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Motoshige ITOHCouncil on Economic and Fiscal Policy, Japan

Gakusyuin University

On the Present State of the Japanese Economy

0

Japan’s nominal GDP: recovery process under Abenomics

1

2

revised data

original data

Nominal GDP of Japan; revised data

3

Expanding money balance

0

10

20

30

40

50

60

70

80

Monetary Base

US Euro Area UK Japan

（％、GDP ratio）

3

4

図１消費者物価指数

-0.6

0.5

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7

2011 12 13 14 15 16

（消費者物価指数、％）

（年月）

消費者物価指数（生鮮・エネルギーを除く総合）

（消費税の影響除き）の前年比（３カ月移動平均）

CPI inflation rate excludingenergy prices and fresh foods

Inflation rate

Three month moving average

Shifting trend of inflation rate

◆ Three arrows of monetary stimulus, flexible fiscal policy, and structural reforms are required.

◆Fiscal Stimulus which complements monetary policy plays an essential role under the current situation.

◆ Quality investment and expenditure to boost potential demand are keys.

Necessary Policy Coordination

5

Ratio of Current profit to sales

6

Trends of unemployment rate and job‐offer job‐seeker ratio

7

8

Return of deflation?

9

Growth rate of world GDP and world export;world economic trend is against Abenomics

◆ Lack of Demand

◆ Legacy of the Global Financial Crisis

◆ Demographic changes such as ageing

◆ Slowdown in innovation and technological diffusion

Secular Stagnation?

‐5

‐4

‐3

‐2

‐1

0

1

2

3Output Gap of G7 countries

0

5

10

15

20

25

30

35

40Share of older population

Japan USGermany FranceUK ItalyCanada

(Source) IMF, World Economic Outlook Database Apr 2016 (Source)United Nations, World Population Prospects, the 2015 Revision

10

Sluggshi innovation: TFP has been very low since 1980s

11

Low interest of major countries

0

1

2

3

4

5

6

7

US Euro Area

UK Japan

(％） Policy Rates

12

13

growth rate seasonally adjusted

Whole world

Industrial nations

emerging nations

14

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

24 25 26 27 28 31 1 2 3 4 7 8 9 10 11 14 15 16 17 18 21 22 23 24

10 11

日本の国債（10年）（左軸）

米国の国債（10年）（右軸）

ドイツの国債（10年）（左軸）

（日）（月）

Trump effects; long‐term interest rate

German 10 year bond

USA 10 year bond

JGB 10 year

US election

15

Most recent yield( middle of February 2017)

duration (year)

JGB yield curve

◆ decreasing budget deficitachieving primary balance surplus by 2020

◆preparing for aging populationsocial security reforms

◆ lowering the level of public debtbudget surplus and nominal GDP growth

mild inflation?

Three aspects of fiscal consolidation

16

17

-6.3

-5.5

-3.0

半減目標

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

2005 07 09 11 13 15

（％）

（年度）

Primary fiscal balance

◆ Corporate Governance Reform◆ Pro‐growth corporate tax reform◆ EPA(FTA) and agricultural reform◆ Expansion of private participation in public

services (PPP, PFI)◆ Increased labor participation of women

and elderly people

Abenomics in Progress: Growth Strategy

18

１．Realizing Productivity Revolution‐ The 4th Industrial Revolution‐ Regulatory reform

２．Increasing investment in new growth areas‐ Environment (Investment in energy saving, renewable and alternative sources)‐ Healthcare, medical and other senior market‐ Education, human resource development

３．Mitigating the impacts of labor force decline‐ Further active participation of women and the elderly ‐ Utilization of foreign human resources‐ Labor market reform

Acceleration of Growth Strategy

19

Japanese Fiscal Policy and

Public Debt Management

Mar. 8. 2017

Kenta Ichikawa

524

539540

554

460

470

480

490

500

510

520

530

540

550

560

ⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣⅠⅡⅢⅣ

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20172018

(Source) (actual)Cabinet Office, Government of Japan "Quarterly Estimates of GDP",

(forecast)"Fiscal 2017 Economic Outlook (Dec 2016) "(Nominal GDP)

(trillion yen)

(CY)

Sep. 2008

Lehman Shock

Mar. 2011

The Great East Japan

Earthquake

Abenomics

Real GDP

Nominal GDP

2*2016 1Q, 2Q, 3Q, 4Q are annualized base

Target:

600 in 2020

(Source) Cabinet Office, Ministry of Health, Labor and Welfare,

Ministry of Internal Affairs and Communications

Employment and Wage

Consumption

3 month average

Economic Growth

2008 2009 2010 2011 2012 2013 2014 2015 20162016

1Q

2016

2Q

2016

3Q

2016

4Q

Nominal -2.1 -6.0 2.2 -1.8 0.7 1.7 2.1 3.3 1.3 3.1 1.2 0.7 1.2

Real -1.1 -5.4 4.2 -0.1 1.5 2.0 0.3 1.2 1.0 2.3 1.8 1.4 1.0

95

100

105

110

115

2008 2009 2010 2011 2012 2013 2014 2015 2016

Private Consumption Integrated

Estimates (seasonally adjusted

series)

(CY2011=100)

Consumption Tax Hike

Consumption Tax Hike(apporoved by the Diet)

