50712550-Nomura-Japan-Research-Pack-2011-03-14

1. Japanese Equity Research

Flash - Utilities and oil sectorsImpact of massive earthquake in northeastern Japan

Shigeki Matsumoto Flash - Insurance sector

Likely impact of Tohoku Pacific Offshore EarthquakeMasayoshi Kobayashi Flash - Construction sector

Impact of Tohoku Pacific (Sendai) earthquakeYoshiaki Komatsu Flash - Earthquake impact on Japanese Equities

Near-term downward pressure looks inevitable, but serious correction unlikelyRyota Sakagami/ Seiichiro Iwasawa Report - Tohoku Pacific Earthquake: Expected impact

Expected impactKatsushi Saito Report - Semiconductor monthly (March 2011)

Slowdown for PCs and TVs, but smartphone-related demand firmMasaya Yamasaki / Tetsuya Wadaki / Tetsukazu Tsuruhama

2. Economic Research

Report - Japan economic overviewEconomic impact of the massive earthquake in northeastern Japan

Kohei Okazaki/ Takahide Kiuchi Global Weekly Economic Monitor

Record quake hits JapanAichi Amemiya/ Alastair Newton/ Ann Wyman/ Charles St-Arnaud/ Chi Sun/ David Resler/ DimitrisDrakopoulos/ Euben Paracuelles/ Jens Sondergaard/ Lavinia Santovetti/ Peter Attard Montalto/ PeterWestaway/ Philip Rush/ Robert Subbaraman/ Sonal Varma/ Stella Wei Wang/ Stephen Roberts/ TakahideKiuchi/ Takuma Ikeda/ Tatiana Orlova/ Tomo Kinoshita/ Yougesh Khatri/ Young Sun Kwon

3. Quantitative Research

Yen Rate Options InsightsRisk-limited bearish swaption strategy for H1 FY11

Yoshiyuki Suimon

Nomura 1 14 March 2011

Japan Research Pack

14 March 2011

Nomura Securities Co Ltd, TokyoJapanese Equity Research

Please read the important disclosures and analyst certifications on pp. 11 to 14. gl

http://www.nomura.com/research/GetPub.aspx?pid=424175









Nomura 2

• Alternative fuel costs due to nuclear reactor shut downs—11/3: The earthquake on 11 March resulted in the shutdown of units 1-3 at the Fukushima No.1 nuclear power plant (combined generating capacity of 2,028MW), units 1-4 at Fukushima No. 2 (4,400MW), units 1-3 at Onagawa (2,174MW), and the Tokai No. 2 nuclear power plant (1,100MW). We estimate alternative fuel costs for 11/3 (20 days left in the fiscal year) at around ¥45bn for Tepco and ¥16bn for Tohoku Power (based on latest oil price of $110/bbl and forex rate of $1/¥82). The above estimates assume shortfalls will be met with high-cost oil and take into account the impact on electricity supplies from the Tokai No.2 plant and electricity interchange trade between Tepco and Tohoku Power.

• Alternative fuel costs due to nuclear reactor shut downs—12/3 onward: Units 4-6 at the Fukushima No. 1 plant and Tohoku Power’s Higashidori nuclear power plant, which were already shut down for regular inspections at the time of the earthquake, could be required to undergo additional inspections by national and local governments to ascertain the impact of the earthquake. The planned shutdown period for these units could therefore be longer than initially anticipated. Using the same oil and forex assumptions as above, we estimate alternative fuel costs of ¥98bn/month for Tepco and ¥29bn/month for Tohoku Power if these units plus those that shut down due to the earthquake are out of operation (total of 15 units: six units at Fukushima No. 1 (4,696MW); four units at Fukushima No. 2; three units at Onagawa; Higashidori (1,100MW); and Tokai No. 2). We adopt conservative assumptions for our estimates, but over time we expect the power companies to be able to shift from high-cost oil to lower-cost LNG and coal and also purchase electricity from other companies. We estimate alternative fuel costs would be nearly 40% lower if the power companies can use LNG for all their needs. However, fuel costs could rise if power plants that use low-cost coal are also out of operation (including the impact on electricity supplies from these plants). At this point there is no indication of when the reactors will be restarted. Based on past earthquakes, it is hard to predict when the reactors may be restarted. When the Onagawa nuclear power plant shut down after the August 2005 earthquake off the coast of Miyagi Prefecture, Unit 2 restarted in January 2006 and Unit 3 restarted the following March. However, when operations at Tepco's Kashiwazaki-Kariwa nuclear power plant were halted by the Niigata-Chuetsu Offshore earthquake in July 2007, the first reactor to be restarted (Unit 7) did not get the go-ahead until May 2009.

