EFTA01458969

8 December 2015 World Outlook 2016: Managing with less liquidity Little hope for en export recovery We do not carry high hopes for exports to recover due to Japan-specific factors (continued outward foreign direct investment, low price elasticity for luxury goods exports, an exclusion of Japanese manufacturers from the global supply chain since the Greet East Japan Earthquake) as well as a global factor, namely the shift to a closed economy regime (disappearance of growth frontiers: decline in benefits of international trade). CPI inflation to comerps at around I The level of CPI excluding energy clearly turned around in HI 2013 after 15 years of declines up to 2012, and has maintained an upward trend of around 1% annualized since then. Deflation has clearly ended. mainly as the result of GE that started at a cautious pace under former-BoJ Governor Shirakawa in 2012. There is an argument that inflation will slow from now on due to a stable JPY exchange rate and a weak rise in wages: however, the fact that the Japanese economy is moving from the flat section on the Phillips curve to the steeper section indicates that an economic expansion will have larger impact on inflation than before. This regime shift should fully offset possible drags on inflation from a stable JPY exchange rate and slow wage growth. Not predicting additional monetary easing Based on the facts that the BoJ at present is promising an almost open-ended easing with no set limit on the timeline and that the scale of the monetary base increase is an annual JPY80trn (16% of GDP), an overwhelming scale compared to other countries, we forecast monetary policy is likely to maintain the current easing stance (no more rounds of easing). Were the BoJ to enact additional monetary easing reluctantly, we believe this would only occur in the case of a sharp slowdown in the global economy, JPY appreciation, and a slump in share prices. Japanese economy almost reaches its new steady state We have reiterated several times that the new steady state of the Japanese economy since the introduction of QQE in April 2013 is 2% nominal GDP growth, 1% CPI inflation. 1% 10-year JGB yield, and 5% M2 growth. The Japanese economy has been in the transition process and seems to be very close to this new steady state. Figure 7: Other indicators & financial forecasts 2014 20 I bl 20113F 2017F Figure 6 : Nominal GDP and M2 growth, % 3.4 3.8 4.8 5.1 industrial production Fiscal balance, 0/0 of GDP -52 -5A -42 -3.4 Public debt. %of GDP Trade balance, USD bn 213.6 -99.8 211.6 -9.3 210.5 -22.6 208.4 -23.5 00.61841 00:0001 126 Inelex.CY2010•100. ••••••ht grdnaGI:e(l/n) Scream JPY On. fa 550 116 540 Trade balance, %of GDP -2.2 -0.2 -0.5 -0.5 Ito 530 Current account, USD bn 24.9 137.0 152.4 1682 105 520 Current account, %of GDP 0.5 3.3 3.6 3.9 100 510 95 Wor; 111,, Current 01-2016 02.2010 04-2010 50 500 Official 0.10 0.10 0.10 0.10 85 480 3M rate 0.17 0.15 0.15 0.15 480 10Y yield 0.32 0.40 0.45 0.55 75 470 70 460 JPY per USD 123 127 128 128 65 460 JPY per [OR 134 128 124 115 2001 203128052037 2809 2011 2013 2015 2017 2019 cane Aleocnal stansact Deasehe fin Re.e.tak as of Denman, 07 Figure 4 : Export volume of major countries — TOM (36000084) 046.404 — J•34. se° tees CY 3310.100 fro US —or. Nat recallable. Magnin EtA *pet Goma frail Moan am Nag Kass rad& Tnn aware awe as ..weed fro" an. 20:6 Scow. Nov *Woks L Dam's ant 8~0 Figure 5 : Consumer price index 109 107 105 103 101 as —Omsk °eat eseldn0 Gam good coaxing Sun food aid apy It CY 2010.101 se 97 1905 2000 2005 2010 2015 Now Eakeing at anapwrian sae Nk• area Samar AlC Danes ark Ikeesaf Mikihiro Matsuoka, Deutsche Bank AG/London NO* E flowed tam 04 :on San. Cants Olikt MEIC Nail WM. Own** an Ffraoraf Page 33 CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119140 CONFIDENTIAL SDNY_GM_00265324 EFTA01458969