ABENOMICSJapan’s dangerous experiment

After years of sluggish performance and two decades of deflation, Abenomics aims to boost Japan’s real economic growth to 3% by 2020 and raise inflation to 2% within the next two years. But will this untested formula work?

StructuralReforms

QuantitativeEasing

?

Fiscal Stimulus

JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER

economicgrowth 2

+1.9%

weakeryen 4

-14%

higher inflation 6

+0.9%

lower long terminterest rates 5

-1.05 bp

increase in private consumption 8

+0.9%

increase inpublic investments 1

+13.9%

highershareprices

+39.3%

rise in corporate profits

higherwages

7

increasein exports 3

+14.7%

StructuralReforms

QuantitativeEasing

Fiscal Stimulus

DRUGSWOMEN

FOREIGNTOURISTS

FOREIGN MONEY

Join the Trans PacificPartnership with the aimof increasing the ratio ofJapan’s international tradeunder free trade agreementsfrom 20% to 70%.

UNIVERSITIES

BUSINESSINVESTMENT

DEREGULATIONZONES

POWER Split electric utilities generation and transmission businesses and open the monopoly-dominated residential electricity market to competition.

Raise women’s participation rate in the workforce by creating 250,000 day care places and request companies to have at least one female executive.

Move 10 Japanese universities in the global top 100 in a decade, up from two today.

Increase the number of tourists visiting Japan from 8.4m last year to 20m in the medium term.

Doubling agricultural incomes in a decade through the promotion of exports and the consolidation of abandoned and underused rural land.

Double the amount of foreign direct investment taken in by Japan, which currently accounts for less than 4% of GDP, by 2020.

Use tax incentives to restore annual domestic private sector investment to around Y70bn, its level before the global financial crisis, in three years.

Streamline the approval process for new medicines and hospital equipment by creating a Japanese version of the US National Institutes of Health.

Help Japanese engineering companies sell more high-speed trains and nuclear power plants abroad and triple the value of transport and power-generation exports.

Allow cities and regions, including Tokyo, to experiment with deregulation measures not yet approved for the nation as a whole.

TRADE

INFRASTRUCTUREEXPORTS

FARMS

Sources: Bank of Japan, Financial Times

Sources: Bloomberg Market Data, Statistics Japan

Source: Financial Times

TradingFloor.com Insights Q4 2013http://www.tradingfloor.com/blogs/quarterly-outlook

Source: Saxo Bank Research

Sources: Saxo TV, TradingFloor.com

110 -

100 -

90 -

80 -

70 -

60 -

50 -

40 -

30 -

20 -

10 -

JUN JUN*SEP MAR

USDJPY

JUN2013 2014*2012

JGB 10 YIELD USDJPY USDJPY FORECAST

*JOHN HARDY FORECASTS USDJPY AT 105 BY THE END OF 2013 AND 110 BY MID-2014.

0.84 0.77 0.80 0.960.56

Jul13,66843.6Jun

13,66744.3

Oct8,928

40

Sep8,87040.2

May13,77545.7

Nov9,44640.1

Apr13,86144.5

Dec10,39539.9

Mar12,398

45

Feb11,55944.2

Jan11,13943.2

Aug13,388

43

2012

201

3

NIKKEI 225 INDEX

CONSUMER CONFIDENCE INDEX

What is Abenomics?

How does Abenomics work?

Structural reforms key to Abenomics success

Abenomics lifts consumer sentiment

The dangers of Abenomics

"We have seen some positive signs from Abenomics, but that was during the anticipation phase. We are now seeing the reality - more volatility in financial markets."

John Hardy, Head of FX Strategy at Saxo Bank.

Abe's economic reforms havebeen widely welcomed byinvestors, with Japan's stockmarket up 42 percent* so farthis year. But will Mrs.Watanabe, Japan's archetypalhousewife, continue to loosenher purse strings? *as of 1 October, 2013.

Mads Koefoed, Head of Macro Strategy at Saxo Bank.

While the Bank of Japan’s aggressive easing programme has helped the yen devalue against the US dollar, it has created significant uncertainty in bond markets, with Japan’s 10-year government bond unexpectedly rising to a record high in May 2013.

"The new experiment in Japan has boosted consumer sentiment and that has now resulted in consumers spending more of their money. “

The three economic policy levers have helped stimulate export growth, boost share prices and increase consumer spending in Japan through a number of policy transmission channels.

1 Year-on-year growth in March 20132 GDP for H1, 20133 Year-on-year growth in August 2013

4 YTD against the US dollar from October 1, 20135 year to date decline in 10-year Japanese government bonds

6 CPI inflation for August 20137 Year to date growth in Nikkei as on October 1, 20138 Private consumption for Q1, 2013

Abenomics is a radical policy experiment engineered by Japan's prime minister, Shinzō Abe, to revive Japan's economy using a three-pronged campaign of monetary easing, fiscal stimulus and structural reforms.

11.01.2013

Shinzō Abe reveals plans to launch a ¥10.3 trillion ($116 billion) fiscalstimulus programme, including publicspending on infrastructure andrenewable energy.

04.04.2013

After setting a 2% inflation target, the Bank of Japan unleashes a massive quantitative easing programme worth ¥134trn ($1.4tn).

01.10.2013

Abe announces plans to raise the sales tax in Japan from 5% to 8% in a bid to raise an additional $81 billion in revenue.

While quantitative easing will move key economic levers and fiscal stimulus will lay the groundwork for future growth, structural reforms will be key to the success of Abenomics.

83% of Saxo Capital Markets’ clients based in the UK hold a net-long position in the US dollar against the Japanese yen compared to 17% of Saxo Capital Markets’ clients in the UK that are net-short USDJPY*.

*AS OF OCTOBER 16, 2013

USDJPY83%LONGUSDJPY

17%SHORTUSDJPY

Saxo Capital Markets Limited is a company authorised and regulated by the ‘Financial Conduct Authority, registration Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA.

This infographic has been produced for information purposes only and should not be considered

as investment advice. Trading margin products can result in losses that exceed your initial deposit.

SOURCES:

The Bank of Japan: http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdfBloomberg Market Data: http://www.bloomberg.com/Statistics Japan: http://www.stat.go.jp/english/TradingFloor.com: http://www.tradingfloor.com/tools/financial-calendarSaxo TV: http://video.saxobank.com/video/8245779/japans-dangerous-experimentFinancial Times: http://www.ft.com/intl/cms/s/0/693cdd54-ccfe-11e2-90e8-00144feab7de.htmlJapan Cabinet Office: http://www.esri.cao.go.jp/en/stat/shouhi/shouhi-e.html