（CY）

0.4

0.6

0.8

1.0

1.2

1.4

1.6

240

250

260

270

280

290

300

2008 2009 2010 2011 2012 2013 2014 2015 2016

Real Compensation of EmployeesJob Opening-to-Application Ratio (RHS)

（Seasonally adjusted、trillion yen）

（CY）

（ratio）

3

Potential Growth RateOutput gap

(Source) Bank of Japan (Source) Bank of Japan

4

Basic Idea of Abenomics－Pursuing both economic revitalization and fiscal consolidation by using all policy tools

◇GDP600 trillion yen [2016 : 540 trillion yen]◇Primary surplus of central and local governments

[2015:-3.0% of GDP]

Measures

Benchmarks for Fiscal Reform2016-18:Total increase of general expenditure from 2015 to 18 [3 years] : 1.6 trillion yen

[cf. Natural annual increase of social security expenditures : 0.64 trillion yen in 2017]

2018: Assess the progress and consider additional expenditure and/or revenue measures as necessary

2019: Consumption tax hike (8% → 10%)

Fiscal Shape In the long run－Stabilize Debt to GDP ratio earlier aiming at steady reduction over the medium term.

[2016 Central and Local Government Debt:189.5%]－Secure Fiscal sustainability despite population declining and aging society.

FY2020 Target

1) Aggressive monetary policy2) Flexible fiscal policy3) Growth strategy including structural reform

Framework of Fiscal Consolidation

-6.3 -5.4

-3.9

-3.0 -2.5 -2.3

-1.9

-3.7 -3.4

-2.4

-2.1 -1.4

-7

-6

-5

-4

-3

-2

-1

0

-3.2 (fiscal target in FY2015)

Primary Surplus Target

-11.3 trillion Yen

●

(FY)

(ratio to nominal GDP:%)

●-8.3 trillion

Yen

●:Economic Revitalization Case Average Growth Rate(FY2018-2025): Nominal GDP 3.7%, Real GDP 2.2%Interest Rate: estimate increase up to 4.4% by FY2025

▲:Baseline Case Average Growth Rate(FY2018-2025): Nominal GDP 1.5%, Real GDP 0.9%Interest Rate: estimate increase up to 1.9% by FY2025

186.7

180.1

186.0189.5 189.0

189.6

100

120

140

160

180

200

220

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

(%)

(FY)

5

Debt to GDP Ratio Projection

In the Economic Revitalization Case, the ratio of

outstanding debt to GDP is projected to decline toward

FY2025. However, it should be noted that the long term

interest rate is projected to be higher than the nominal

GDP growth rate after FY2023, then the existing bonds

which had been issued at low interest rates would be

refinanced sequentially at higher interest rates.

PB Projection

(Source) Cabinet Office

●⇒●・Continuing tight expenditure control

(Total increase of general expenditure from 2015 to 2018: +1.6 trillion yen)

・Additional expenditure and revenue measures following the 2018 interim review

5.312.3

34.0

52.042.3

54.0 52.443.5 38.6 36.2 36.6 40.9

35.9

0.4 9.0

42.4

90.5 100.8

109.0 111.0

110.2 119.4 114.2 109.1

109.3

106.1

9.4 8.4

13.1 14.2

10.714.0

13.416.5

19.6

12.0

5.7

21.3

76.4

151.8 151.5

176.2 177.5

164.3

172.0

163.9 162.2

169.8

154.0

0

50

100

150

200

1975 1985 1998 2009 2010 2011 2012 2013 2014 2015 2016 2016 2017

(trillion yen)

FILP Bonds

Refunding Bonds

Newly Issued Bonds

(FY)

(Note1) Up to FY2015: Actual figures

(Note2) Figures may not sum up to total because of rounding.(Note3) "Newly Issued Bonds" includes Reconstruciton Bonds

and Special Bonds for covering Public Pension Funding.

(Initial)

(3rd Supplementary budget)

(Initial)-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2013/01 2013/07 2014/01 2014/07 2015/01 2015/07 2016/01 2016/07 2017/01

10Y

5Y

2Y

2016/7/8-0.300%

(%)Negative Interest

Rate

QQE2QQE1 YieldCurve

Control

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(Year)

(FY)

Japan

France

Germany

U.S.

9

11

13

15

17 U.K.

6

JGB Annual Issuance Amount Average Maturity of JGBｓ

JGB Yields

(Source) Bloomberg

16.2

8.4

7.16.6

5.8

(Source) Estimated by MOF based on data from websites of OECD and government debt management authorities

（unit : trillion yen）

FY2017Changes from FY2016(initial)

40-Year 3.0 ＋0.6

30-Year 9.6 ±0

20-Year 12.0 - 1.2

10-Year 27.6 - 1.2

5-Year 26.4 - 2.4

2-Year 26.4 - 1.2

TBs(1-year) 23.8 - 1.2

10-Year Inflation-Indexed 1.6 - 0.4

Auctions for Enhanced-Liquidity 10.8 ＋1.2

Total 141.2 - 5.8



Newly-issued bonds(Construction Bondsand Special Deficit-Financing Bonds)

34.4 - 0.1

Reconstruction Bonds

1.5 - 0.6

FILP Bonds 12.0 - 4.5

RefundingBonds

106.1 - 3.0

Total 154.0 - 8.2



JGB market issuance 148.0 - 4.2

Market issuance (calendar-based)

141.2 - 5.8

Non-Price Competitive Auction Ⅱ etc 6.8 ＋1.6

Sales for Households 3.0 ＋1.0

BOJ rollover 3.0 - 5.0

Total 154.0 - 8.2

〈Breakdown by Financing Methods〉〈Breakdown by Legal Grounds〉〈Market Issuance Plan by JGB types〉

＝

7

➢ Maturity structure is designed to reflect investor demands appropriately, so that the current low interest rate

situation should be utilized smoothly and effectively.

