2010 10 01 - GS - Japan - BOJ Watchers Are Back, Easing to Start Reflecting the Economic Situations

8/8/2019 2010 10 01 - GS - Japan - BOJ Watchers Are Back, Easing to Start Reflecting the Economic Situations

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Japan Economics AnalystIssue No: 10/07

October 1, 2010 Goldman Sachs Global Economics,Commodities and Strategy Researchat https://360.gs.com

Important disclosures appear at the back of this document

Chiwoong Lee

[email protected]+81 3 6437 9984

Yuriko Tanaka

[email protected]

+81 3 6437 9964

BOJ Watchers are baaaack; easing to start

reflecting the economic situation

We have revised our economic forecasts for

2010-2011, adjusting the growth path for 3Qand 4Q 2010 although keeping the overall2010 forecast at +2.9%. We have lowered our2011 forecast to +1.0%, from +1.3%. It doesnot factor in the 4 tn supplementary budgetcurrently being formulated and will probablyneed revising when the budget details becomeclear.

The BOJ has been easing despite raising itseconomic forecast, a signal that it isresponding to market and governmentpressure rather than making decisions on its

own behalf.

The picture should change. We think the BOJwill have to undertake further easing becausedeterioration in the real economy (exportslowdown, a stall in durables consumption aspolicy stimulus fades) is added to the mix ofmarket movement and government reaction(continuing yen strength amid talk ofadditional easing in the US, increasedgovernment demands on the BOJ). We sayBOJ Watchers are baaaack because BOJactions should start to reflect the BOJassessment of the economy.

We think the next easing will come inOctober and we envisage further easing inDecember or 1Q 2011. However, impact onthe real economy and deflation is likely to bevery small.

Weakening in the real economy centered

on consumption and exportsBreakout of real GDP growth contributions

-24

-20

-16

-12

-8

-4

0

4

8

12

07 08 09 10

Net exports

Private demand

Public demand

Real GDP

(qoq ann%; contribution pp)

12Q1

Ourforecast

Source: Cabinet Office, GS Global ECS Research.

BOJ cannot be termed truly independent

Bank of Japan Act, Articles 3, 4

Article 3 (Respecting the Autonomy of the Bank of

Japan and Ensuring Transparency)

(1) The Bank of Japan's autonomy regarding currency and

monetary control shall be respected.

(2) The Bank of Japan shall endeavor to clarify to the

citizen the content of its decisions, as well as its decision-

making process, regarding currency and monetary control.

Article 4 (Relationship with the Government)

The Bank of Japan shall, taking into account the fact that

currency and monetary control is a component of overall

economic policy, always maintain close contact with the

government and exchange views sufficiently, so that its

currency and monetary control and the basic stance of the

government's economic policy shall be mutually

compatible.

Source: BOJ.


2/12

Goldman Sachs Global Economics, Commodities and Strategy Research Japan Economics Analyst

Issue No: 10/xx 2 October 1, 2010

I: Revising our economic growth forecast; focus on

consumption trends and export slowdown

Changing 2010 outlook, lowering 2011 forecast;uncertainties remain on the policy front

We have revised our 2010-2011 economic growthforecasts. We maintain our full-year 2010 forecast of+2.9%, but have made adjustments to our 3Q and 4Qforecasts. We lower our 2011 forecast to +1.0% from+1.3%, but our new forecast does not take into accounta roughly 4 trillion supplementary budget currentlyunder consideration. We will likely need to review our2011 forecast again once the budget plan is finalized(see Exhibits 1 and 2; also see page 10 for details).

Contraction in 4Q: We have made adjustments to oureconomic forecasts on recent economic indicators andthe impact of forex trends on exports and exportindustries. We are still forecasting growth of +2.9%for 2010, but have revised our forecasts for the secondhalf.

While exports slowed more rapidly than we expectedin 3Q, we raise our growth forecast to a sequential,annualized rate of +1.4%, from +0.6%, on a greater-than-expected surge in demand ahead of the expiry ofeco-car subsidies. Looking ahead, however, weforecast the first contraction in five quarters in 4Q (-

1.4%) due to the export slowdown and a sharp falloffin auto sales following expiry of the eco-car subsidies.In addition, the surge in demand we had beenforecasting in 4Q is now likely to come in 1Q2011 dueto the extension of the consumer electronics eco-point

program, which was scheduled to conclude at the endof December.

Policy factor to keep growth fluctuating in 2011:We see a surge in demand in 1Q ahead of the expiry ofthe consumer electronics eco-point program. In

particular, TV demand should be boosted by thetermination of analog broadcasting. However, weexpect auto demand to continue declining, so we

forecast only minor overall growth. Growth lookslikely to moderate in 2Q due partly to a falloff inconsumer electronics spending after the eco-point

program comes to an end. We also expect continuingexport weakness.

