (9618 HK: HK$220.40, BUY)
• KDDI Corporation (9433 JP: ¥3,989, HOLD)
• Keyence (6861 JP: ¥53,370, BUY)
• Larsen & Toubro (LT IN: INR2,163.05, BUY)
• Macrotech Developers (LODHA IN: INR1,030.15, BUY)
• Maruti Suzuki India Limited (MSIL IN: INR8,522.20, BUY)
• Mitsubishi Corporation (8058 JP: ¥4,330, BUY)
• Mitsui & Company (8031 JP: ¥3,926, HOLD)
• Mitsui OSK Lines Ltd (9104 JP: ¥3,325, UNDERPERFORM)
• Nabtesco Corp. (6268 JP: ¥3,315, HOLD)
• Nidec Corporation (6594 JP: ¥7,359, BUY)
• NTT DATA Corporation (9613 JP: ¥1,917, BUY)
• Pinduoduo Inc. (PDD: $85.65, HOLD)
• Recruit Holdings Co. (6098 JP: ¥4,091, BUY)
• Reliance Industries (RIL IN: INR2,621.15, BUY)
• SBI Holdings (8473 JP: ¥2,605, BUY)
• Seven & i Holdings Co., Ltd. (3382 JP: ¥5,585, BUY)
• Sony Group Corporation (6758 JP: ¥10,350, BUY)
• Sony Group Corporation (SONY: $77.50, BUY)
• Standard Chartered PLC (STAN LN: p621.20, BUY)
• State Bank of India (SBIN IN: INR604.60, BUY)
• Sumitomo Metal Mining (5713 JP: ¥4,588, HOLD)
• Suzuki Motor (7269 JP: ¥4,470, BUY)
• Takeda Pharmaceutical Co. (4502 JP: ¥4,072, BUY)
• Toyota Motor (7203 JP: ¥1,845, HOLD)
• Toyota Motor (TM: $138.83, HOLD)
Distribution of Ratings
Distribution of Ratings

IB Serv./Past12 Mos. JIL Mkt Serv./Past12 Mos.

Count Percent Count Percent Count Percent

BUY 1978 59.88% 69 3.49% 14 0.71%

HOLD 1151 34.85% 9 0.78% 1 0.09%

UNDERPERFORM 174 5.27% 1 0.57% 0 0.00%

22
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23
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