・ Super long-term ：Effectively increased carefully assessing potential demand from investors such as

(over 10 years) life insurance companies, combining normal auctions and “Auctions for Enhanced-

Liquidity”

－ Decrease in 20-year（- 1.2 trillion yen）, increase in 40-year（＋0.6 trillion yen）

－ Increase in Auctions for Enhanced-Liquidity for Super long-term（＋1.2 trillion yen）

・ Long-term ：Decreased, reflecting weakened demand in a low interest rate environment

(10-year JGBs) （- 1.2 trillion yen）

・ Short- to Medium-term ：Substantially decreased, based on diminished demand under negative interest

(5, 2-year JGBs and 1-year TBs) rate situation（- 4.8 trillion yen）

➢ The amount of Auctions for Enhanced-Liquidity is to be increased in remaining maturity zones where strong

market demands for improved liquidity exist.


FY2017

Changes from FY2016

15.5-39 Year 3.0 ＋0.6

5-15.5 Year 6.6 ＋0.6

1-5 Year 1.2 ±0

Total 10.8 + 1.2

FY2017 JGB Issuance Plan

Appendix

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2011 2012 2013 2014 2015 2016

Nominal GDP Growth rate

CPI (less fresh food)

CPI (less fresh food & energy)

(%, change from the previous year)

(CY)

(Note) The effects of consumer tax rate change in April 2014 on CPI are eliminated.(Source) MOF, Cabinet Office, Ministry of Internal Affairs and Communications, BOJ

CPI and Consumer Confidence

9

Consumer Price Index “Do you have anxiety about

post-retirement life?”(Research by The Central Council for Financial

Services Information)

(Source)The Central Council for Financial Services Information

Top 3 reasons of “Yes”

Pension and insurance 72.5%

Insufficient financial assets 69.5%

Currently uncomfortable about daily lives 41.4%

*Multiple answers allowed

Abenomics

0.1

- 0.2

3.3

2.1

1.7

-1.8

0.7

1.3

Wage and Employment

(Source) : Ministry of Health, Labor and Welfare, Ministry of Internal Affairs and Communications

10

(million, %)

2012 2013 2014 2015 2016

Regular Employees

Change of Nominal Wages -0.3 0.4 0.9 0.4 0.8

Number of Employees 33.4 32.9 32.8 33.0 33.6

(change) (-0.4) (-1.4) (-0.5) (0.8) (1.5)

Non-regular Employees

Change of Nominal Wages 1.5 -0.4 0.5 0.5 -0.1


(change) (0.1) (5.1) (2.9) (0.9) (1.8)

Total Employees

Change of Nominal Wages -0.9 -0.4 0.4 0.1 0.5

Change of Real Wages -0.9 -0.9 -2.8 -0.9 0.7


(change) (-0.2) (0.9) (0.7) (0.8) (1.7)

Growth Strategy

• Reduction of Effective

Corporate Tax Rate

―37.00%(2012) → 29.74%(2018)

• Corporate Governance

(more than 3500 companies)

―Stewardship Code

(214 corporate investors)

• Electric Power Deregulation

• TPP, Japan-EU EPA

• Agriculture Structural Reform

• Drastic simplification project for

regulation and administrative

process for foreign investors

Regulation Reform

• Equal pay for equal work

－guideline released on Dec

• Increase minimum wage

―3% hike（2016）

• Increase the capacity of

child care and elderly care

―500k for each

―raise wages for care workers

• Reducing working hours and

improving labor productivity

• Lengthen the eligible period

for maternity leave benefits

• Utilizing foreign professional

―World’s fastest Green card system

• Income Tax reform

―To encourage female laborparticipation(From FY2017)

Work-style and Labor Market Reform

• Forth Industrial Revolution

（Society5.0）

－Social application of AI, Robot, IOT

• Industrial Structural Reform

• Medical Care Innovation

• Encouraging Investment for

R&D－prioritize public investment in growth-

enhancing areas－support new cutting-edge technologies

Investment for the Future

Japanese stewardship code will be revised in 2017.(PM Abe’s speech in NY (Sep. 2016 ))

The Council for Regulatory Reform started from Sep 2016.

－Cabinet Decision Jun. 2016Submit related Bill in2017

• Introduce a new government-sponsored scholarship

• Shorten the minimum eligible period for receiving pension from 25 to 10 years

Increase Disposable Income(for low income households)

11

- Spurring innovation and investment

- Reward higher R&D investment by providing more tax

deduction (up to 14% of total R&D expenses).

- Extend the deadline for corporate tax filing by three months

to help companies better prepare for dialogue with

investors; and expand deductible management

remuneration to include a salary that is linked to share

price.

- Create a new 20-year tax-exempt Nippon Individual

Savings Account (NISA) scheme to offer more safe

investment opportunities.

- Boosting wages and encouraging women to work more

- Expand the tax incentive for an increase in salary expense

(from 10 to 12% of the increase).

- Raise the income limit for the spousal tax deduction from

1.03 million to 1.5 million.