FY2010 supplementary budget may necessitate

further forecast revisions: The government iscurrently considering a roughly 4 trillionsupplementary budget. It has not provided an explicit

breakdown, but we think the policies will probablylack any immediate impact judging from the five main

pillars: (1) employment stimulus, (2) a new growth

strategy, (3) childcare, medical, care-giving, andwelfare measures, (4) regional stimulus, infrastructureimprovements, and small-business measures, and (5)regulatory and institutional reforms. Our new 2011forecast does not take this supplementary budget intoaccount, and we will likely need to make revisions asdebate in the Diet moves forward. The supplementary

budget suggests the risks to our 2011 economicforecast are on the upside.

Exhibit 1: Growth forecast revised down

Main economic forecasts: Old vs. new(%)

New old New old

Real GDP 2.9 2.9 1.0 1.3

Private consumption [57.8] 2.1 2.0 0.4 0.0

Private capex [16.2] 1.0 1.7 2.6 7.2

Private housing investment [3.2] -8.2 -8.1 2.2 3.6

Government consumption [18.5] 1.5 1.5 0.6 0.6

Public fixed investment [3.9] -3.4 -3.1 -7.0 -6.8

Exports [17.5] 23.6 24.9 5.0 8.2

Imports [17.4] 9.5 10.8 4.8 8.1

Nominal GDP 0.9 0.9 0.8 1.1

GDP deflator -1.9 -1.9 -0.2 -0.2

Industrial production 16.7 17.3 1.1 1.3

Core CPI -1.0 -1.3 -0.4 -0.4

Overnight call rate (EOP) 0.1 0.1 0.1 0.1

2010Calendar Year

2011

Source: GS Global ECS Research.

Exhibit 2: Contraction in 4Q

GDP quarterly pathCalendar Year Fiscal Year 2012

2009 2010E 2011E 3/10 3/11E 3/12E 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1QE

Real GDP (qoq ann %) -5.2 2.9 1.0 -1.9 1.9 1.1 5.0 1.5 1.4 -1.4 2.0 0.8 1.7 1.7 1.7

Private consumption (57.8) -1.0 2.1 0.4 0.7 1.4 0.4 2.2 0.0 2.9 -2.7 1.8 -0.8 1.2 1.1 1.4

Government spending (18.5) 1.5 1.5 0.6 1.7 1.3 0.5 2.2 1.1 0.6 0.6 0.6 0.5 0.5 0.5 0.5

Private housing investment (3.9) -14.2 -8.2 2.2 -18.5 -3.1 2.2 1.2 -5.1 4.0 3.1 2.5 2.0 2.0 3.2 -2.0

Private capex (16.2) -19.2 1.0 2.6 -15.3 3.2 2.9 3.2 6.2 2.0 1.0 2.1 2.4 4.2 4.5 4.5

Public fixed investment (3.9) 7.4 -3.4 -7.0 9.3 -6.4 -6.9 -3.5 -10.3 -7.0 -6.0 -7.0 -7.0 -7.0 -7.0 -7.0

Export (17.5) -23.9 23.6 5.0 -9.5 16.7 5.9 31.0 25.8 1.9 -3.0 3.0 8.0 8.1 10.9 11.5

Import (17.4) -16.7 9.5 4.8 -11.8 9.3 6.0 12.6 17.4 5.0 -5.0 3.0 9.5 8.5 9.5 11.0

2010 2011

Source: GS Global ECS Research.


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Goldman Sachs Global Economics, Commodities and Strategy Research Japan Economics Analyst


II: BOJ Watchers are baaaack; easing to start reflecting

the economic situation

Pure BOJ watchers have not been able toforesee easing

As the central bank is the entity that makes themonetary policy decisions, conventional pointers tomonetary policy are the trend of the real economy andthe central banks assessment of the economy. If thereal economy is showing improvement and the banksassessment is also improving, we would not normallyexpect monetary easing. However, that has beenhappening in Japan since late last year. The BOJ has

implemented further easing while upgrading itseconomic assessment.

It was the October 14 2009 Statement on MonetaryPolicy where the BOJ said Japans economy hasstarted to pick up. The tone was maintained insubsequent statements and on August 30 2010 thestance was upgraded to Japans economy showsfurther signs of a moderate recovery and it is likely to

be on a recovery trend. Yet, starting at a specialmeeting on December 1 2009, the BOJ has introduced

Exhibit 3: BOJs economic assessment bears little relation to monetary policy

Changes in the BOJ economic assessment, timing of additional easingPolicy meeting date Economic assessment Policy decision

2009 22-Jan Economic conditions have been deteriorat ing signif icantly and are l ikely to

continue deteriorating for the time being

Decided on the sp ecifics of CP purchase, examine outright purchase of

corporate bonds.

