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Japan Economics Weekly

Focus of the week·················································2

Termination of car purchase incentives would weigh on production

Industrial production has entered an adjustment phase. The termination or

scaling-back of the government’s incentive measures on durable consumer

goods as well as slowing global demand have been responsible. We are most

concerned about negative ramifications on overall industrial production from the

termination of incentive measures for car purchasers, which have already

considerably affected car sales. The risk of industrial production recording three

successive quarters of decline from the July-September quarter is now

mounting.

Business cycle update ··········································7

Still a long way to overcome deflation

Money and credit update ····································14 The BoJ has opted for QE2

Upcoming Indicators/Events

Major Economic Data

Japan Economic Forecasts

07 October 2010

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07 October 2010

Japan Economics Weekly 2

Focus of the week

Termination of car purchase incentives would weigh onproduction

• Industrial production has entered an adjustment phase

• Termination or scaling-back of the government’s incentive measures on durableconsumer goods as well as slowing global demand have been responsible

• We are most concerned about negative ramifications on overall industrial

production from the termination of incentive measures for car purchasers, which

have already considerably affected car sales

• Risk of industrial production recording three successive quarters of decline is

now mounting

Japan's industrial production index peaked in June and is now projected to continue a

succession of month-on-month declines through October. A sharp pullback in passenger

vehicle sales appears to be a very real possibility now that stimulus measures have been

withdrawn, and while we believe that overall industrial production has already entered an

adjustment phase, we fear that the worst may still be to come for automakers and autoparts manufacturers, and that output of durable consumer goods could therefore surprise

on the downside through Q1 2011.

Auto sales

Sales of new cars, trucks, and buses (excluding mini-cars) dropped 4.1%yoy in September

to 308,663 vehicles, thereby marking the first year-on-year decline in 14 months. New cars

– which are mostly sold to households – recorded a 5.4%yoy decline to 278,283 vehicles,

reflecting a sharp pullback towards the end of the month after the "eco car" subsidy

scheme was terminated earlier than had originally been planned. That said, while a

30.1%mom surge in car sales for August (on a seasonally adjusted basis) was followed by

a 34.6%mom retrenchment in September, the two-month average of 288,101 units was

the highest since March 2006, reflecting strong sales throughout the summer months.

We expect to see a big decline in car sales going forward, however. Exhibit 1 plots

seasonally adjusted car sales versus the trend extracted from data for January 2003

through August 2008, which can perhaps be considered a measure of the level of potential

demand. Actual sales remained below this trend line from August 2008 through June 2009

as the global financial and economic crisis continued to take its toll, during which time

actual demand fell short of "potential" demand by around 367,600 vehicles on a

cumulative basis.

Exhibit 1: Trend in New Car Registrations Exhibit 2: Gap from the Trend in New Car Sales

150

200

250

300

350

400

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

New car registration

Trend

(1000 cars)

-400

-300

-200

-100

0

100

200

300

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Gap from the trend

Accumulated gap

(1000 cars)

Note: Ordinary cars + small cars, seasonally adjusted, Trended by HP filter Source: Japan Automobile Dealers Association, Credit Suisse

Source: Japan Automobile Dealers Association, Credit Suisse



07 October 2010


Sales have since exceeded potential by some 605,200 vehicles on a cumulative basis

through September 2010, reflecting both support from the "eco car" subsidy scheme and a

last-minute demand surge ahead of its termination. This figure exceeds the post-crisis

demand shortfall by some 237,600 units, which suggests that more than a month's worth

of future demand may have been cannibalized (with potential demand thought to lie

somewhere between 210,000 and 220,000 units). Car sales exceeded potential by just

14,000 units in September, which means that declines of around 7,000 units in each of the

next two months would bring sales back to their longer-term trend level. However, theaforementioned cannibalization of future demand could see sales fall well below trend for

a period of time, and while the sharp slump triggered by the global financial crisis is

unlikely to be repeated given that the "eco car" subsidy scheme was known to be

temporary, a simple calculation suggests that monthly sales might need to drop by more

than 4% per month if this adjustment process is to be completed by the end of FY2010.

Post-correct recovery likely to be relatively modest

We would expect any subsequent recovery to be relatively modest, however. We say this

because potential demand among domestic consumers continues to decline. Annual

domestic car sales (ordinary passenger vehicles plus compact passenger vehicles) have

steadily fallen since peaking above 4.3 million units at the height of the bubble economy

back in 1990, dropping below 3.0 million units in 2007 for the first time in 21 years. Whilethis downtrend may be partially attributed to both economic conditions and a deregulation-

driven surge in minicar sales, we also note that total car sales (including minicars)

declined in five straight years through 2009.

The total number of vehicle ownerships has fallen in four successive years since FY2006,

with the FY2009 level down some 2.0 million vehicles from the FY2006 peak. The

household penetration rate has declined from its FY2002 peak, but having remained

relatively steady over the past few years (averaging just under 85%) suggests that the

Japanese car market may already be close to saturation point, with future demand likely to

be driven by replacement purchases rather than increases in overall penetration.

Demographic trends also appear likely to have a negative impact on sales, with the non-

driving elderly population continuing to grow while many of today's younger consumers

apparently see somewhat less of an incentive to own a car than might previously havebeen the case.