- Others

- Provide tax exemption when foreign visitors purchase sake

at local breweries.

- Review applicability of inheritance tax for foreign residents

to attract highly-skilled foreign workers.

Deductible amount

Annual income1,500

(Unit: thousand yen)

2,0101,030

Spousal Tax Deduction

380

R&D Tax Deduction

1,410

12

FY 2017 Tax ReformsPromoting Corporate Investment and Wage Hikes

6.28.4

10.413.4

19.724.0

40.0

60.0

0.8 1.1 1.42.0

3.53.7

8.0

15.0

0

4

8

12

16

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015 2016 … 2020 … 2030

Visitor arrivals(←left)

The value of travel consumption of inbound tourists(right→)

（trillion yen）（million）

Progress of Structural Reforms and Growth Strategy

13

Source : Tokyo Stock Exchange

12.9% 15.0% 16.7% 18.0%21.5%

48.4%

79.7%

0%

20%

40%

60%

80%

2010 2011 2012 2013 2014 2015 2016

+31.3%

Corporate Governance ReformRatio of 1st Section Companies with two or more Independent

Directors

66.5 67.3 67.4 67.7 68.1 68.8 69.3

70.1 70.3 71.1 71.6 71.6

72.3

73.6 74.5 75.2

76.7 76.4 75.9 75.6 75.3 75.3 75.5 75.4 75.8 75.6 75.2 74.7 74.5

73.9 73.9 73.7

85.6 85.7 85.6 85.4 85.3 86.5 86.2

87.1 87.5 87.1 86.6 87.3 87.6 88.1 88.0 88.3

65

70

75

80

85

90

Japan US Sweden

(%)

Women’s labor force participation rate(cross country comparison )

*Age: 25-54 Source: OECD Stat

40 million8 tril. yen

（2020）

60 million15 tril. yen

（2030）

Foreign visitors ・・・Consumption ・・・

Our target

Source: Japan National Tourism Organization

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Japan U.S.France GermanyU.K.

（％）

Total fertility rate in Japan

1985 1995 2005 2015

1.76 1.42 1.26 1.46

Source: Cabinet Office

Total fertility rate Toward a “Tourism-oriented developed nation”

2008

128.08

2040

107.28

2011

111.11

2040

96.43

1997

86.99

2040

57.87

0

20

40

60

80

100

120

140

80 85 90 95 00 05 10 15 20 25 30 35 40

1998

67.93

2012

65.55 66.48 1997

65.57

2012

62.70

64.40

2002

3.59

2.08

0

5

10

15

20

50

55

60

65

70

80 85 90 95 00 05 10 15

(Source) Ministry of Internal Affairs and Communications, National Institute of Population and Social Security Research

＜Population＞＜Labor force＞

Unemployed persons（RHS）

Workers（LHS）

Labor force(LHS)

（million people) （million people）

TotalProjection

15-64years old

（million people）

1980 1980 2000 2000

Over 15 years old

14

(General account, based on initial budgets)

15

Expenditure and Revenue

(Note) Figures may not add up to the totals due to rounding.

(Unit : trillion yen)

FY2017 Initial Budget

34.4

57.7

97.5

0

20

40

60

80

100

1975 80 85 90 95 2000 05 10 15

(trillion yen)

(FY)

Total Expenditure

Tax Revenue

Bond issue volume

(Source) OECD “Economic Outlook 100"(November 2016).

(Note1) Figures represent the general government-based data (including the central/local governments

and social security funds), except for Japan and the U.S. where the figures of the social security funds are

excluded. The following figures include social security funds.

(Note2) FY2017 draft budget data is not reflected.

(Note3) Figures for Japan are adjusted to exclude special factors.

16

General Government Gross Debt

(Source) IMF “World Economic Outlook Database"(October 2016).

(Note) FY2017 draft budget data is not reflected.

General Government Fiscal balance

（CY）

-16.0

-12.0

-8.0

-4.0

0.0

4.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

（％）

Japan

U.S.

U.K.

France

ItalyCanada

Germany

（CY）

0

30

60

90

120

150

180

210

240

270

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

（％）

Japan

Italy

France

U.K.

U.S.

Canada

Germany

15.1

21.3

24.4

26.3

25.4

39.1

25.0

37.5

36.2

27.0

31.6

35.5

26.2

31.6

46.7

39.4

31.4

37.3

31.1

46.9

30.3

29.7

37.1

50.2

33.7

37.4

40.6

40.5

45.2

44.5

43.1

40.9

69.2

65.9

2.4

2.2

8.3

8.8

11.4

17.2

6.6

8.2

18.0

13.4

10.4

20.1

16.3

1.4

9.4

17.5

12.9

21.1

5.4

22.1

23.3

17.3

5.7

22.4

19.9

20.6

22.0

18.6

19.3

23.4

27.3

1.5

29.4

17.5

23.4

32.7

35.1

36.8

39.1

42.2

44.1

44.4

44.9

45.0

45.9

46.3

47.9

48.1

48.9

48.9

50.1

52.3

52.3

52.5

52.9

54.4

56.0

56.2

57.3

61.2

62.6

63.8

63.8

66.5

68.2

70.7

95.3 0 50 100

34 Mexico

33 Chile

32 United States

31 Switzerland

30 Korea

29 Australia

28 Japan

27 Canada

26 Israel

25 Poland

24 Latvia

23 United Kingdom

22 Slovak Republic

21 Estonia

20 New Zealand

19 Ireland

18 Spain

17 Norway

16 Netherlands

15 Iceland

14 Germany

13 Czech Republic

12 Portugal

11 Sweden

10 Slovenia

9 Greece

8 Hungary

7 Austria

6 Finland

5 Italy

4 Belgium

3 France

2 Denmark

1 Luxembourg

Comparison of OECD Countries

17

General Government Social Security Expenditures

(as a percentage of GDP: 2011)

Tax and Social Security Contributions Ratio

(as a percentage of NI: 2014)

(Source) OECD “National Accounts”, “Revenue Statistics”, EU “Government Finance Statistics”, etc.