Utilities and oil sectors

Shigeki Matsumoto CFA +81-3-6703-1137 [email protected]

Impact of massive earthquake in northeastern Japan

A total of 11 nuclear reactors shut down after the earthquake off Japan’s Pacific northeastern coast on 11 March. The reactors are at the Fukushima No. 1 and No. 2 nuclear power plants, operated by Tokyo Electric Power (Tepco) [9501] (Buy; ¥2,121, 11 March close), the Onagawa nuclear power plant, operated by Tohoku Electric Power [9506] (Neutral; ¥1,886), and Japan Atomic Power’s Tokai No. 2 nuclear power plant. A fire broke out in the vicinity of LPG storage tanks at Cosmo Oil’s [5007] (Neutral; ¥282) Chiba refinery. Also, operations appear to have been halted at oil refineries in Negishi, Kashima and Sendai owned by JX Holdings [5020] (Buy; ¥589). We believe other facilities in the power, oil and gas sector have been damaged by the earthquake but it is hard to get a detailed picture at this point. Recurring profits at Tepco and Tohoku Power could fall short of forecasts owing to the impact of facility recovery expenses and an increase in alternative fuel costs. Recurring profits at refining companies could be affected by the impact of facility recovery expenses and lower sales of petroleum products (or by an increase in costs related to the procurement of petroleum products from alternative sources). However, the impact of the earthquake on refiners could be alleviated if domestic spot prices rise for petroleum products.

13 March 2011 Report no. 11-740

Please read the important disclosures and analyst certifications on pp. 3–9. gl

Nomura Securities Co Ltd, Tokyo Japanese Equity Research – Flash Report

This report is based on information available as of 12 March 2011, 7pm JST.


Nomura 3

• Impact from retail insurance contracts: Insurance payouts on retail insurance contracts will be related to household earthquake insurance contracts, natural disaster coverage riders, and earthquake-caused fire cost insurance. Household earthquake insurance is based on the no-loss/no-profit principle and therefore should have no impact on insurance companies’ earnings. Payouts related to the Tohoku offshore quake will be made from standard liability reserves. We do not believe natural disaster coverage riders are very common, and therefore related payouts should not amount to substantial sums of money. Earthquake-related fire cost insurance covers fires caused by earthquakes, volcanic eruptions and earthquake-caused tsunamis. Payouts are made when a fire destroys at least 50% of the building, 100% of household items in the house, or 50% of a building storing movable property. Payouts are limited to 5% of the insured amount, up to a maximum of ¥3mn. Although we expect the Tohoku quake caused some damage covered by this insurance, we do not expect the impact from related insurance payouts to be that great because in rural areas, such contracts are more common with mutual aid associations than with insurance companies. As a result, we do not expect insurance companies to suffer large losses from payouts to retail customers.

• Impact from corporate contracts: Corporate insurance contracts with earthquake disaster extended coverage riders could lead to substantial losses for nonlife insurance companies. However, nonlife insurance companies have not been disposed to underwriting such insurance because of the high risks involved. While we assume that they have underwritten some earthquake disaster extended coverage riders with large corporations, the extent of those contracts and the likely losses related to payouts on them is not clear at this time.

• Nonlife insurer’s payouts resulting from the Great Hanshin quake: Total payouts from the nonlife insurance industry following the Great Hanshin Earthquake that devastated the Kobe area in 1995 came to ¥78.3bn. We estimate that this was mostly related to household earthquake insurance contracts. (GS/KS)

Insurance sector

Masayoshi Kobayashi +81-3-6703-1127 [email protected]

Likely impact of Tohoku Pacific Offshore Earthquake

The devastation caused by the Tohoku Pacific Offshore Earthquake and subsequent tsunamis is even greater than initially estimated. Nonlife insurers payouts following an earthquake are generally related to four types of insurance contracts: (1) householdearthquake insurance contracts, (2) contracts with natural disaster coverage riders (3) earthquake-caused fire cost insurance, and (4) contracts with earthquake disaster extended coverage riders. The first three are contracts with households (ie, retail contracts) while that the fourth type is primarily with corporate clients.