19-Feb Expansion of special fund-supply operation. Begin CP purchase operation.

Begin corporate bond purchase from March.

18-Mar Expand JGB outright purchase (Y16.8tn/yr to Y21.6tn/yr)

7-Apr Economic conditions have deteriorated s igni ficantly.

30-Apr

22-May The pace of deterioration in economic conditions is l ikely to moderate

gradually.

16-Jun Economic conditions, after deteriorating significantly, have begun to stop

worsening.

15-Jul Japan's econom ic conditions have stopped wors ening. Extend the period for CP & corporate bond purchas es , and special fund-

supplying operations.

11-Aug

17-Sep Economic conditions are showing s igns of recovery.

14-Oct Japan's economy has s ta rted to pi ck up .

30-Oct Economy headed toward a pick-up fol lowing the rapid and substantial

deterioration in the second half of fiscal 2008.

20-Nov Economy is picking up mainly due to various policy measures taken at home

and abroad, although the momentum of se lf-sustaining recovery in domes tic

private demand remains weak.

1-Dec E While Japan's economy is picking up, there is not yet sufficient momentum to

support se lf-sustaining recovery in capex and private consum ption.

Introduce new three-month fixed rate fund supply operation

18-Dec Economy is picking up mainly due to various policy measures taken at home

and abroad, although the momentum of se lf-sustaining recovery in domes tic

private demand remains weak.

2010 26-Jan

18-Feb

17-Mar Increase three-month fixed rate fund supply operation from Y10tn to Y20tn

7-Apr Economy has been picking up mainly due to improvement in overseas

economic conditions and to various policy measures , although there is not yetsufficient momentum to s upport a self-sus taining recovery in dome stic private

demand.

30-Apr Japan's economy continued to pick up. Instructed the staff to examine on possible ways to support private financial

institutions in terms of fund provisionin g with a view to strengthening the

foundations for economic growth

21-May Economy is starting to recover moderately, induced by improvement in

overseas economic conditions.

Preliminary framework for fund provisioning with a view to s trengthen the

foundations for economic growth

15-Jun Above framework decided

15-Jul

10-Aug

30-Aug E Economy shows further signs of a moderate recovery, and it is likely to be on a

recovery trend.

Introduce s ix-month fixed rate fund s upply operation (Y10 tn)

7-Se p Eco no my s ho ws furthe r s igns of a m od era te re cove ry. Th e Ban k w il l care fu ll y e xa mi ne the o utl oo k for eco no mi c a cti vity a nd pri ce s,

and, if judged neces sary, take policy actions in a timely and appropriate

manner.

Source: BOJ (E denotes extraordinary meeting).


4/12

Goldman Sachs Global ECS Research Japan Economics Analyst


additional easing such as special financing for thecorporate sector and funding to expand existingmeasures and support the foundations for economicgrowth. These seem to exist independently of theimprovement in the BOJs economic assessment.

Interestingly, none of the easing since December wason the policy list the BOJ drew up in response to thefinancial crisis in autumn 2008. The BOJ does notappear to associate its recent measures with thefinancial crisis (See Exhibit 3).

Deflation an insufficient explanation

If we go to the roots of the additional easing, we findthat Japans persistent deflation has had an influence.The core CPI (which in Japan only excludes freshfood) has posted 16 straight months of decline in adowntrend dating from May 2009. The core coreindex excluding energy and food is not showing anysigns of a pickup.

The BOJ issued clarification of the Understanding ofMedium- to Long-Term Price Stability on December18, 2009 in which it explained (1) the policy boarddoes not tolerate a flat yoy path or declines for the CPIand (2) the midpoints of most policy board membersunderstanding of price stability are price rises ofaround 1%. The reference to deflation in the mostrecent policy statement, August 30, can be taken tomean that monetary easing will continue while

deflation persists: The Bank recognizes that Japan'seconomy faces the critical challenge of overcomingdeflation and returning to a sustainable growth pathwith price stability. With such recognition, the Bankhas been striving to pursue powerful monetary easing,ensure financial market stability, and supportstrengthening the foundations for economic growth.(See Exhibit 4).

However, there are two reasons why we find it hard tobelieve that the present deflationary situation has beenan influence on recent additional easing. The first isthat the BOJ is not expecting deflation to worsen, even

though it might be bad. For example, the August 30policy statement said the year-on-year rate of declinein the CPI (excluding fresh food) has been slowingand is expected to continue to slow. The second istiming. Additional easing has not coincided withsteepening falls in prices. We therefore think otherfactors are in play (see Exhibit 5).

Exhibit 4: Deflation is an influence, but the BOJsees deflation improving

CPI

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

06 07 08 09 10 11 12

National core CPI

National core-core CPIBOJ outlook

(yoy % chg)

Source: MIC, BOJ.