(Note1) The data in 2011 is used because no comparable data is available in terms of statistical standards after 2012.

(Note2) Figures represent the general government-based data (including the central/local governments and the social security

funds) except for fiscal balance.

(Source) Cabinet Office, OECD “National Accounts”, “Revenue Statistics”,

(Note) Figures of Iceland are as of CY2013.

32.8

31.3

30.3

28.0

26.8

26.8

26.7

26.6

25.6

25.4

25.2

24.4

24.0

24.0

23.9

23.1

23.1

22.6

22.1

20.4

20.1

18.5

17.6

17.4

17.2

16.4

15.8

14.5

7.9

0 20 40

1 Denmark

2 France

3 Finland

4 Austria

5 Greece

6 Italy

7 Belgium

8 Sweden

9 Germany

10 Slovenia

11 Japan

12 Norway

13 United Kingdom

14 Portugal

15 Netherlands

16 Luxembourg

17 Spain

18 Ireland

19 Hungary

20 Czech Republic

21 Poland

22 Iceland

23 Slovak Republic

24 Estonia

25 United States

26 Turkey

27 Israel

28 Switzerland

29 Korea

18

Breakdown by JGB and T-Bill Holders (Sep. 2016)

Note.1: "JGB" includes FILP Bonds. "T-Bill" is the sum of "Treasury Bills (TBs)" and "Financial Bills (FBs)"

with a maturity of 1 year or less and TBs and FBs have been jointly issued since February 2009.

Note.2: "Banks, etc." includes Japan Post Bank, "Securities investment trust " and "Securities Companies".

Note.3: "Insurance and Pension etc." includes Japan Post Insurance, Public Pensions, Pension Funds, etc.

Source: Bank of Japan “Flow of Funds Accounts (Preliminary Figures)”

Insurance and

Pension etc.

28.0%

Banks etc.22.4%

BOJ

37.9%

Household

1.2%

Foreigners

10.3%General Government (ex Public Pensions)

0.2%

Total ¥1,091 trillion

(≒$9.3 trillion)

JGB and T-Bill Holders

Total ¥971trillion

(≒$8.3 trillion)

JGB Holders

BOJ

36.7%

Banks etc.24.7%

Insurance and

Pension etc.

31.3%

Household

1.4%

Foreigners

5.7%General Government (ex Public Pensions)

0.2%

T-Bill Holders Total ¥120 trillion

(≒$1.0 trillion)Foreigners

47.4%

Insurance and

Pension etc.

1.9%

BOJ

47.3%

Banks etc.3.4%

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2016/6/23Brexit

（％）（％）

2016/7/29Announcement of

conducting "Comprehensive Assessment"at the next

MPM

2016/1/29QQEN 2016/11/8

U.S. presidential

election

2016/9/21QQE with YCC

40year

30year

20year

10year

5year

2year

JGB yields

19(Source) Japan Bond Trading Co.

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

15/1 15/7 16/1 16/7 17/1

（bp）

1 year

2 year

"（↑）"shows that the outlook is positive."（↓）"shows that the outlook is negative.

(Long-term debt denominated in home currency on 24 Feb 2017)

List of Major Countries‘ Sovereign Ratings Dollar/Yen Basis Spread

(Source) Bloomberg

20

Moody’s S&P FitchAaa/AAA U.S. Germany U.S.

Germany Canada GermanyCanada Canada

Aa1/AA+ U.K.(↓) U.S.Aa2/AA France U.K.(↓) U.K.(↓)

Korea France FranceKorea

Aa3/AA- China(↓) China(↓) Korea

A1/A+ Japan Japan ChinaIreland

A2/A Japan(↓)Ireland

A3/A- Ireland(↑)

Baa1/BBB+ Spain SpainItaly(↓)

Baa2/BBB Italy(↓)Spain

Baa3/BBB- ItalyBa1/BB+ Portugal Portugal PortugalBa2/BB

Ba3/BB-

B1/B+

B2/B

B3/B- GreeceCaa1/CCC+

Caa2/CCC GreeceCaa3/CCC- GreeceCa/CC

C

SD/RD

Japan's Economy and Monetary Policy

March 8, 2017

Takako Masai

Bank of Japan

1999年2月「ゼロ金利政策」の開始

Feb 1999 Introduction of the zero interest rate policy （- Aug 2000）

Mar 2001 Introduction of the quantitative easing policy（- Mar 2006 ）

Mar 2006 Release of "The Bank's Thinking on Price Stability"

Dec 2009 Release of "Clarification of the 'Understanding of Medium- to Long-

Term Price Stability'"

Oct 2010 Introduction of the comprehensive monetary easing policy

Feb 2012 Introduction of the "price stability goal in the medium to long term"