Nomura 4441

• Minimal negative impact on general contractors: While the general contractors all have some projects in Tohoku, they are not engaged in any big projects in the region that are likely to impact earnings, so the negative effect should be minimal. Tohoku accounted for 5.0% of orders at Shimizu [1803] (Neutral; ¥336) in Apr-Dec 2010, and Hokkaido for 2.3%, while the respective figures for Kajima in Apr-Sep 2010 were 5.5% and 1.0%. Other general contractors do not disclose the regional breakdown of orders.

• Expectations of reconstruction demand likely to mount for construction sector: As occurred just before the close of trading on Friday, expectations of reconstruction demand are likely to be heightened for the construction sector. General contractor stock prices generally rose in the month following the Great Hanshin (Kobe) earthquake in January 1995, with those of companies based in the Kansai region, including Obayashi [1802] (Neutral; ¥348), Okumura [1833] (Neutral; ¥305) and Kinden [1944] (Neutral; ¥724), rising most. Share prices also rose for Sho-Bond, a specialist in reinforcing work to improve earthquake resistance, and Penta-Ocean, which specializes in marine construction. However, general contractor share prices had fallen back to pre-earthquake levels by end-March 1995, while the prices of Kinden, Sho-Bond and Penta-Ocean remained firm. Stock prices reacted little to the earthquake off Niigata in July 2007, and at the time, construction sector prices were declining because of deterioration in profitability. The underlying earnings of mainly general contractors rose following the Kobe earthquake, mostly in civil engineering and building construction, but declined again in 97/3–98/3 because of a subsequent negative reaction. While some new demand can be expected this time, the difference in extent is likely to be minimal.

• Market reaction: The huge damage from the tsunami is likely to focus market attention on Penta-Ocean, which specializes in shoreline and river protection work, along with companies specializing in fixing damaged support pillars and paving on expressways, such as Sho-Bond Holdings, Yokogawa Bridge Holdings and Nippo. Another focus will likely be Kajima, as the Tohoku region is historically its home market. With regard to recovery in the power supply, Yurtec, a subsidiary of Tohoku Electric Power, will be principally responsible. If it lacks sufficient capacity, companies in neighboring regions, such as Kandenko, will probably see order growth as they help out. If, however, the problems that Tokyo Electric Power [9501] (Buy; ¥2,121) has at its Fukushima nuclear power plants become as serious as those it experienced at Kashiwazaki-Kariwa nuclear power plant, it could be forced to reduce capital spending again, and this would hurt the earnings of Kandenko. Another concern is the regional broadband networks currently under construction by Comsys Holdings [1721] (Neutral; ¥780) and Kyowa Exeo [1951] (Neutral; ¥735). These optical fiber projects at local government level are led by the Ministry of Internal Affairs and

Construction sector

Yoshiaki Komatsu +81-3-6703-1139 yoshiaki.komatsu@nomura .com

Impact of Tohoku Pacific (Sendai) earthquake

The huge damage from the tsunami is likely to focus market attention on Penta-Ocean Construction [1893] (Neutral; ¥137, 11 March), which specializes in shoreline and river protection work, along with companies specializing in fixing damaged support pillars and paving on expressways, such as Sho-Bond Holdings [1414] (Buy; ¥1,744), Yokogawa Bridge Holdings [5911] (Buy; ¥479) and Nippo [1881] (Neutral; ¥549). Another focus will likely be Kajima [1812] (Neutral; ¥212), as the Tohoku region is historically its home market. With regard to recovery in the power supply, Yurtec [1934] (No rating; ¥372), a subsidiary of Tohoku Electric Power [9506] (Neutral; ¥1,886), will be principally responsible. However, it will clearly lack sufficient capacity, so companies in neighboring regions, such as Kandenko [1942] (Buy; ¥497), will probably see order growth as they help out.