Exhibit 5: Market movement governmentpressure BOJ easing

BOJ monetary policy and market movement

80

82

84

86

88

90

92

94

960.2

0.3

0.4

0.5

0.6

0.7

09/10 09/12 10/2 10/4 10/6 10/8

6-month TIBOR

3-month TIBOR

Yen/dollar rate (rhs)

(%) (yen/dollar)

New fundsupply op.

began

New fundsupply op.increased

Weakeryen

Yen-sellingintervention

Strategic growthlending sc heme

New fundsupply op.increased

Source: Datastream.

BOJ not truly independent in the first place

Some market participants think there may beadditional easing as a consequence of the BOJ losingindependence in a scenario of revisions to the Bank of

Japan Act in a split Diet. But is the BOJ trulyindependent in the first place?

Article 3 of the Bank of Japan Act is entitled Respecting the Autonomy of the Bank of Japan and

Ensuring Transparency. However, Article 4 says theBOJ needs to maintain consistency with governmenteconomic policy, which implies that the BOJ is notindependent even though the government does notmake monetary policy decisions. The Bank of Japanshall, taking into account the fact that currency andmonetary control are components of overall economic


5/12



policy, always maintain close contact with thegovernment and exchange views sufficiently, so thatits currency and monetary control and the basic stanceof the government's economic policy shall be mutuallycompatible. We think this explains the easing thathas occurred while the BOJ was upgrading itseconomic assessment (see Exhibit 6).

Expecting the market and government to

remain an influence on monetary policy

Going forward, BOJ monetary policy seems unlikelyto become independent of government decisions.Short-term forex movement is hard to predict.However, we expect the strong yen bias to continuefor the next six months with US easing and weakeconomic indicators supporting a rate of around83/US$. If this happens, we think the Japanese

government will maintain an interventionist forexstance and call on the BOJ for further easing, giventhat the government is hemmed in by budgetconstraints and the split Diet (see Exhibit 7).

and expecting new influence from economic

deterioration

We have lowered our economic forecast for 2010. Wehave also lowered our 2011 forecast but that may needrevising when we see the details of the 4 tnsupplementary budget that is currently on the drawing

board. Our focus here is 2H 2010.

We believe the economy sustained growth in 3Q withsupport from last-minute consumption demand and

exports, which were still relatively firm. The issue is4Q. We foresee a backlash from excessive growthfor consumer durables and a sharper slowdown forexports and we therefore forecast negative growthcontributions from consumption and exports. We notethat the business condition outlook in the September

BOJ Tankan is deterioration for both manufacturingand nonmanufacturing(see Exhibit 8).

Exhibit 8: Weakening in the real economycentered on consumption and exports

Breakout of real GDP growth contributions

-24

-20

-16

-12

-8

-4

0

4

8

12

07 08 09 10

Net exports

Private dem and

Public demand

Real GDP

(qoq ann%; contribution pp)

12Q1

Ourforecast

Source: Cabinet Office, GS Global ECS Research.

Exhibit 7: We expect the strong yen bias tocontinue

Forex outlookCurrent

29-Sep 3-month 6-month 12-month

Major 3 USD/JPY 83.7 85.0 83.0 90.0

(83.6) (83.5) (83.2)

EUR/USD 1.36 1.22 1.35 1.38(1.36) (1.36) (1.36)

EUR/JPY 113.7 103.7 112.1 124.2

(113.5) (113.3) (112.8)

Europe EUR/GBP 0.86 0.84 0.84 0.84

GBP/USD 1.58 1.45 1.61 1.64

GBP/JPY 132.5 123.3 133.6 147.6

High yields USD/CAD 1.03 1.03 1.03 1.00

AUD/USD 0.97 0.88 0.88 0.86

AUD/JPY 81.4 74.8 73.0 77.4

NZD/USD 0.74 0.74 0.74 0.70

Asia KRW/USD 1142 1150 1100 1050

KRW /JPY 13 .64 13.53 13.25 11 .67

CNY/USD 6.68 6.74 6.66 6.49

CNY/JPY 12.52 12.61 12.46 13.87

IDR/USD 8935 8800 8700 8500IDR/JPY 0.94 0.97 0.95 1.06

Other BRICs RUB/USD 30 .38 30.50 29.50 27 .50

(excl. China) INR/USD 44 .95 44.00 43.40 43 .00

BRL/USD 1.71 1.70 1.80 1.95

Note: Figures in ( ) are forward rates as of September 29.Source: GS Global ECS Research.

Exhibit 6: BOJ cannot be termed trulyindependent

Bank of Japan Act, Articles 3, 4

Article 3 (Respecting the Autonomy of the Bank of

Japan and Ensuring Transparency)

(1) The Bank of Japan's autonomy regarding currency and

monetary control shall be respected.