Jan 2013 Introduction of the "price stability target" of 2 percent

〃 Release of "Joint Statement of the Government and the Bank of Japan

on Overcoming Deflation and Achieving Sustainable Economic

Growth"

Apr 2013 Introduction of Quantitative and Qualitative Monetary Easing (QQE)

Oct 2014 Expansion of QQE

Jan 2016 Introduction of QQE with a Negative Interest Rate

Sep 2017 Introduction of QQE with Yield Curve Control

Changes in the Bank's Monetary Policy Management

Chart 1

Nominal interest rates － Inflation expectations ＝ Real interest rates

Mechanism of QQE

Chart 2

Quantitative and Qualitative Monetary Easing (QQE)

Large-scale purchases of JGBsStrong and clear commitment to

achieve the price stability target of

2 percent

⇒ ⇒

⇒

Decrease Increase

Decrease

Improvement in the economy

and increase in prices

Consumer Prices

Chart 3

Notes: 1. Figures for the CPI (all items less fresh food and energy) are calculated by the Research and Statistics Department, Bank of Japan.

2. Figures for the CPI are adjusted to exclude the estimated effects of changes in the consumption tax rate.

Source: Ministry of Internal Affairs and Communications.

-3

-2

-1

0

1

2

3

07 08 09 10 11 12 13 14 15 16

CPI (all items less fresh food and energy)

CPI (all items less fresh food)

y/y % chg.

CY

Chart 4

The 10 Strategic Public-Private Joint Projects

toward GDP of 600 Trillion Yen

1. The fourth industrial revolution

2. Toward a world leading healthcare country

3. Overcoming environmental and energy constraints and expanding investments

4. Changing sports to a growth industry

5. Revitalizing markets for transaction of existing houses and reform

6. Improving productivity in the service industry

7. Bringing about revolution among small and medium-sized firms and micro firms

8. Promoting proactive agriculture, forestry and fishery, as well as reinforcing

exports

9. Realizing Japan as a tourism-oriented country

10. Taking measures to stimulate domestic consumer sentiment

Source: "Japan Revitalization Strategy 2016" (Cabinet Decision, June 2, 2016)

Japanese economy and securities market:Setting the scene

Paul HunterSecretary General, International Bankers Association of Japan

The Background

l Third largest global economy in the world.

l The major developed market in Asia.q Well placed to do business with new and expanding markets in the region (Japan is an

important source of capital to Asia).

q It does not do restrictions: there are no current account, capital account, exchange rate controls unlike some other Asian countries.

l A sound and predictable legal and business environment.

l An aging society with population size predicted to fall substantially.

l Dramatic changes in the energy mix post the ‘triple disaster’.

l The U.S. is Japan’s largest trading partner followed by China and the EU (20%, 17.5% and 10.6% respectively).

2

Japanese business environment

l 52 Fortune 500 companies in 2016 are Japanese – ranking third.

q 11% of firms in Fortune 2000 are Japanese.

l Major globally recognized companies across sectors e.g. car manufacturing, electronics, heavy industry, renewables, transport, trading companies.

l Japan has the third highest global R&D spend.

l Japanese companies are cash rich active in the M&A market.

r In 2016, outbound M&A by Japanese firms continued to be strong; JPY 10.4 trillion (USD 90 billion).

r Recent activity includes Softbank buying ARM, Mizuho targeting RBS North American loan book, and Asahi buying SAB Miller.

3

The scale

Remember there are some big numbers:

l Large pension funds JPY 360.2 trn ($ 3.2 trn, Sept 2016, BOJ), e.g. Government Pension Investment Fund with JPY132.8 trn ($ 1.17trn, Sept 2016) which is the world’s largest public pension fund.

l Japan has the largest accumulation of personal wealth in the world –amounting to JPY 1,752 trn ($ 15.5 trn, Sept 2016, BOJ).

l Government bond market (JPY929trn, Dec 2016, MOF).

l Size of stock market: TSE market capitalization (section 1) was JPY 566 trn ($ 5 trn), Feb 2017.

4

Abe administrationl Elected December 2012. His two back to back terms give him a rare bout of

stability and the opportunity to effect some change.

l Levels of ambition: monetary policy, fiscal consolidation and structural reform.

l Major economic topics :

q TPP (getting to a position where it would be signatory although now thwarted) and progress on EU-Japan FTA – a variety reforms have been required across sectors.

q ‘Womanomics’: potential boost to GDP.

q Monetary policy developments: negative interest rates and targeting the yield curve and not the monetary base.

q Tax environment: corporate tax reduction (but probably more needed to be competitive) and ‘My Number’ (Tax payer id system) which is aimed at stopping tax evasion, but out of kilter on inheritance tax changes for foreign workers.

q Tokyo as financial centre: role of Governor Koike, the vision and environment to be profitable and building on macro advantages.

q Capital markets changes: JPX400, Stewardship and Corporate Governance Code, GPIF mandate reform – and their impacts.

l But the markets are clearly looking for more expansive and more timely changes.

5

Capital Markets Activity Boosted by Abenomics

0

1,000

2,000

3,000

4,000

5,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

Nikkei 225

JPX Volume

(JPY Bn)

Nikkei 225 (Left-hand scale) Trading Volume (Right-hand scale)

Daily average volume pre-Abenomics Daily average volume post-Abenomics

Source: Japan Exchange Group

6

Transforming the flow of funds in

the Japanese financial markets

Takashi Nagaoka

Financial Services Agency, Japan

8 March, 2017 London

* This presentation represents the presenter’s own views, and not necessarily those of the JFSA.