Please read the important disclosures and analyst certifications on pp. 3–7.gl




Nomura 5

• Japanese equities overall bound to come under near-term pressure: In our opinion, the recent earthquake is bound to exert downward pressure on Japanese equities as a whole over the near term, partly because reports over the weekend point to greater damage than initially anticipated. In terms of the impact on the Japanese economy, observers are increasingly comparing this recent earthquake with the Kobe earthquake of 1995, when the TOPIX and the Nikkei Average fell 8% in the first five days thereafter before rallying 5% over the following 10 days, thereby falling 3% over 15 days following the earthquake. Applying these numbers to today’s markets sees the TOPIX and the Nikkei Average moving in ranges around 850–900 and 9,500–10,000 respectively. If the Nikkei Average and the TOPIX did fall below 10,000 and 900 respectively, we think they could well find technical support around their 200-day moving average lines, which as of 11 March stood at 9,840 and 873 respectively.

• We do not envision serious correction: Although we believe economic activity is bound to fall in the immediate wake of the earthquake, we expect output to recover rapidly as plants are repaired or production is transferred to alternative sites. Industrial production fell 2.6% m-m in January 1995, the month of the Kobe earthquake, but recovered in February and was back up at its December 1994 level by March. Moreover, we expect the Japanese government to provide fiscal support to the regions affected. In the case of the Kobe earthquake, the government provided support totaling ¥3trn, equivalent to the estimated amount of damage caused. This kind of policy response would probably help to provide some stability to the equity markets. Meanwhile, Japanese companies are now in a very different place to January 1995 in terms of fundamentals and share price valuations. In January 1995, the TOPIX had a twelve month-forward ROE of 3.8% and equivalent P/E of 53x, versus equivalent metrics of 8.4% and 14x for March 2011. Also, whereas substantial yen appreciation through April constituted a major cause of the fall in Japanese equities in 1995, we see little risk of this happening again in 2011, partly because the BOJ has indicated that it will implement additional monetary easing if the yen starts to strengthen. Overall, although we expect this earthquake to provide further impetus to the correction in Japanese equities that has been occurring since mid-February, we do not envision a serious correction.

• Impact by sector: The sectors that performed best in the month following the Kobe earthquake were those most likely to benefit from reconstruction demand, namely construction, metal products (including bridges, construction materials, housing equipment), and glass & ceramics products. We expect these sectors to perform relatively well on this occasion too. Meanwhile, the sectors that performed worst

Earthquake impact on Japanese equities Seiichiro Iwasawa +81-3-6703-1260 sei [email protected] Ryota Sakagami +81-3-6703-1255 ryo [email protected]

Near-term downward pressure looks inevitable, but serious correction unlikely 1. The recent major earthquake is bound to exert downward pressure on Japanese equities as a whole over the near term, in our view. Based on declines after the Kobe earthquake, we expect the TOPIX and the Nikkei Average to decline and then rebound in ranges around 850–900 and 9,500–10,000, respectively. 2. Although we expect this earthquake to provide further impetus to the correction in Japanese equities that has been occurring since mid-February, we do not envision a serious correction for the following reasons. First, industrial production only fell in the immediate month following the Kobe earthquake. Second, the government is likely to provide fiscal support to the regions affected. Third, we see little risk that the earthquake will trigger a sharp rise in the value of the yen. 3. We expect the following sectors to perform relatively well as they are more likely to benefit from reconstruction demand: construction, metal products (including bridges, construction materials, housing equipment), glass & ceramics products.

13 March 2011 Report no. S11-017

TOPIX (11 March) 915.51 Please read the important disclosures and analyst certifications on pp. 4–7. gl

Nomura Securities Co Ltd, Tokyo Investment Strategy – Flash Report



Nomura 1

• Industry structure: Industrial production in the prefectures worst affected by the

earthquake and tsunami comes to 6.8% of Japan’s total industrial output. This is a smaller percentage of total output than that accounted for by Hyogo and Osaka Prefectures, which were affected by the Great Hanshin (Kobe) earthquake, but greater than that of Hyogo Prefecture alone. Based on the affected areas’ share of national industrial output, we see the possibility of major impacts in farming/forestry/fisheries, mining, food manufacturing, ceramics/stone/clay, primary metal (steel, etc) manufacturing, electrical machinery, precision equipment, and electric power/gas/water. Considering the major disruption to infrastructure such as roads and electric power generation facilities, we think the short-term impact on economic activity could be greater than after the Kobe earthquake. Another characteristic of the affected region is the large amount of IT-related industry.