Exhibit 3: Long-term Trend in Car Sales Exhibit 4: Passenger Cars Held by Individuals andDiffusion Rate

0

1

2

3

4

5

6

808182838485868788899091929394959697989900010203040506070809

Light vehicles

Ordinary cars + small cars

(million cars)

20

25

30

35

40

45

50

85 87 89 91 93 95 97 99 01 03 05 07 09

65

70

75

80

85

90Passenger cars held by individuals (LHS)

Diffusion rate of passenger cars (RHS)

(million cars) (%)

Source: Japan Automobile Dealers Association, Japan Mini Vehicles Association, CreditSuisse

Source : Automobile Inspection & Registration Information Association, Cabinet Office, CreditSuisse



07 October 2010


Impact on industrial production

A sharp drop-off in new vehicles sales is likely to have a severe impact on industrial

production in the short term. Total industrial output fell 0.3%mom in August to mark a third

consecutive decline, and while this was perhaps largely attributable to an export slowdown

stemming from a loss of global economic momentum, the situation is set to worsen from

October onwards as weak foreign demand combines with a post-stimulus retrenchment in

domestic car sales.

The Ministry of Economy, Trade and Industry's survey of production forecasts points to a

2.9%mom decline in output for October, which would mark the sharpest contraction since

February 2009 (-8.6%mom). The biggest cuts are anticipated for the transport equipment

sector, with a 4.6%mom decline in September to be followed by a 10.5%mom drop in

October. With the transport equipment sector accounting for 16.9% of total industrial

production, the October contraction would subtract around 1.7ppt from overall output.

October thus looks likely to mark the start of a fully fledged adjustment phase, with various

media reports indicating that automakers are planning to cut output by somewhere in the

order of 20-30%.

Falling domestic car sales are by no means the sole culprit, however. Prior to the global

financial crisis around 75% of all domestically manufactured passenger vehicles were

exported, but this percentage has since dropped below 70%. While exports and domestic

shipments both surged sharply during the post-crisis recovery phase, exports are still

around 30% down on their pre-crisis levels, whereas domestic shipments have already

recouped all of their post-crisis losses. With foreign demand far from weak, this

phenomenon would appear to reflect a shift by Japanese automakers towards greater

overseas production in the face of a sharply stronger yen.

For example, US auto sales recovered sharply from mid-2009 onwards as economic

stimulus measures proved effective, with sales of Japanese cars showing double-digit

year-on-year growth in the first half of 2010 despite a series of vehicle recalls. However,

sales of imported Japanese cars actually fell by 8.2%yoy in 1H 2010, while sales of locally

produced cars increased by 16.6%yoy in the same period. Exports to the US have already

started to slow in line with a loss of economic momentum, but even if the US does manage

to avoid a sharp slowdown, we would still expect domestic production activity to remain

relatively muted given that the current level of the USD/JPY exchange rate provides

automakers with a strong incentive to continue to shift production overseas.

Exhibit 5: Shipment of Passenger Cars Exhibit 6: Japanese Car Sales in the US

0.40

0.500.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

0.10

0.150.20

0.25

0.30

0.35

0.40

0.45

Exports (LHS)

For domestic market (RHS)

(million cars)

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

Cars assembled in the US

Imported cars

(YoY,%)

Note: Three-month moving average, Date for 3Q10 assumed that shipment in September isunchanged from the previous month. Shipment for the domestic market is calculated by totalproduction minus exports.Source: Japan Automobile Dealers Association, Credit Suisse

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse



07 October 2010


There are also concerns over negative spillovers into other industries. According to 2005

Input-Output Tables for Japan, a one-unit increase in demand for the transport equipment

sector boosts overall demand by 2.815 units1. This is significantly higher than the average

multiplier of 1.875 on an all-industries basis (excluding office supplies and "activities not

elsewhere classified"), thereby highlighting the importance of the transport equipment

sector to the economy as a whole. It is also up from 2.692 in 1995 and 2.671 in 2000,

suggesting that cuts to transport equipment production are likely to have an even greater

impact on overall industrial activity than might previously have been the case. Input-outputtables can also be used to show that the impact is likely to be greatest for iron & steel,

other manufacturing industry products, and electrical machinery among manufacturing

sectors, and on commerce, education & research, and services for businesses among

non-manufacturers.

Exhibit 7: Output Multiplier by Industry

Manufacturing Sector Non-manufacturing Sector

Beverages and foods 2.010 Construction 1.935

Textile products 1.934 Electricity, gas, etc. 1.634

Pulp, paper wooden products 2.124 Water supply , waste disposal business 1.653

Chemical products 2.218 Commerce 1.514

Petroleum and coal products 1.218 Finance and insurance 1.597

Ceramics products 1.831 Real estate 1.250

Iron and steel 2.650 Transport 1.815

Non-ferrous metal 1.968 Information and communications 1.683

Metal products 2.129 Public administration 1.458

Industrial machinery 2.205 Education and research 1.429

Electrical machinery 2.142 Medical service, soc ial security, etc 1.679

Info. and communication equipment 2.206 Other public service 1.585

Electronic component 2.165 Business services 1.706

Transportation equipment 2.815 Personal services 1.691

Precision instruments 1.981 Office supplies 2.724

Miscellaneous products 2.043

Source MIAC, Credit Suisse

Exhibit 8: Input Coefficients in Transportation Equipment Industry (Major industries)

Manufacturing Sector Non-manufacturing Sector

Transportation equipment 57.48 Commerce 5.97

Iron and steel 5.73 Education and research 4.26

Miscellaneous products 4.78 Business service 3.69

Electrical machinery 3.19 Transport 2.07

Non-ferrous metal 2.39 Electricity, gas, etc. 1.19

Industrial machinery 1.24

Chemical products 1.24

Metal products 1.21

Note: Total of intermediate sectors=100Source MIAC, Credit Suisse

1According to METI's 2007 50-sector updated input-output tables for Japan, the passenger motor carssector had a production inducement coefficient of 2.9.