Demographic trends: aging/decreasing population

Stable accumulation of household financial wealth over a

medium- to long-term

Form of household financial assets: majority in cash & deposits

Larger part of their assets directly invested in equity &

investment trusts

Financial intermediation: banking sector dominance

Further provision of risk-money to economic activities in need of

funds

1

Background—Challenges & Needs

2

Reform Initiatives

JFSA has been taking a number of initiatives to transform

flow of funds, working on:

Investees:

To improve corporate governance

Investors:

To mobilize household assets

Intermediaries:

To promote customer-oriented business

Corporate governance is indispensable in enhancing corporate

values of investee companies in the medium- and long-term

Institutional investors have an important role in increasing

corporate values by engaging in constructive dialogue with

investee companies

From these perspectives, JFSA introduced:

Stewardship Code in 2014

Corporate Governance Code in 2015

3

Reform 1: Corporate Governance Reform

4

Reform 2: Policy Initiatives on Household Assets

Long-term, regular and diversified investment would be effective to

achieve stable increase of the household financial assets

In 2014, JFSA introduced a tax-exempt individual savings account: so-

called NISA

JFSA plans to introduce a new NISA scheme in 2018 which aims at

promoting long-term, regular and diversified investment by households

Practical investment education/literacy would be critical for retail

investors (in particular, beginners) to make informed-decision

JFSA launched a council of experts to further explore ways to promote

long-term, regular, diversified investment and practical investment

education/literacy.

All financial intermediaries in the investment chain should act in the

best interests of their customers

In the past: Broker dealers had tendencies to put too much

emphasis on commission revenues from investment trust sales in

the short run

Going forward: Seven principles* (“comply-or-explain” approach)

for financial intermediaries to put their customers’ interests first

*) Prepared by JFSA based on the recommendations by the Financial System

Council, for finalization after public consultation

JFSA will continue to cultivate an environment where financial

intermediaries can compete with each other to deliver higher-quality

products/services best suited for customers

5

Reform 3: Promoting Customer-Oriented Business

Thank you very much

Please visit JFSA website at:

http://www.fsa.go.jp/en/index.html

http://www.fsa.go.jp/en/index.html

JSDA/ICMAGlobal Financial City - Tokyo

www.pwc.com/jp

March 2017

PwC Japan GroupPricewaterhouseCoopers Aarata LLCPartner, Takeshi Shimizu

PwC

Global Financial City - Tokyo

AGENDA1. Tokyo’s Financial Market Challenges

2. Tokyo Metropolitan Government's Initiatives

3. The Consortium for Japan International Asset Management Center Promotion

AGENDA1. Tokyo’s Financial Market Challenges

2. Tokyo Metropolitan Government's Initiatives

3. The Consortium for Japan International Asset Management Center Promotion

1

PwC

Japan is confronting a number of factors which require a strengthening of its asset management capabilities.

1-1. Social imperatives in Japan

* Source: Flow of funds, December 22, 2016, Bank of Japan

USD 17 trillion of Japanese household assets 52% of Japanese household assets (USD 9 trillion) allocated to currency

and deposits vis-à-vis 13% and 34% in the US and Europe* Slow pace of private asset accumulation compared to other nations



Underutilized household assets



Underutilized household assets

25% of its people are aged 65 or over By 2040, this ratio is estimated to rise to 36% Public pension benefits comprise 67% of elderly household income

25% of its people are aged 65 or over By 2040, this ratio is estimated to rise to 36% Public pension benefits comprise 67% of elderly household income

Aging population 25% of its people are aged 65 or over By 2040, this ratio is estimated to rise to 36% Public pension benefits comprise 67% of elderly household income

Aging population

Government Pension Investment Fund (“GPIF”) is the world's largest public pension fund with USD 1.3 trillion AUM

GPIF has increased the allocation to global equities and alternative investments to boost returns

Other asset owners are also seeking to diversify their investments in search of higher rates of return




Pension funds and institutions starting to

diversify allocations




Pension funds and institutions starting to

diversify allocations

2

PwC

Japan lags far behind other advanced nations in levels of personal investment, and the majority of household assets linger in bank deposits. Over the last 20 years, household assets have grown at a slow pace.

Household Asset Composition Household Asset Accumulation Trend

1-2. Household assets and asset accumulation

Bank Deposits SecuritiesInsurance & Pension Other

Source: Financial Industry Report, September 2016, Japan Financial Services Agency

United States United Kingdom Japan

8,514 1,071 1,740

United States United Kingdom Japan

Total household asset growthGrowth of household assets due to investment returns

3

PwC

Japanese asset owners’ asset allocation trends have been changed from JGB concentration to global investments.

Total Assets Portfolio Composition

1-3. Key asset owner investment trends

GPIF

US$ billion

Japan Post Bank

2013 2015JP bonds

JP stock

Global bonds

Global equity

+17%

Short-term assets

2013 2015

Japan Post Insurance

Other

+5%

+4%

2013 2015

1,347

2,082

815

4%

1%

5%

4Source: website of GPIF, Japan Post Bank, and Japan Post Insurance

PwC

1-4. Responses to Japanese social imperatives

Japanese government agencies and industry groups are aligned to redevelop Japan as a leading financial services center, and to cope with Japanese social issues.