(2) The Bank of Japan shall endeavor to clarify to the

citizen the content of its decisions, as well as its decision-making process, regarding currency and monetary control.

Article 4 (Relationship with the Government)

The Bank of Japan shall, taking into account the fact that

currency and monetary control is a component of overall

economic policy, always maintain close contact with the

government and exchange views sufficiently, so that its

currency and monetary control and the basic stance of the

government's economic policy shall be mutually

compatible.

Source: BOJ.


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Weakening in the real economy is important in that itgives the BOJ a reason for easing in addition to marketmovement and government pressure. So far the BOJhas been unenthusiastic about additional easing due toimprovement in the real economy and the limitedimpact on the real economy and the market. Now wesee opportunities for justified easing. From thestandpoint of (avoiding) government criticism and

pressure, the BOJ should find it easier to introduceeasing that is compatible with government policy asstated in Article 4 of the Bank of Japan Act. We thinkthe BOJ will probably consider more aggressiveeasing in 4Q, when real economic slowdown becomesclear, and in 1Q 2011. In a speech on September 26,Governor Shirakawa said The Bank, with a freshsense and responsibility as a central bank, will do theright thing at the right time with proper measures, if

judged necessary after careful examination of

economic and financial developments.. We thinkmeasures will be warranted by economicdevelopments.

We expect additional easing in 4Q2010-1Q2011

We think additional easing is likely in October and wealso expect further moves in 4Q or in 1Q 2011. Theoptions we see, listed in order of probability, are

(1) expansion of the three- or six-month fundingfacility

(2) an increase in lending targeted at strengthening

the foundations for economic growth(3) asset purchases(4) a cut in the policy rate(5) an increase in outright purchases of JGBs(6) the introduction of, or commitment to, an

inflation target

So far we have argued that an increase in outright purchases of JGBs (5) was unlikely because, asGovernor Shirakawa has noted, uptake of governmentdebt by the central bank has the effect of increasingthe Japan premium and therefore pushed interest ratesup. That argument still holds but we no longer regard

this option as low probability given worseningconditions in the real economy, a supplementary

budget, and demands for extra easing. GovernorShirakawa has also said every central bank pays fullattention to ensuring smooth operations in moneymarkets over time, projecting the future course of theeconomy as well as its own balance sheet size,whenever it purchases government bonds but wewould not take full attention to money markets tomean that purchases will not be made.

Governor Shirakawa has always expressed negativeviews on inflation targeting (5). In his September 26speech he said The Banks monetary policyframework incorporates the advantages of inflationtargeting at most, i.e. improved accountability, whiledealing with the disadvantages. The Bank iscontinuing to explore a desirable framework formonetary policymaking, but I have self-confidencethat the current framework is a fairly advanced one.Given such a stance, the BOJ seems unlikely tointroduce a direct target, but we think it might make acommitment not to raise the policy rate until inflationreached a certain level.

But we do not expect much economic impact

We do not expect additional easing to have muchimpact on the real economy. Conventional monetary

policy seeks to reduce borrowing cost with lowerinterest rates and thus to stimulate capex demand.Unconventional monetary policy has the same goal.By taking on market stresses and strains and engagingin fund supply that exceeds funding needs, the central

bank seeks to galvanize economic activity. Currently,however, firms have ample cash flow and banklending attitudes are not severe. The reason recoveryin economic activity is not making headway is thatdemand is not growing. It is not the case that firmscannot invest in meeting demand due to fundingconstraints (see Exhibits 9 and 10).

Exhibit 9: Not a case of demand growth beingstymied by funding constraints (1)- Cash flow is ample

Corporate liquidity ratio

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

00 01 02 03 04 05 06 07 08 09 10

Large corporations

Small corporations

(%)

10/6 Source: BOJ.


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Exhibit 10: Not a case of demand growth beingstymied by funding constraints (2)- Banks lending attitude has not become moresevere

Bank lending attitude DI in the BOJ Tankan

-40

-30

-20

-10

0

10

20

30

40

90 92 94 96 98 00 02 04 06 08 10

Lending stance DI

Financing condition DI

(%)

"Easy" - "Difficult"

Source: BOJ.

Deflation implications also limited

We would not expect additional easing to have a directeffect on deflation. Lets take the simple examples ofHagen-Dazs vanilla ice cream and theme parks, bothof which are in the CPI survey (with respectiveweights of 0.3% and 0.2%). Would their price risesimply because the BOJ increased its fund supplies?

No. The mechanism is that increased fund supplyreduces the cost of investment which, in turn,stimulates demand. The improvement in demand leadsto an increase in consumer purchasing power and

purchasing appetite, which boosts prices.