07 October 2010


Economic stimulus measures drove four successive increases in real consumer spending

from 2Q 2009 onwards, with durable consumer goods contributing 0.4ppt to the 0.5%

average pace of quarter-on-quarter growth as sales of energy-efficient household appliances

and environmentally friendly motor vehicles were boosted by the "eco points" and "eco car"

purchase incentive and subsidy schemes. By comparison with the "eco car" program,

however, the "eco points" scheme (applicable to LCD televisions, refrigerators, and air

conditioners) appears to have had relatively little impact on domestic production levels.

Whereas most domestically sold cars were made in Japan, a significant proportion of household appliances are likely to have been assembled overseas. As such, while sales of

durable consumer goods are likely to fall away over the next few months following a

temporary surge driven by stimulus policies and this year's abnormally hot summer, it is the

decline in car sales that is likely to have the greatest impact on overall production activity.

Exhibit 9: Real Consumer Spending by Goods andServices

Exhibit 10: Production by Products Subject to “Eco-point” System, etc.

-2.5-2.0-1.5-1.0-0.50.0

0.51.01.5

2.02.5

2 Q 0 5

3 Q 0 5

4 Q 0 5

1 Q 0 6

2 Q 0 6

3 Q 0 6

4 Q 0 6

1 Q 0 7

2 Q 0 7

3 Q 0 7

4 Q 0 7

1 Q 0 8

2 Q 0 8

3 Q 0 8

4 Q 0 8

1 Q 0 9

2 Q 0 9

3 Q 0 9

4 Q 0 9

1 Q 1 0

2 Q 1 0

ServicesNon-durable consumer goodsHalf-durable consumer goodsDurable consumer goods

(QoQ% pts)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3 Q 0 7

4 Q 0 7

1 Q 0 8

2 Q 0 8

3 Q 0 8

4 Q 0 8

1 Q 0 9

2 Q 0 9

3 Q 0 9

4 Q 0 9

1 Q 1 0

2 Q 1 0

3 Q 1 0

Passenger cars

Liquid crys tal TV sets

RefrigeratorsAir-conditioners

Total

(QoQ% pts)

Note: Contribution to quarter-on-quarter change in real consumer spendingSource: Cabinet Office, Credit Suisse

Note: Data for 3Q10 are an average in July and August.Source: METI, Credit Suisse

We are currently forecasting a relatively gradual deceleration in industrial output from

+27.5% (yoy) in 1Q 2010 to +21.0% in 2Q, +13.5% in 3Q, and +10.0% in 4Q, but weremain wary of the potential for a somewhat sharper slowdown in late 2010 / early 2011

given that car sales have plunged and major manufacturers are projecting further declines

in production through October.



07 October 2010


Business cycle update

Still a long way to overcome deflation

• The job market has bottomed out, but is too modest to overcome deflation

• Consumer spending was well supported by unusually hot weather and last-

minute demand before the termination of the “eco car” incentive measures

• Total cash earnings slowed down to 0%yoy in August to the lowest growth in

six months

Foreign demand (Exhibits 11-16)

A slowdown in the momentum behind the global recovery has started weighing on exports.

Seasonally adjusted trade volume dropped 6.9%mom in August, the largest monthly drop

since January 2009, on our estimates. The average index for July-August was 4.8% below

the average for April-June, suggesting that overall exports in July-September will likely drop

from the previous quarter for the first time in six quarters. Exports have fallen in three of the

last four months, and it is probable that the export recovery has entered a soft period. The

biggest month-on-month decline was in exports to the US, which fell by a large 10.3%mom.

Exports to Asia (-4.7%mom) and the EU (-0.5%mom) also dropped. Exports to the EU havebeen relatively robust since the beginning of the year, as the recovery in exports to the EU

started more slowly than that to the US and Asia in the early stage of the current cycle.

However, the pace of the recovery has lost momentum in the last two months.

Industrial production (Exhibits 17-20)

Industrial production has entered the adjustment phase to some extent, in our view.

Production dropped by 0.3%mom in August, for the third consecutive monthly decline.

According to METI, the major manufacturers plan to cut production by 0.1% in September

and 2.6% in October. If these plans are realized, production in the July-September period will

drop by 1.2%qoq, for the first decline in six quarters. We anticipate that the production will

likely fall in the October-December period as well. For October, this reflects METI’s

expectation of a large decline in production by the transportation industry. Preparing for the

end of the tax incentives for purchasing environmentally friendly cars, major auto makershave announced plans to cut production by 20-30% in October and beyond, in anticipation of

a significant decline in auto sales. The transportation equipment industry provides about

20% of total production and spillover effects to other industries can be significant.

Corporate sentiment (Exhibits 21-22)

The September BoJ Tankan survey reported that companies’ DI for business conditions

improved for the sixth straight quarter for both manufacturers (+1 to +8) and non-

manufacturers (-5 to 2) due to the effect of an unseasonably hot summer and the impact of

last-minute demand. However, manufacturers expect conditions to begin worsening again

in the future, with a DI for future business conditions of -1 for manufacturers and -2 for

non-manufacturers. The reactionary decline after last-minute demand, rapid yen

appreciation, and heightened uncertainty over the global economic outlook are having a

major impact on corporate sentiment, in our view.

Corporate capex (Exhibits 23-26)

In the BoJ Tankan survey, capital spending for FY10 on an all-firms basis was revised

upward 1.3% points compared to the June survey, to a 1.0%yoy decline. However, this is

a modest upward revision compared to past capital spending recoveries, and suggests

that companies are maintaining their cautious stance on capital spending.