• Production trends: Following the Kobe earthquake, industrial production fell in January 1995 (–2.6% y-y) but rebounded in February and March. Production in March 1995 was 0.4% higher than the December 1994 level. These figures suggest that there was a short-term drop in output, followed by a relatively rapid recovery as production resumed or was transferred to alternative facilities. The only manufacturing sectors that did not see production recover to pre-earthquake levels within three months were fabricated metals and textiles. In nonmanufacturing, activity did not return to pre-earthquake levels within three months in the freight transportation, wholesale & retail trade, securities, nonlife insurance, travel, and leisure sectors.

• Petrochemicals: It appears that operations at ethylene centers in the Chiba and Kashima complexes have been suspended. A fire broke out at the Chiba oil refinery of Cosmo Oil, and it appears that Mitsui Chemicals and Sumitomo Chemical have halted operations at their Chiba complexes, and that Mitsubishi Chemical has suspended operations at its Kashima complex. Mitsui Chemicals has another ethylene center in Osaka, and Mitsubishi Chemical has another in Mizushima. Operations at Showa Denko (plant in Oita), Tosoh (Yokkaichi) and Asahi Kasei (Mizushima) have been unaffected by the earthquake. Together with rising naphtha prices, we think the suspension of operations at the Chiba and Kashima complexes will tighten supply/demand, as a result of which higher product prices are more likely to be accepted. If the gap between domestic and overseas prices were to widen, however, we think this could result in the expansion of imports.

• Industrial gas: Taiyo Nippon Sanso has 31 industrial gas production bases nationwide, six of which are located between Hachinohe and Kashima. We estimate that combined, these account for around 10–15% of the company’s operating profits. The company also supplies gas to chemical plants, and the possible impact on them is a concern. Air Water will be affected by the halting of production at Sumitomo

Tohoku Pacific Earthquake

Jiyun Konomi +81-3-6703-1110 [email protected]

Expected impact

The Tohoku Pacific Earthquake occurred on the afternoon of 11 March. We would like to express our sadness at the loss of life and offer our condolences to all those suffering as a result of this disaster. Making full use of our comprehensive Japan research structure, we have considered the likely impact of the earthquake from the perspectives of macroeconomy, investment strategy, and key sectors, based on currently available information. In this report, we summarize the likely impact on key industrial sectors. We will be issuing separate reports covering the macroeconomic impact, implications for investment strategy, and the effect on individual sectors. This report is based on the existing knowledge of our analysts, media reports, and announcements made so far by companies. We have not yet discussed any issues with company representatives, as disaster response is currently their top priority.

13 March 2011 Japanese full report: 13 Mar

Report no. 11-73

Please read the important disclosures and analyst certifications on pp. 10–14.gl

Nomura Securities Co Ltd, Tokyo Japanese Equity Research

This report is based on information available as of 13 March 2011, 12am JST.


Nomura 1

• Global semiconductor shipments up 15.6% y-y in January: Preliminary World

Semiconductor Trade Statistics (WSTS) data for January show semiconductor

shipment value rising 15.6% y-y, following December's growth of 13.1%. The

Americas region (+37.4% y-y, +22.7% in December) continued to drive the overall

market. By product, micro ICs (+38.1%, +16.6%) and logic devices (+14.3%, +10.6%)

made notable contributions to overall growth. Growth in micro IC shipment value was

led by microprocessors, while shipments of logic devices for PCs also increased

markedly. In memory, shipment value contrasted appreciably for DRAM and NAND.

DRAM shipment value declined 15.0% y-y (-6.5% in December) on a 41.6% slide in

the average selling price, while shipment value of NAND flash climbed 39.5%

(+64.4%) on bit volume growth of 94.4% (+65.1%), supported by robust demand.

• Memory prices—bottoming for DRAM: From the second week of February 2011

through the second week of March, the spot price for DDR2 DRAM (1Gb 800MHz)

was flat at $1.40, while that for DDR3 (1Gb 1,333MHz) fell from $1.20 to $1.10.

Between the second half of January and the second half of February, contract prices

for DDR3 (1Gb 1,333MHz) were flat at $0.90. Prices have remained flat as DRAM

makers have reduced output and restricted supply. Prices could rebound on an upturn

in demand when new chipset shipments resume. Over the same period, the NAND

flash memory spot price fell from $4.40 to $4.00 for 16Gb multilevel cell (MLC)

products, while that for 32Gb MLC products fell from $6.00 to $5.00. The declines

reflect a drop in prices of high-quality products used chiefly in smartphones. Prices in

the volume zone (16Gb, 32Gb) have fallen sharply, in our view because the excessive

sense of undersupply has eased following the seasonal correction in demand and an

end to concerns about the power outage at a certain manufacturer.