In the current situation we do not expect anyimmediate impact on prices from additional BOJeasing. We continue to expect the CPI to remain innegative territory through to end-FY2011.

Chiwoong Lee

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8/12



Individuals behave rationally, but the collectiveoutcome is not rational. This phenomenon can occurin complex economic structures. Householdconsumption is a good example. Individualhouseholds will curtail consumption in order toincrease savings. And of course their savings levelwill increase in the near term. However, on a macrolevel we see a different result. If consumption iscurbed and savings increased across the entireeconomy, then the consumption slowdown willdepress demand, which will in turn reduce incomes. Ifincomes are reduced, savings will fall even ifconsumption is reined back. In other words, ifeverybody holds back on spending to increase theirsaving, it will depress demand, and savings willactually fall in the end. The sum of micro decisions

does not necessarily translate into a desirable macroresult. This is the fallacy of composition.

In a contemporary perspective, this phenomenon canbe seen in the prisoners dilemma of game theory. Amore practical example is the rise of trade

protectionism. Thinking only of their own narrowinterests, countries will protect their markets, leadingto a slowdown in the trade that has driven the globaleconomy. The results will eventually reboundadversely on their own economies.

The Japanese economy has also seen fallacy of

composition/prisoners dilemma-type scenarios in thepast. For example, despite zero interest rates, Japanesecompanies would repay debt in order to improve theirfinancial situation. This depressed demand slowed theeconomy, meaning that in the end company financesdid not improve for a long time.

However, the fallacy of composition cannot be solvedat an individual level. If only one person resolves toact in a different way, that person will lose. Peoplewill strive to act in their own rational self-interest on amicro level. The problem needs to be addressed at thelevel of general rules/systems. For example, penaltiescould be exacted if a certain level of consumption isnot reached. This would stimulate consumption,improve the economy, and result in increased savings(of course there have to be limits to suchconsumption). People naturally think their individualefforts cannot count for much in a macro perspective.However, in the current global economic environment,maybe its time to reconsider the fallacy ofcomposition.

Petit Economics: Note on the fallacy of composition


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Upcoming Releases

Date Time Indicators and events GS Consensus Previous

Oct. 04 Monetary Policy Meeting (Day 1)10:30 Monthly Employment Statistics (Apr.)

Total cash wages yoy % +1.5% +0.7% +1.4%

Oct. 05 Monetary Policy Meeting (Day 2)

15:30 BOJ Governor Press Conference

Oct. 07 14:00 Business Condition Indices (Aug.) n.a. 86.5 87.4

Oct. 08 8:50 Balance of Payments (Aug.)

Current account 727.7 bn 995.1 bn 1675.9 bn

14:00 Economy Watcher Survey (Sep.) 43.0 n.a. 44.9

BOJ Monetary Policy Meeting ():According to media reports, the BOJ is thinking of additionaleasing in the form of 3-6 month funding, which is expected to be debated at one of the two October policy

board meetings (October 4-5 and October 28). We regard additional easing as very likely in October andwe think that economic slowdown may well prompt further easing after that. In this scenario we think thelikely choice is expansion of measures that are already in place.

September Economy Watcher Survey (): We forecast that the household sentiment index will fall to43.0 in the Economy Watchers Survey due for release on October 8, from 44.9 for August. Depressants

potentially include (1) low consumption of autumn/winter merchandise due to the hot weather, (2) thetermination of eco-car subsidies, and (3) impact from the strong yen.

Note: The importance of the economic indicator in terms of its impact on the market is indicated by very high: , high: .


10/12


Issue No: 10/xx 1 0 October 1, 2010

Main Economic Forecasts

Calendar Year Fiscal Year 2012

2009 2010E 2011E 3/10 3/11E 3/12E 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE 1QE

Real GDP (qoq ann %) -5.2 2.9 1.0 -1.9 1.9 1.1 5.0 1.5 1.4 -1.4 2.0 0.8 1.7 1.7 1.7

Private consumption (57.8) -1.0 2.1 0.4 0.7 1.4 0.4 2.2 0.0 2.9 -2.7 1.8 -0.8 1.2 1.1 1.4

Government spending (18.5) 1.5 1.5 0.6 1.7 1.3 0.5 2.2 1.1 0.6 0.6 0.6 0.5 0.5 0.5 0.5Private housing investment (3.9) -14.2 -8.2 2.2 -18.5 -3.1 2.2 1.2 -5.1 4.0 3.1 2.5 2.0 2.0 3.2 -2.0

Private capex (16.2) -19.2 1.0 2.6 -15.3 3.2 2.9 3.2 6.2 2.0 1.0 2.1 2.4 4.2 4.5 4.5