Exports should likely

continue to recover,

but at a slower pace

Industrial production

seems to have entered

a temporary correction

phase

BoJ Tankan survey

reports sharp

deterioration in

companies’ outlook

FY10 capital spending

plans are revised

upward only slightly



07 October 2010


Employment (Exhibits 27-31)

The employed population (including self-employed) fell slightly, down -10K mom in August,

the first time decline in three months (+220K in July). Meanwhile, the unemployment rate

eased 0.1pp to 5.1%, and the job-offer-to-applicant ratio continued to improve for the

fourth consecutive month (+0.01pt to 0.54 in August). We tend to think the job market has

bottomed out. Still, at present, industrial production seems to have entered an adjustment

phase. This presents a risk that the job recovery will remain weak or even stall againaround year-end.

Consumer sentiment (Exhibits 32-34)

The momentum driving the recovery in personal spending is rapidly slowing. The August

Economy Watchers Survey reported that the household activity-related DI had dropped to

44.9 for the first decline in two months. The 4.5 point drop over the previous month was the

sharpest decline since November 2009. The improvement in the July DI can be attributed to

the robust sales of summer products, particularly air conditioners, which were spurred by the

extremely hot weather, and we would surmise that the drop in the August DI was due to low

turnout attributable to the heat wave and poor sales of fall goods. The DI for future economic

conditions stood at 39.6, the fourth straight month of declines (down 6.6pts mom) and the

lowest level since December 2009. Moreover, the employment-related DI fell 6.8pts mom to

44.5, to undercut 50 for the first time in five months.

Consumer spending (Exhibits 35-36)

Real household consumption rose 0.7%mom in August in the Household Survey (Family

Income and Expenditure Survey, seasonally adjusted). Meanwhile, real retail sales gained

+1.6%mom in August (+1.7% in July). In addition, unusually hot weather and rush demand

against the termination of the “eco car” incentive scheme seem to have continued to

support consumption in September, implying private consumption in the July-September

period could achieve positive quarter-on-quarter growth. Meanwhile, retail sales seemed

to have been supported relatively well in August, reflecting the impact of an abnormally hot

summer and a last-minute surge in demand for durable consumer goods. Retail sales rose

4.3%yoy in August. This is the eighth consecutive month yearly increase and the largest

rate of increase since April.

Residential investment (Exhibits 37-38)

New housing starts jumped 20.5%yoy in August for the third consecutive month yearly

increase. This large increase in August is basically a base-year effect, but the recent trend

in housing starts signals that housing market has bottomed out and may be moving

towards moderate recovery phase, in our view. On a seasonally adjusted base, new

housing starts also showed the third consecutive monthly increase (7.4%mom) and

reached to an annualized 0.8 million unit level for the first time in five month (annualized

0.829 units). Having said that, according to the September BoJ Tankan survey, the

business condition DI for large real estate companies is expected to worsen again towards

December. We remain cautious about a sustainability of the housing market recovery for

the time being.

Public demand (Exhibit 39)Real public works spending rose 9.3% in FY2009 for the first time in 15 years, thanks to

the formulation of a large-scale supplemental budget and the decision to bring forward the

public works budget as an additional stimulus measure. However, the DPJ government

froze about ¥3tn worth of projects in the first supplementary budget, and the second

supplementary budget for fiscal 2009 consists almost entirely of financing support for

SMEs and employment measures. Public works spending amounts to only ¥500bn for

regional infrastructure development. On a GDP basis, real public works have fallen

quarter-on-quarter since last autumn.

The job market has

bottomed out, but the

outlook has become

even gloomier

Pace of

improvement in

consumer

sentiment gradually

slows down

An abnormally hot

summer and a last-

minute surge in demand

for durable goods

supported consumer

spending in August

Housing starts rose for

the third consecutive

month in August, but

we remain cautious

about the outlook

Second supplementary

budget consists

primarily of financing

support for SMEs and

employment measures



07 October 2010


Wage and price indicators (Exhibits 40-42)

Total cash earnings was unchanged from the previous year, to the lowest growth rate in

six months in August. A rate of decline in scheduled cash earnings was eased slightly to

-0.1%yoy from the previous month (-0.3%yoy), but unscheduled cash earnings slowed

down (from 12.4 yoy to 10.8%yoy) and special cash earnings, which reflect bonuses and

so on, turned negative for the first time in three month to -10.7%yoy from +3.8%yoy in July.

The lack of response by retail prices to the shrinking negative output gap over the pastfour quarters suggests to us that the level of the output gap matters more than its direction.

August core core CPI (CPI excluding food and energy) was in line with the consensus

forecast declining -1.5%yoy. On a seasonally adjusted basis, it fell -0.1%mom. Meanwhile,

September Tokyo core core CPI was -0.1%mom. It suggests nationwide core core CPI in

September will also remain weak. It is unlikely, in our view, that core core CPI will turn

positive during FY2011. Based on our estimated SVAR model, deflationary pressure from

a large GDP shock that occurred during Q4 2008-Q1 2009 will peak in Q3 2010 but will

likely remain considerable until the beginning of 2013. Incidentally, the tobacco tax hike

that started from October 2010 will push up core core CPI by +0.2-0.3ppt.

