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
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