Public fixed investment (3.9) 7.4 -3.4 -7.0 9.3 -6.4 -6.9 -3.5 -10.3 -7.0 -6.0 -7.0 -7.0 -7.0 -7.0 -7.0

Export (17.5) -23.9 23.6 5.0 -9.5 16.7 5.9 31.0 25.8 1.9 -3.0 3.0 8.0 8.1 10.9 11.5

Import (17.4) -16.7 9.5 4.8 -11.8 9.3 6.0 12.6 17.4 5.0 -5.0 3.0 9.5 8.5 9.5 11.0

Real GDP (yoy % chg) -5.2 2.9 1.0 -1.9 1.9 1.1 4.7 2.4 2.8 1.6 0.9 0.7 0.8 1.5 1.5

Private consumption -1.0 2.1 0.4 0.7 1.4 0.4 3.3 1.8 2.0 0.6 0.5 0.3 -0.1 0.8 0.7

Government spending 1.5 1.5 0.6 1.7 1.3 0.5 1.5 1.6 1.7 1.1 0.7 0.6 0.5 0.5 0.5

Private housing investment -14.2 -8.2 2.2 -18.5 -3.1 2.2 -18.1 -10.5 -2.9 0.7 1.1 2.9 2.4 2.4 1.3

Private capex -19.2 1.0 2.6 -15.3 3.2 2.9 -4.6 2.4 4.5 3.1 2.8 1.9 2.4 3.3 3.9

Public fixed investment 7.4 -3.4 -7.0 9.3 -6.4 -6.9 4.6 -5.5 -6.5 -6.7 -7.6 -6.8 -6.8 -7.0 -7.0

Export -23.9 23.6 5.0 -9.5 16.7 5.9 34.6 30.0 20.3 13.0 6.4 2.4 3.9 7.5 9.6

Import -16.7 9.5 4.8 -11.8 9.3 6.0 5.5 15.7 10.2 7.2 4.8 3.0 3.8 7.6 9.6

Nominal GDP (yoy % chg) -6.1 0.9 0.8 -3.6 0.6 1.1 1.8 0.7 1.1 0.0 0.5 0.5 0.7 1.5 1.7

Industrial production (yoy % chg) -21.8 16.7 1.1 -8.9 10.1 1.8 27.4 20.9 14.8 6.0 0.8 0.5 1.3 2.0 3.5

GDP deflator (yoy % chg) -0.9 -1.9 -0.2 -1.7 -1.3 0.0 -2.8 -1.7 -1.7 -1.6 -0.4 -0.2 -0.1 0.0 0.3Core CPI -1.3 -1.0 -0.4 -1.6 -0.9 -0.3 -1.2 -1.2 -1.0 -0.7 -0.7 -0.1 -0.5 -0.4 -0.4

Core core CPI -0.7 -1.4 -0.7 -0.9 -1.4 -0.5 -1.1 -1.6 -1.6 -1.3 -1.0 -0.3 -0.7 -0.6 -0.6

Unemployment rate (%) 5.1 5.1 4.8 5.2 5.1 4.7 4.9 5.2 5.1 5.0 4.9 4.8 4.7 4.7 4.6

Current account ( tn) 13.3 16.7 17.9 15.8 17.0 18.1 5.0 3.5 4.7 3.5 5.4 4.3 4.7 3.5 5.5

As % of GDP (%) 2.8 3.5 3.7 3.3 3.6 3.7

Interest rates (EP; %)

Overnight call rate 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10

3-month TIBOR 0.51 0.40 0.40 0.50 0.40 0.40 0.50 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40

10-year JGB yield 1.29 1.30 1.90 1.39 1.50 2.00 1.39 1.10 1.20 1.30 1.50 1.70 1.70 1.90 2.00

Yen/dollar (PA) 93.5 88.3 87.0 92.7 86.5 88.5 90.7 92.0 85.7 84.7 83.7 85.3 88.8 90.0 90.0

Yen/euro (PA) 130.2 114.3 117.9 131.0 110.2 121.7 125.5 117.1 109.8 104.8 109.3 116.1 122.1 124.2 124.2

2010 2011

Recent Economic Indicators

3Q2009 4Q2009 1Q2010 2Q2010 2/10 3/10 4/10 5/10 6/10 7/10 8/10

Real GDP % qoq ann. -0.3 3.4 5.0 1.5

Industrial production % mom 5.3 5.9 7.0 1.5 -0.6 1.2 1.3 0.1 -1.1 -0.2 -0.3

% yoy -19.4 -4.3 27.4 21.0 31.3 31.8 25.9 20.4 17.3 14.2 15.4

Tertiary activity % mom 0.6 -0.3 1.1 -0.1 -0.5 -2.6 2.4 -0.9 0.2 1.6

Leading indicator (CI) 2005=100 83.9 91.2 99.0 100.7 98.1 102.0 102.2 99.6 100.3 100.0