The level of the output

gap matters more than

its direction



07 October 2010


Exhibit 11: US Manuf. ISM Survey New Order Index Exhibit 12: Manufacturing Survey New Order Index

20

30

40

50

60

70

80

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

-50.0

-40.0

-30.0

-20.0-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

NY Fed Manufact uring Survey

Philadelphia Fed Business Outlook Surv ey

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: NY Fed, Philadelphia Fed, Credit Suisse

Exhibit 13: China PMI Manuf. Survey Exhibit 14: Real Trade Indices

20

25

30

35

40

45

50

55

60

65

70

Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10

New orders

Imports

60

70

80

90

100

110

120

130

140

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

Real Exports

Real Imports

(2005=100)

Source: © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse Source: BoJ, Credit Suisse

Exhibit 15: Customs-Cleared Trade Indices Exhibit 16: Current Account Balance

-50

-40

-30

-20

-10

0

10

20

30

40

50

Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 F eb-10 Aug-10

Exports (mom)

Imports (mom)

Exports (yoy )

Imports (yoy ) -5

0

5

10

15

20

25

30

35

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

-80

-60

-40

-20

0

20

4060

80

100

120

Current Account (LHS)

YoY (3MMA, RHS)

(trillion y en) (%)

Source: MoF, Credit Suisse Source: BoJ, Credit Suisse

Exhibit 17: Industrial Production and Shipments Exhibit 18: Industrial Production and Shipments (2)

60

70

80

90

100

110

120

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

Production

Shipments

(2005=100)

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Jul-

10

Production (mom % chg)

Shipments (mom % chg)

Production (yoy % chg)

Shipments (y oy % chg)

(%)

Note Production data in Sep and Oct are METI's forecasts.

Source: METI, Credit Suisse




07 October 2010


Exhibit 19: Industrial Inventory Index and Inventory toShipment Ratio

Exhibit 20: Industrial Inventory Changes

80

90

100

110

120

130

140

150

160

Jul-

01

Jul-

02

Jul-

03

Jul-

04

Jul-

05

Jul-

06

Jul-

07

Jul-

08

Jul-

09

Jul-

10

Inv entory index

Inv entory to s hipment ratio index

(2005=100)

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Jan-

09

Jul-

09

Jan-

10

Jul-

10

Seasonally adjusted mom % chg

YoY % chg

(%)

Source: METI, Credit Suisse Source: METI, Credit Suisse

Exhibit 21: BoJ Tankan Survey (BusinessConditions DI)

Exhibit 22: Business Watchers’ Survey for Manufacturers and the Nomura PMI

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10

Large manufact urers

Large non-manuf acturers

( " g o o d " － " b a d " % p o i n t s ）

0

10

20

30

40

50

60

Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10

Future condition DI

Nomura/J MMA Manuf acture PMI

(%)

Source: BoJ, Credit Suisse Source: Cabinet Office, the BLOOMBERG PROFESSIONAL™ service

Exhibit 23: Core Machinery Orders (1) Exhibit 24: Core Machinery Orders (2)

600

700

800

900

1000

11001200

1300

Jul-

01

Jul-

02

Jul-

03

Jul-

04

Jul-

05

Jul-

06

Jul-

07

Jul-

08

Jul-

09

Jul-

10

(billion y en)

-50

-40

-30

-20

-10

0

10

20

30

Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10


YoY % chg

(%)

Source: Cabinet Office, Credit Suisse Source: Cabinet Office, Credit Suisse

Exhibit 25: Floor Area of Construction Started (non-residential)

Exhibit 26: Average Office Vacancy Rates

-60

-40

-20

0

20

40

60

80

Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

(%) （1000㎡)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Aug-98 Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10

Tokyo

Nagoy a

Osaka

(%)

Source: MLIT, Credit Suisse Source: Miki Shoji, Credit Suisse



07 October 2010


Exhibit 27: Changes in the Number of Workers Exhibit 28: Changes in the Non-Farm Payroll Number

-3

-2.5

-2

-1.5-1

-0.5

0

0.5

1

1.5

Aug-06 F eb-07 Aug-07 Feb-08 Aug-08 F eb-09 Aug-09 F eb-10 Aug-10


YoY % chg

(%)

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Aug-06 F eb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 F eb-10 Aug-10


yoy % chg

Source: MIC, Credit Suisse Source: MIC, Credit Suisse

Exhibit 29: Unemployment Rate Exhibit 30: Job Offers to Applicants Ratio

3

3.5

4

4.5

5

5.5

6


220

240

260

280

300

320

340

360

380No. of unemployed (RHS)

Unemployment Rate (LSH)

(%) (10 thousand)

0.4

0.5

0.6

0.70.8

0.9

1

1.1

1.2

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

(X)

Source: MIC, Credit Suisse Source: MLHS, Credit Suisse

Exhibit 31: New Job Offers (Including Part-TimeEmployees)

Exhibit 32: Consumer Sentiment Index

-40

-30

-20

-10

0

10

20

30



yoy % chg

(%)

20

25

30

35

40

45

50

55

Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10

(%)

Source: MHLW, Credit Suisse Note: Data before April 2004 use old base.

Source: Cabinet Office, Credit Suisse

Exhibit 33: Business Watchers’ Survey – CurrentBusiness Conditions for Households (1)

Exhibit 34: Business Watchers’ Survey – CurrentBusiness Conditions for Households (2)

10

15

20

25

30

35

40

45

50

55

60

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

Household activ ity -related

(Retail)

(%)

0

10

20

30

40

50

60

70

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

Food and bev erageServices

Housing

(%)

Source: Cabinet Office, Credit Suisse Source: Cabinet Office, Credit Suisse



07 October 2010


Exhibit 35: Real Household Spending Exhibit 36: Retail Sales

-8

-6

-4

-2

0

2

4

6

8

Aug-06 F eb-07 Aug-07 Feb-08 Aug-08 F eb-09 Aug-09 F eb-10 Aug-10


yoy % chg

(%)

-8

-6

-4

-2

0

2

4

6

Aug-06 F eb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10


yoy % chg

(%)

Source: MIC, Credit Suisse Note: Retail sales indices, %mom chg.


