2012 tokyo ebig von richthofen

7/29/2019 2012 Tokyo Ebig Von Richthofen

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Equity-Based Insurance Guarantees Conference

June 18, 2012

Tokyo, Japan

Overview of Japanese Capital Markets

Peter von Richthofen


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Overview of the Japanese Capital MarketsPeter von Richthofen, Bank of America Merrill Lynch

SOA Equity-Based Guarantees Conference, Tokyo, June 2012


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Japan Capital Markets: Background

Deflation2

Japan Household Financial Assets (JPY trn)1

0 0

1.0%

1,200

1,400

,

-2.0%

-1.0%

.

Annual Inflation Rate

growth in

household

wealth

Causes?

400

600

800

.

CAGRsince2000

Falling Savings Rate drivenby demographic trends3

14

16 8

11

(%)

Savings rate (LHS)

> 60 yrs old population share (RHS)

200

2

4

6

8

10

12 14

17

20

23

26

29

Deposits Bonds Equities

Inv Trusts Insurance & Pension Reserves

Other

1) Source: Bank of Japan, Flow of Funds Statistics; 2) Source: Bloomberg;

3) SourceCabinet Office, Statistics Bureau, BofAML Global Research

0 32


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Composition of Household Financial Assets: International Comparison

Composition of Household Financial Assets

(USD trn, end 2011)) Japan households hold theirfinancial assets mainly in

Japan $ 19.3trn57% 28% bank deposits

Distinctly different allocationfrom the other majoreconomic blocks

US $ 49.1trn14% 29%32%

EuroArea $ 24.0trn36% 32%

Currency & Deposits Bonds Shares & Equities

Investment Trusts Insurance & Pension Reserves

1) Source: Bank of Japan, Flow of Funds, - Overview of Japan, US, and the Euro area . YE 2011


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Snapshot of the US Capital Market and Key Financial Institutions

USD 49trn of Household Financial Assets1

Deposits Bonds Equities Inv. Funds Insurance & Pension Reserves

7.1trn 4.8trn 15.5trn 5.6trn 14.3trn

USD 14.6 trn ofDepository

Institutions Assets2USD 10.6 trn of Inv.

Fund Assets2USD 6.7 trn of

Insurance Reserves2USD 6.7 trn of

Pension Reserves2

1 1 1

USD 36.8 trn ofFixed Income

USD 14.8 trn of

Loans

Gov Bonds & Bills

Corp Bonds & ABS

Inv Funds

Assets3

Market Cap4

Treasuries

Bonds & Bills

27%

Corp Bond

22%

Money Mkt 7%

OtherMunicipal &

Agency

10%ABS

28%

1) Source: Bank of Japan, Flow of Funds, - Overview of Japan, US, and the Euro area - YE 2011; 2) Source: Federal Reserve Statistical Release, Flow of

Fund Accounts of the United States First Quarter 2012; 3) Source: SIFMA; 4) Source: Bloomberg - Mkt Cap of the Russell 3000 Index which comprises

98% of US listed equities. All data is for YE 2011


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Snapshot of the Japan Capital Market and Key Financial Institutions

JPY 1,483trn of Household Financial Assets

Deposits Bonds EquitiesInv.

Funds Insurance & Pension Reserves

838trn 39trn 420trn

JPY 1,272 trn ofDepository

Institutions AssetsJPY 70 trn of

Inv. Fund Assets

JPY 342 trn ofInsurance Reserves

JPY 78 trn of NetPension Reserves

1 1 1 1

JPY 978 trn of Fixed JPY 256 trn of

Loans

Gov Bonds & Bills

Corp Bonds & ABS

Inv Funds

Market Cap

Treasuries

Municipal &

Agency

12%

Corp Bond9%ABS 0.1%

Overseas Assets

on s s

79%

1) Source: Bank of Japan, Flow of Funds - Overview of Japan, US, and the Euro area - YE 2011; 2) Source: Bank of Japan - Basic Figures of the Flow of

Funds - Fourth Quarter of 2011; 3) Source: Japan Secruities Dealers Association ; 4) Source: Tokyo Stock Exchange Fact Book 2012;

All data is for YE 2011


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Observations - Japan Capital Market vs US Capital Market

Household Financial Assets:

Japan: Almost no growth, heavily concentrated in bank deposits Depository Institutions:

Japan: Very substantial holders of JGBs (28% of Depository Institutions assets)

Investment Fund Sector:

Lar e Sector in the US market 3/4 of Bankin Sector total assets ...

... but much smaller in Japan (5% of Banking Sector Assets). Helps retail customersaccess overseas assets

Size of Fixed Income Market vs Equity Market:

US: 2.5x

Corporate Bonds and ABS: Large sector in the US (50% of FI Assets) but much smaller in the Japan market.

US Insurers are predominantly credit investors, and JGB investors in Japan


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JGB Market Overview

JGB Yield Curve (Mid June 2012)

1.864

2.095

1.66

2.00

The JBG market is very substantial in size (largerthan the US Treasury market at YE 2011 FX rates)

JGB maturities extend out to 40yrs, with average

0.0980.10

0.848

0.228

0.50

1.00

.

JGB yields have been at generally low levels sincethe mid 1990s

Currently the 5yr yield is close to all-time lows on

Foreigners 7%

Households 4% Others 4%

Composition of JGB Holders

10yr - 20yrs

20yrs - 30yrs 5%> 30yrs 1%

JGB Distribution by Tenor Bucket

Source: Bloomberg

Banks

41%Public

Pensions

9%

BOJ

9%

< 3yrs

38%

5yr - 10yrs25%

14% verage

remaining years

to maturity:

6yrs 11mths

Insurers &Private Pensions

26%

3yrs - 5yrs17%

Source (both pie charts): Japan MOF, Quarterly JGB Newsletter, April 2012, BAMLData is for YE 2011


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Example of JGB Holders: Banks

JGB holdings of the four big mega banks have more then doubled post-Lehman

JPY 40trnJPY 113trn

Bank investment activity is concentrated in the medium term sector of the curve (90% of holdingsare yr o yr enor an e r ex ens ve uy ng as epresse y e eve s n a segmen

"City Banks are evolving into JGB funds" (BAML Research)

JGB holdings of city banksb maturit rofile Ratio of holdin

JGB Holdings (Banks' Account) JPY trn

100

120

140

160

180

6070

8090100

80

100

120 10yr

2012 tokyo ebig von richthofen

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