• SPE market: According to January 2011 data from Semiconductor Equipment and

Materials International (SEMI) and the Semiconductor Equipment Association of

Japan (SEAJ), the B/B ratio was 0.85 for North American-made semiconductor

production equipment and 0.99 for Japanese-made SPE. Orders for North American

SPE fell 2.9% m-m to $1,535mn, the first slide in two months, while orders for

Japanese SPE fell 3.3% to ¥103.4bn, the third straight decline. These falls are in line

with our expectations. We see orders rebounding in 2011, driven by major capex at

microprocessor makers and logic foundries. We think SPE orders will rise at least until

2011 Q3, and possibly until Q4 depending on the timing of DRAM investment. We

retain our “Bullish” stance on the SPE sector. Our stock picks are Dainippon Screen

Mfg [7735] (Buy; ¥839) and Hitachi High-Technologies [8036] (Buy; ¥1,890), as

they should benefit more from capex among logic device manufacturers.

Semiconductor monthly March 2011 Masaya Yamasaki CFA +81-3-6703-1190 [email protected]

Tetsuya Wadaki CPA +81-3-6703-1184 [email protected]

Tetsukazu Tsuruhama +81-3-6703-1188 [email protected]

Slowdown for PCs and TVs, but smartphone-related demand firm We believe the semiconductor market is recovering moderately now that distributors haveadjusted inventories, but we see disparities in product demand. In addition to the impactfrom seasonal factors, demand for semiconductors used in TVs and PCs for the consumer market continues to correct, while smartphone-related demand is firm. Shipments of high-end PCs have declined owing to problems with new chipsets, and related components appear to have been hit in February. While some caution is still warranted, in part due to the shift in demand to tablets, we expect the chipset problems tobe resolved soon. NAND flash memory, IGBTs and other power semiconductors continueto see brisk demand, and we also anticipate a gradual recovery for logic and analog ICs. In order of investment preference, we recommend Toshiba [6502] (Buy; ¥512, 9 March close) then Mitsubishi Electric [6503] (Buy; ¥966), both of which we expect to generaterecord-high profits in 12/3, as well as Hitachi [6501] (Buy; ¥507) and Fuji Electric Holdings [6504] (Buy; ¥272), which we expect to benefit from structural reforms.

11 March 2011 Japanese full report & English summary: 10 Mar

Report no. 11-071


Nomura Securities Co Ltd, Tokyo Japanese Equity Research


Nomura Global Economics 1

• Kobe earthquake an effective reference point: With information on damage still

limited, estimating the impact of the earthquake and tsunami on Japan’s economy and financial markets is problematic. However, we think the Kobe earthquake of January 1995 provides a good reference point. We believe recent major earthquakes in Japan, rather than overseas, provide a better benchmark for assessing the economic impact of the disaster, as characteristics specific to Japan are likely to have a large say in how long consumers and companies refrain from normal activity or what kind of stimulus measures the government decides to implement. In the case of the Kobe earthquake, the short-term impact on the domestic economy was smaller than anticipated but economic expansion driven by rebuilding demand took longer to feed through than expected. As with the Kobe earthquake, operating rates at manufacturing facilities have been relatively low, making it comparatively easy for companies to shift production to sites unaffected by the disaster. However, given the extensive damage to road networks, power plants and other infrastructure over a wide area, we think the short-term economic impact of the Sendai earthquake will be greater.

• Earthquake likely to delay Japan’s exit from current economic lull: Based on what occurred after the Kobe earthquake, we think an all-out slump in the Japanese economy caused by the Sendai earthquake is overly pessimistic. However, a V-shaped recovery supported by a rapid upturn in demand driven by rebuilding work in the affected areas is also unlikely. We now expect the Japanese economy to take longer than we expected to exit its current soft patch owing to the earthquake and tsunami. The consensus forecast on the timing for this exit was Jan–Mar 2011, while we had projected Apr–Jun. However, we now think Jul–Sep or possibly Oct–Dec is more likely. We expect solid economic recovery to be confirmed in Oct–Dec.