Exhibit 37: New Housing Started Exhibit 38: New Housing Started (2)

50

60

70

80

90

100

110

120

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

4

5

6

7

8

9

10

Units (LHS)

Square meters (RHS)

（1000 units）（million ㎡）

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

Aug-

06

Feb-

07

Aug-

07

Feb-

08

Aug-

08

Feb-

09

Aug-

09

Feb-

10

Aug-

10

Units (mom % chg)

Square meter (mom % chg)

Units (yoy % chg)

Square meter (yoy % chg)

(%)

Source: MLIT, Credit Suisse Source: MLIT, Credit Suisse

Exhibit 39: Construction Orders from Public Sector Exhibit 40: Corporate Prices

-80

-60

-40

-20

0

20

40

60

80

J ul-07 J an-08 J ul-08 J an-09 J ul-09 J an-10 J ul-10

Orders f rom central government

Orders f rom local government

（yoy %

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

CGPI

CSPI

（YoY %）

Note: Quarterly base, but monthly base for 2009.

Source: MLIT, Credit Suisse

Source: BoJ, Credit Suisse

Exhibit 41: CPI Exhibit 42: Nominal Wage Indices

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

Core CPI

Core core CPI

（YoY%）

-8-7

-6-5

-4-3

-2-1

01

23

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

Total Cash Earnings

Scheduled Earnings

（YoY%）

Source: MIC, Credit Suisse Source: MHLW, Credit Suisse



07 October 2010


Money and credit update

The BoJ has opted for QE2

• The BoJ implemented additional monetary policy easing this week, including

(1) a lowering of the policy rate target, (2) a clarification of the time horizon

based on the “understanding of medium-to long-term policy stability” and (3)establishment of an asset purchase program

The Bank of Japan lowered its policy rate target from the current “around 0.1%” to “around

0.0-0.1%” at the Monetary Policy Meeting this week. While we had anticipated the policy

change by the BoJ, the timing was somewhat earlier than expected. The BoJ also clarified

that it will maintain a virtually zero interest rate policy until the board becomes confident

that price stability is in sight. In addition, the BoJ said that it will examine the establishment

of a program on its balance sheet to purchase various assets including risky assets such

as corporate bonds, ETFs as well as J-REITs. We think that the BoJ’s decision this week

signifies the start of implementing “QE2”.

BoJ current account and monetary base (Exhibit 43)

The monetary base reaccelerated to 4.8%yoy in September. While banknotes in

circulation slowed down for the first time in four months to 1.0%yoy, current account

balances at the BoJ rose 38.4%yoy from 32.7%yoy in July. An increase in demand for

funds towards the end of the month and the BoJ’s unsterilized intervention seems to have

contributed to the increase. On a seasonally adjusted base, the monetary base rose for

the first time in two months by an annualized 2.8%mom. As noted above, the BoJ lowered

its policy rate target to “0.0-0.1%” this week and we think this decision will make it easier

for the BoJ to raise current account balances at the BoJ if necessary.

Money stock (Exhibit 44)

M2 grew 2.8%yoy in August, accelerating from a 2.7% increase in July. On a seasonally

adjusted basis, M2 rose 3.8%mom annualized, the fastest growth in three months. The

growth rate of M1 accelerated for the third consecutive month by 2.1%yoy, but quasi-money showed the slowest increase since October 2007(+0.7%yoy) to 0.8%yoy. While

investors seem to have shifted their money from risky assets to safe deposits (mainly,

demand deposits), weak demand for bank loans has contributed to slower growth of

outstanding quasi-money. Broadly defined liquidity also slowed to 0.1%yoy from 0.7%yoy

in July. Outstanding foreign bonds dropped year-on-year for the second consecutive

month by 3.8% and that of investment trusts has been slowing since early this year

(August: +0.1%yoy).

Bank lending (Exhibits 45-47)

According to the Principal Figures for Financial Institutions, outstanding bank lending in

August dropped for the ninth consecutive month by 2.0%yoy (July:-1.9%yoy). While the

rate of decline in outstanding bank loans for city banks accelerated to -3.9%yoy from -

3.7%yoy in July, the lending by regional and second regional banks rose for the third

consecutive month by 0.2%yoy. On a seasonally adjusted basis, the lending by all banks

dropped 0.1%mom with -0.4% for city banks. The lending by regional banks rose for the

seventh consecutive month by 0.2%. That’s said, we think that the increase in bank

lending by regional banks are mainly to individuals (housing loans) or for local

governments, rather than private corporations.

Unsterilized

intervention

contributed to a rise in

current account

balances at the BoJ in

September



07 October 2010


Credit market (Exhibits 48-50)

Credit markets continued to ease on receding financial market anxiety and expected

economic recovery. While LIBOR rates have declined slowly, they have undercut levels

recorded before the Lehman shock and have narrowed to November 2007 levels.

Nevertheless, term rates tend to fall reflecting the BoJ’s ample liquidity supply towards the

year-end. However, while the newly introduced funds-supplying operations, which are

aimed at lowering the rates in the long end of the money market, were taking effect, thespread between six- and three-month LIBOR rates has not shrunk very much yet. In

corporate bond markets, while credit spreads on Baa-rated bonds continued to fall, the

spread on Aa- and A-rated bonds have started widening, recently. According to a Nikkei

article, long-term JGB yields have recently been unstable on uncertainty about the

outcome of the ruling Democratic Party of Japan’s presidential election having a negative

influence on the yields on high-rated bonds.