Real household consumption % yoy 0.5 2.0 1.9 -0.3 -0.5 4.4 -0.7 -0.7 0.5 1.1 1.7

Retail sales % yoy -1.9 -0.7 3.7 3.7 4.2 4.7 4.9 2.8 3.3 3.8 4.3

Machinery orders (a) % mom -0.7 1.1 2.9 0.3 -3.8 5.4 4.0 -9.1 1.6 8.8

Housing starts % yoy -35.8 -20.9 -6.6 -1.1 -9.3 -2.4 0.6 -4.6 0.6 4.3 20.5

Export volume (b) % yoy -24.9 -1.2 43.8 32.8 45.9 43.9 39.5 31.9 27.5 25.5 14.2

Import volume (b) % yoy -12.6 -5.0 13.1 19.3 23.0 16.9 17.6 22.3 18.1 13.8 19.1

Trade balance (c) bn 1,352 1,906 2,370 1,781 548 858 771 376 634 892

Current account balance (c) bn 3,626 3,966 4,654 3,647 1,185 1,785 1,380 905 1,362 1,464

Unemployment rate % 5.4 5.2 4.9 5.2 4.9 5.0 5.1 5.2 5.3 5.2 5.1

CPI National (excl. fresh food) % yoy -2.3 -1.7 -1.2 -1.2 -1.2 -1.2 -1.5 -1.2 -1.0 -1.1 -1.0

Domestic corporate price % yoy -8.3 -5.2 -1.7 0.2 -1.6 -1.3 -0.2 0.4 0.4 0.0 0.0

Money stock M2 % yoy 2.8 3.3 2.8 3.0 2.7 2.7 2.9 3.1 2.9 2.7 2.8

/US$ exchange rate (d) /US$ 93.6 89.7 90.7 92.0 90.3 90.5 93.4 91.7 90.9 87.7 85.5

Three-month TIBOR (d) % 0.55 0.50 0.45 0.39 0.45 0.44 0.40 0.39 0.39 0.38 0.37

Benchmark bond yield (d) % 1.34 1.31 1.34 1.29 1.35 1.34 1.36 1.29 1.21 1.11 1.00

Nikkei 225 stock price (d) 10,141 9,959 10,503 10,343 10,175 10,671 11,140 10,104 9,786 9,457 9,268

(a) Private-sector orders, excluding electric power and shipping . (b) Customs cleared. (c) Balance of payments, seasonally adjusted.

(d) Period average.


11/12


Issue No: 10/xx 1 1 October 1, 2010

Economic Calendar

Monday Tuesday Wednesday Thursday Friday

October 4 October 5 October 6 October 7 October 8

Monetary Policy Meeting Monetary Policy Meeting Leading Indicator (Aug) Economy Watchers Survey

BOJ Governor's Press Conf. (Sep.) E: 43.0Monthly Labor Stat. (Aug.) ECB Meeting Balance of Payments (Aug.)

(E): +1.5% yoy Current a/c: 727.7 bn

[10yr JGB Auction]


Consumer Confidence (Sep.) Machinery Orders (Aug.) Corporate Price (Sep.)

HOLIDAY Money Stock (Sep.)

[30yr JGB Auction]


Reuter Tankan (Oct.) G20 Finance Ministers and

Tertiary Activity (Aug.) CB Governors' Meeting

(Oct. 22-23)

[5yr JGB Auction] [20yr JGB Auction]


Customs-Cleared Trade (Sep) Monetary Policy Meeting Industrial Production (Sep.)

BOJ Outlook Report CPI (Oct./Sep.)

Household Survey

Retail Sales (Sep.) (All households; Sep.)

Labor Market (Sep.)

[JGB Liquidity Housing Starts (Sep.)

Supply Auction] [2yr JGB Auction]

November 1 November 2 November 3 November 4 November 5

Monthly Labor Stat. (Sep.) HOLIDAY

FOMC FOMC ECB Meeting

[JGB Liquidity

[10yr JGB Auction] Supply Auction]

November 8 November 9 November 10 November 11 November 12

Le ading Indica tor (S ep) Economy Watche rs Surve y Consume r Confide nce (Oct.) Reute r Tankan (Nov.)

(Oct.) Machinery Orders (Sep.)

Balance of Payments (Sep.) Corporate Price (Oct.)

Money Stock (Oct.)

[40yr JGB Auction] [5yr JGB Auction]


12/12

We, Chiwoong Lee and Yuriko Tanaka, hereby certify that all of the views expressed in this report accurately reflect personal

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2010 10 01 - GS - Japan - BOJ Watchers Are Back, Easing to Start Reflecting the Economic Situations

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