Asset Management Industry Revitalization Established “Tokyo Global Financial Center Council” Driving discussion of issues and development of

recommendations to attract foreign asset managers

Asset Management Industry Revitalization Established “Tokyo Global Financial Center Council” Driving discussion of issues and development of

recommendations to attract foreign asset managers

Japan Industry

Associations

5

Prime Minister Abe’s Japan Growth Strategy 2016 Boost competitiveness of asset management industry Target measures to attract and retain global asset managers

to be defined Effectively utilize special economic zones

Prime Minister Abe’s Japan Growth Strategy 2016 Boost competitiveness of asset management industry Target measures to attract and retain global asset managers

to be defined Effectively utilize special economic zones

Governor Koike’s Initiative for Global Financial City Retake Tokyo’s status as a leading financial center Transform Tokyo’s financial district into a vibrant

community of leading global asset managers by 2020

Governor Koike’s Initiative for Global Financial City Retake Tokyo’s status as a leading financial center Transform Tokyo’s financial district into a vibrant

community of leading global asset managers by 2020

Central Government of

Japan

Tokyo Metropolitan Government

PwC

2-1. Overview of the immediate measures for attracting foreign financial companiesForeign financial institutions will be given detailed support at each stage of setting up businesses in Japan, from before entry to actual launch of operations.

Study on feasibility of business establishment in Japan

Development of a business plan

License registration and preparation

Launch of business

Support for business establishment procedures after entry to Japan

Enhance consultation services for financial businesses• Launch a financial one-stop support service• Expand services provided by “Tokyo One-Stop Business

Establishment Center”• Establish an FSA central consultation desk

Compile an English Guide Book

Attracting foreign financial institutions Market research, business plan development and

preparations for license registration supported by TMG Accelerator program Public-private financial promotion activities Revise the inheritance tax

6Source: website of Tokyo Metropolitan Government

PwC

2-2. Attracting foreign financial institutions and promotional activities by public-private collaboration

7

Nihonbashi Life Science Building

Pharmaceutical development company

Nihonbashi Life Science Hub

Tokyo Station

JP Building

Financial village (to train financial experts)

Global Business Hub Tokyo

Hibiya-dori Street

Gyoko-dori Street

LINK-J: Life Science Innovation Network Japan

Map prepared from Tokyo Metropolitan Government materials for the 2nd National Strategic Zone Symposium (Sep 12, 2016)

HQ of major banks, securities, and insurance companies

Business exchange centers

Law firms and auditing firms

Drug development company

FINOLAB(Center forFinTech companies)

Marunouchi Naka-dori Street

Major financial institutions/law firms/accounting firms and international financial institutions.

Tokyo Stock Exchange

Bank of Japan

Nihonbashi River

EGG JAPAN(Incubation Center)

(end October 2016).

• The ideal form of a public-private promotional organization• The establishment of a Tokyo version the “Lord Mayor” system • The expansion of the Consortium for Japan International Asset Management Center Promotion (“JIAM”)

Source: website of Tokyo Metropolitan Government

PwC

The following subjects are being discussed in the “Advisory Panel for Global Financial City Tokyo”.

Subject Challenge to address

Revising the taxsystem

• Corporate and individual taxes• Inheritance tax

Optimizingregulations

• Financial regulations • Fiduciary duty

Building an English language environment

• Translating laws and regulations into English• Consultations and filing of applications in English at

various desks

Cultivating asset managers

• “Emerging Managers Program” to promote the provision of seed money

• Generating opportunities to match up asset managers and institutional investors

Investment education and the nurturing of talent

• Financial literacy education• High-quality education focused on finance professionals

2-3. Matters under current discussion

8Source: website of Tokyo Metropolitan Government

PwC

Asset Management CommunityAsset Management Community

3-1. JIAM was established to promote Global Financial City TokyoJIAM is maintaining close communications with government agencies, industry associations, asset owners and leading service providers to support the development of an internationally competitive and vibrant asset management community.

9

Current JIAM Membership/ Sponsorship

Government Agencies National government Local government Regulators

Asset Owners Public pensions Private pensions Financial institutions

PwC

The Japanese Nation:Healthy and diversified portfolio of household assets

The Japanese Nation:Healthy and diversified portfolio of household assets

3-2. JIAM – Service OfferingsJIAM provides support to foreign asset managers to achieve healthy and diversified portfolios of household assets in Japan.

Asset Management Community:Foreign qualified asset managers

JIAM Service Offerings

1. Provide information and business development guidance– Provide guidance on industry requirements

and market entry – Support development of business

relationships and opportunities

▪ Support business establishment– Support in establishing a legal entity in Tokyo

and acquiring appropriate licenses– Introduce candidate service providers

▪ Support operational outsourcing– Provide support for external outsourcing of

middle and back-office operations

▪ Research and fact finding– Collect and synthesize the "voice" and

analyze the requirements of both Japanese and foreign asset managers

1

2

3

4

‘s ultimate beneficiaries

10

© 2017 PricewaterhouseCoopers Aarata LLC, PricewaterhouseCoopers Kyoto, PwC Consulting LLC, PwC Advisory LLC, PwC Tax Japan. All rights reserved. PwC refers to the PwC network member firms and/or their specified subsidiaries in Japan, and may sometimes refer to the PwC network. Each of such firms and subsidiaries is a separate legal entity. Please see www.pwc.com/structure for further details.This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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