07 October 2010


Exhibit 43: Monetary Base Exhibit 44: Money Stock (M2)

0

20

40

60

80

100

120

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

BOJ current account balances

Monetary base

(trn yen)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Aug-

01

Aug-

02

Aug-

03

Aug-

04

Aug-

05

Aug-

06

Aug-

07

Aug-

08

Aug-

09

Aug-

10

（YoY%）

Source: BoJ, Credit Suisse Source: BoJ, Credit Suisse

Exhibit 45: Average Outstanding Bank Lending(Banks and Shinkin Banks)

Exhibit 46: Outstanding Bank Lending (DomesticBanking Accounts)

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0


Banks

Banks （special fact or adjusted）

（yoy%）

-6

-4

-2

0

2

4

6

Jul-96 Jul -98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10

(YoY,%)

Source: BoJ, Credit Suisse Source: BoJ, Credit Suisse

Exhibit 47: CP Underwritten by Banks Exhibit 48: LIBOR-OIS Spread (3-month)

-40

-30

-20

-10

0

10

20


(YoY %)

0.00

0.10

0.20

0.30

0.40

0.50

0.600.70

0.80

0.90

Sep-

08

Dec-

08

Mar-

09

Jun-

09

Sep-

09

Dec-

09

Mar-

10

Jun-

10

Sep-

10

(pp)

Source: BoJ, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse

Exhibit 49: Money Market Rates Exhibit 50: Credit Spreads

-0.2

0

0.2

0.4

0.6

0.8

1

Sep-

01

Sep-

02

Sep-

03

Sep-

04

Sep-

05

Sep-

06

Sep-

07

Sep-

08

Sep-

09

Sep-

10

O/N call rate

TIBOR3M

TIBOR6M

(%)

0

10

20

30

40

50

60

70

80

90

100

Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

Aa, Spread

A, Spread

Baa, Spread

Source: the BLOOMBERG PROFESSIONAL™ service , Credit Suisse Note: Credit spreads are calculated using the Bloomberg Fair Market Value index and JGB5Y yields.

Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse



07 October 2010


Upcoming Indicators/Events

August machinery orders: Wednesday 13 October

• Previous July (Core orders, mom): 8.8%

Core machinery orders rose8.8%mom in July for a

second straight month of

growth. In particular, orders

from manufacturers were up

10.1%, sustaining the strong

9.9% growth recorded in

June. That said, core

machinery orders still

undercut the trough of past

machinery order cycles.

While the Cabinet Office’s

forecast survey predicts that

July-September will mark thefourth straight quarter of

positive growth, machinery

orders are expected to rise

only 0.8%qoq. Given the substantial monthly fluctuations, we expect that machinery orders

declined in August for the first negative month-on-month growth in three months.

Moreover, industrial production has declined month on month for three straight months

since June, with all improvement in the capacity utilization rate at a standstill. Capital

goods shipments fell 5.8%mom in August for the second straight month of negative growth.

Accordingly, we surmise that machinery orders will likely fall quarter on quarter for the first

time in five quarters in October-December.

Private corporate capital spending has gradually recovered on the back of solid corporate

earnings, but fears of a global economic slowdown, current sharp yen appreciation, and

unstable share prices may have made companies more cautious about capital spending.

The September BoJ Tankan survey reported that large companies’ DI for business

conditions improved more than expected for both manufacturers and non-manufacturers,

but the outlook worsened substantially. Capital spending plans for FY10 were revised

upward by 1.3ppts from the previous survey on an all-firms basis, but this is minimal for a

capital-spending recovery period, and large non-manufacturers’ capital spending plans

were revised downwards from the previous survey. Moreover, the USD/JPY rate on which

these business plans were premised assumed that JPY would be more than ¥5 weaker

than it actually is, so if the exchange rate continues to trend at current levels, the corporate

earnings forecast would be revised downwards and, as a result, capital spending plans

could be revised.

Upcoming IndicatorsPrior

Oct 12 (Tue) 14:00 Consumer Confidence Survey (Sep) (yoy, pp) 2.3

Oct 13 (Wed) 8:50 Machinery Orders (Aug) Core orders (mom%) 8.8

8:50 Money Stock (Sep) M2 (yoy%) 2.8

Broadly Def ined Liquidity (yoy%) 0.4

8:50 Bank Lending (Sep) (yoy%) -1.9

Oct 14 (Thu) 8:50 Corporate Goods Price Index (Sep, prelim) (yoy%) 0.0

Indicator

Source: BoJ, Cabinet Office, Ministry of Public Management, Home Affairs, Posts and Telecommunications, MoF, METI, MHLW, MLIT, Credit Suisse

Exhibit 51: Long-Term Trend of Core Machinery Orders

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

Jul-

88

Jul-

90

Jul-

92

Jul-

94

Jul-

96

Jul-

98

Jul-

00

Jul-

02

Jul-

04

Jul-

06

Jul-

08

Jul-

10

(trn yen)

Note: Shadows represent economic recession periodsSource: Cabinet Office, Credit Suisse



J a p anE c on omi c s W e ek l y

1 8

Major Economic DataJan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10

Consumption-related indicators

Real spending by all households YoY % 1.7 -0.5 4.4 -0.7 -0.7 0.5

Real spending by wage-earners YoY % 1.5 -2.2 3.6 -2.3 -3.4 0.3

Real disposable income YoY % -0.4 1.5 0.3 0.8 -5.3 7.4

Average propensity to consume YoY % 73.5 72.2 78.1 72.7 72.8 71.0

Department store sales YoY % -7.0 -7.1 -5.1 -5.8 -3.9 -7.4

Super store sales YoY % -4.3 -2.0 -6.7 -5.5 -6.2 -3.5Convenience store sales YoY % -2.7 -2.0 -2.6 -1.4 -1.1 0.9