• Government stimulus measures: The government announced supplementary budgets after the Kobe earthquake that provided a total of ¥3trn in spending to help with rebuilding. We expect government stimulus measures for the Sendai earthquake to exceed this level. However, it took the government around 40 days from the date of the

Japan economic overview

Economic impact of the massive earthquake in northeastern Japan A 9.0-magnitude earthquake occurred off the northeastern coast of Japan on 11 March (Friday). The earthquake, with its epicenter in the Tohoku-Sanriku area, was the largest ever recorded in Japan. The size of the economy of the main earthquake-affected region is roughly the same as that of the area hit by the Great Hanshin (Kobe) earthquake in 1995, but with this Tohoku Pacific (Sendai) earthquake affecting road networks, power plants and other infrastructure over a wide area, we expect the short-term economic impact to be greater than the Kobe earthquake. The area affected by the Sendai earthquake has a large number of IT-related companies. Due to the earthquake andtsunami, the Japanese economy is now likely to take longer than we expected to exit its current lull. We had projected an Apr–Jun exit but now forecast Jul–Sep or possibly Oct–Dec. We forecast that the largest negative impact on quarterly real GDP growth willemerge in Apr–Jun 2011. We think a slump in the domestic economy caused by the earthquake is an overly pessimistic outlook. However, based on the experience of the Kobe earthquake, we think a V-shaped recovery supported by a rapid upturn in demand driven by government-funded rebuilding work in the affected areas is also unlikely. We believe the earthquake has increased the likelihood of additional monetary easing measures by the BOJ, and we expect these measures to be implemented in conjunction with the announcement of new government stimulus measures.

13 March 2011 Japanese full report: 13 Mar

Report no. M11-040

Economists Takahide Kiuchi +81-3-6703-1280 [email protected] Kohei Okazaki +81-3-6703-1291 [email protected] Financial & Economic Research Center Nomura Securities, Tokyo

Please read the important disclosures on pp. 11–12. gl

Nomura Securities Co Ltd, Tokyo Economic Research

(continued over)

This report is based on information available as of 13 March 2011, 11am JST.


Please see analyst certifications and important disclosures on the last page of this report.

Nomura Securities International Inc.

Global Weekly Economic Monitor N O M U R A G L O B A L E C O N O M I C S

Record quake hits Japan A devastating earthquake has hit Japan and the ensuing tsunami has brought broader damage.

GLOBAL LETTER Europe will work 5 But it needs to strengthen its governance, fix its banks and reform structural policies.

REGIONAL ROUNDUPS

United States Unemployment rate surprise 6 A surge in final sales looks to have helped generate a drop in unemployment.

Europe Moody’s blues 8 Moody’s downgraded the debt of both Greece and Spain.

Japan Intermediate goods and materials leading recovery 10 Increased exports to Asia have led to a structural change toward “producer” goods.

Asia Korea’s demographic sweet spot 12 Over the next five years South Korea should benefit from favorable demographics.

Emerging Markets Prepared for a world of sovereign risk? 14 Overall risks have diminished but Middle East unrest and inflation could revive them.

SPECIAL TOPICS

Global Earthquake in Japan - the economic implications? 16 The effect of the earthquake and tsunami that hit Japan are, for now, incalculable.

United States How does a mismatch in the labor market matter? 17 A mismatch between jobs and available workers is pushing up NAIRU.

Europe Europe will work: The executive summary 20 We present the main findings of our major new report on the future of Europe.

Italy Italian politics: Uncertainty extended? 23 The likelihood of early elections in 2011 has fallen and, for now, markets are content.

Vietnam Prioritizing macro stability 24 Policy rate hikes and other measures have reduced the risk of crisis.

Turkey Turkey: When the facts change, TCMB hikes? 26 Changing market dynamics have reduced the need for ”postmodern” policy.

Emerging Markets EMFX valuation: Setting up for the shock? 28 Our valuation metrics show differences across most of Asia, EEMEA and LatAm.

11 March 2011

DATA AND OUTLOOKS Forecast summary ...................... 2

Our view in a nutshell ................. 3

Economic data calendar .............. 4

United States ........................... 30

Europe ..................................... 34

Japan ....................................... 38

Asia ......................................... 40

Emerging Markets ..................... 46

Contacts .................................. 58


Nomura

Yen Rate Options Insights

① Risk-limited bearish swaption strategy for H1 FY11 The market has been quiet ahead of fiscal year-end. But if the strong

US payrolls report released at the beginning of March is followed by similarly bullish economic data, we think an end to QE2 would become more likely. That, in turn, could refocus the market’s attention on the possibility of a policy tightening.

We have moved up our forecast for an ECB rate hike and, with it, raised our outlook for JGB yields through the end of June. In this report we recommend two payer spread strategies designed for bearish market conditions that we expect in H1 FY11. The break-even 10yr rate for both strategies in the event of a decline in rates is just under 1.3%.

② 2–20yr bear flattener with 2yr expiry based on macro factors and relative value

According to a QUICK bond market survey released at the end of February, market participants’ average expectation of core CPI inflation over the next 12 months continues to increase at a rapid pace and now stands at −0.27%. Past periods of rising inflation expectations and rate hike expectations have typically been characterized by bear flattening driven by higher short- and medium-term rates.

We recommend a 2–20yr conditional bear flattener strategy with a 2yr expiry, taking into account the fact that (1) the JGB forward curve is currently pricing in a BOJ rate hike 1.9 years from now and (2) IV is higher on 2yr into 20yr swaptions than on 2yr into 2yr swaptions. We recommend a 2.5% strike for the 2yr into 20yr payers because that level serves as resistance for 20yr rates.

③ Appendix. Charts JGB futures options: open interest, trading volume and prices

Yen swaptions: Implied normal volatility

Nomura Securities Co Ltd, Tokyo Fixed Income ResearchJapan Quantitative Strategy

11 March 2011 Translation of Japanese report issued on 10 March 2011

Yoshiyuki Suimon Quantitative Analyst (+81 3) 6703 3860 [email protected] Fixed Income Research Dept Nomura Securities Co Ltd, Tokyo US Contact

David Resler Chief US Economist (+1 212) 667-2415 [email protected] George Daniel Goncalves Chief US Rates Strategist (+1 212) 667 2254 [email protected] Nomura Securities International, Inc. Two World Financial Center New York, NY 10281-1198

Please read the important disclosures and analyst certifications on pp. 8-11.

35

40

45

50

55

60

65

70

0 10 15 20

Normal Vol [B

P]

Swap tenor [yrs]

5

2Y 10Y

Expiry (option term)

2y2y

2y20y

Strategy 3: Sell 2yr into 20yr payers, which have high IV relative to 2yr into 2yr

0.6

0.8

1

1.2

1.4

1.6

1.8

2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2005

/04

2005

/12

2006

/04

2006

/08

2006

/12

2007

/04

2007

/08

2007

/12

2008

/04

2008

/08

2008

/12

2009

/04

2009

/08

2009

/12

2010

/04

2010

/08

2010

/12

2–20

yr spread [%

]

Rate [%

]

2005

/08

Uncollateralized O/N call2yr swap rate2–20yr spread (%)

Source: Nomura

Exhibit. 2–20yr spread bear flattened as BOJ raised rates Exhibit. Term structure of volatility (2yr expiry) supports strategy


Any Authors named on this report are Research Analysts unless otherwise indicated Analyst Certification Each research analyst identified herein certifies that all of the views expressed in this report by such analyst accurately reflect his or her personal views about the subject securities and issuers. In addition, each research analyst identified on the cover page hereof hereby certifies that no part of his or her compensation was, is, or will be, directly or indirectly related to the specific recommendations or views that he or she has expressed in this research report, nor is it tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

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Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for ratings published from 27 October 2008 The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to price target defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks (accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from 30 October 2008 and in Japan from 6 January 2009 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Price Target - Current Price) / Current Price, subject to limited management discretion. In most cases, the Price Target will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% o downside is less than 5%. rA 'Reduce' recommendation indicates that potential downside is 5% or more.

Nomura 12Nomura 11 14 March 2011

A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008) STOCKS A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six months. A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over the next six months. A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over the next six months. A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months. Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other information contained herein. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months. Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector - Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe; Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior to 30 Octo er 2008 bSTOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price, subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside implied by the recommendation. A 'Strong buy' recommendation indicates that upside is more than 20%. A 'Buy' recommendation indicates that upside is between 10% and 20%. 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