Household activity-related DI YoY pts 18.4 19.1 16.5 12.5 9.0 3.8

Consumer sentiment index YoY pts 12.6 13.1 12.0 9.6 7.1 5.9

Monthly wages YoY % -0.2 -0.7 1.0 1.6 0.1 1.8

Real monthly wages YoY % 1.2 0.6 2.2 3.0 1.1 2.7

Labor market conditions

Unemployment rate s.a. % 4.9 4.9 5.0 5.1 5.2 5.3

# of workers s.a, MoM 10k 54 -25 -5 -28 -24 4

# of unemployed s.a, MoM 10k -16 -7 10 8 1 7

# of non-labor force s.a, MoM 10k -48 26 -8 25 30 -8

Job offers to applicants ratio s.a. 0.46 0.47 0.49 0.48 0.50 0.52

Job offers s.a. MoM％ 2.3 1.5 2.7 -1.0 3.5 2.7

Job seekers s.a. MoM％ -3.8 -1.9 0.4 -0.5 -0.2 -1.2

New job seekers s.a. MoM％ -1.1 -0.4 5.6 0.9 -1.3 5.8Corporate-related indicators

Industrial production

Production s.a. MoM % 4.3 -0.6 1.2 1.3 0.1 -1.1

Production YoY % 18.9 31.3 31.8 25.9 20.4 17.3

Shipments YoY % 20.1 29.0 29.9 27.1 21.0 18.1

Inventory YoY % -12.3 -7.5 -6.0 -3.4 -0.8 1.2

Inventory to sales ratio s.a.(2005=100) 108.0 108.3 102.3 103.5 108.5 106.7

Manufacturers' operating ratio s.a.(2005=100) 90.1 90.1 90.6 90.6 91.3 89.4

Machinery orders

Core machinery orders s.a. MoM % -3.1 -3.8 5.4 4.0 -9.1 1.6

YoY % -1.1 -7.1 1.2 9.4 4.3 -2.2

Foreign demands s.a. MoM % 2.3 3.0 3.9 -3.7 2.7 2.4

YoY % 60.9 137.3 52.4 92.5 129.5 74.7

New housing starts YoY % -8.1 -9.3 -2.4 0.6 -4.6 0.6s.a. annualized, 10k 86.3 79.4 85.4 79.3 73.7 75.0

Construction starts (floor) YoY % -27.5 -15.9 8.1 4.4 14.7 -1.4

s.a. MoM % 15.2 7.3 23.7 -32.8 8.2 -0.9

* Contracted rate is the number of contracts sold divided by the number of units for sale.Source: MIAC, Department Store Assoc., Chain Store Assoc. Convenience Store Assoc., Cabinet Office, MHLW, METI, MLIT, MoF, BoJ, JREI, Credit Suisse



J a p anE c on omi c s W e ek l y

1 9

Major Economic Data (continued)Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10

Contracted rate for condominiums

Tokyo metropolitan area % 70.3 70.7 82.8 79.9 77.0 83.9

Kinki area % 56.1 63.2 64.6 72.3 76.0 76.9

Prices

Nationwide core CPI YoY % -1.3 -1.2 -1.2 -1.5 -1.2 -1.0

Tokyo core CPI YoY % -2.0 -1.8 -1.8 -1.9 -1.5 -1.3

Domestic CGPI YoY % -2.2 -1.6 -1.3 -0.2 0.4 0.4Raw materials YoY % 15.5 14.2 10.9 21.7 29.9 18.5

Intermediate goods YoY % -1.7 -1.3 -1.2 1.0 1.9 1.8

Final goods YoY % -0.6 -0.7 -1.1 -1.2 -1.2 -1.7

CSPI YoY % -1.3 -1.3 -1.2 -1.0 -0.7 -1.0

External demand

Trade balance billion yen 61.0 647.3 949.9 734.9 316.0 682.2

Exports YoY % 40.8 45.4 43.5 40.3 32.1 27.7

Imports YoY % 9.1 30.1 21.1 24.8 34.2 26.2

Trade volume

Exports YoY % 41.3 46.1 43.7 39.6 31.9 27.5

Imports YoY % 2.1 23.0 16.9 17.7 22.5 18.1

Real trade balance s.a. MoM % -4.0 -1.4 26.3 15.4 -15.0 -2.5

Exports s.a. MoM % 0.3 1.1 2.7 6.6 1.0 -0.3

Imports s.a. MoM % 1.5 1.9 -3.9 3.0 7.2 1.1Balance of payments

Current account balance billion yen 881.9 1,593.3 2,556.4 1,242.1 1,205.3 1,047.1

Current account balance s.a. billion yen 1,684.5 1,184.6 1,784.5 1,379.6 904.8 1,362.1

Trade and services billion yen 10.8 712.3 1,099.5 433.6 347.2 658.8

Trade balance billion yen 166.7 785.3 1,089.0 859.1 391.0 769.0

Service balance billion yen -155.9 -73.0 10.5 -425.5 -43.8 -110.2

Income accounts billion yen 915.9 961.9 1,667.6 946.0 928.7 462.1

Capital and financial balance billion yen -469.2 -1,542.0 -3,694.5 49.3 -1,283.4 -438.5

Financial account billion yen -449.6 -1,518.5 -3,616.5 72.8 -1,236.0 -439.9

Direct investment billion yen 435.9 -1,124.8 -153.7 -197.8 -469.0 -513.8

Portfolio investment billion yen 5,257.6 -1,297.0 -9,784.0 6,592.4 1,758.0 -7,832.5

Changes in reserve assets billion yen -173.3 -29.7 181.6 -214.5 -91.0 -407.5

Business conditions indices

Coincident CI MoM % 3.0 0.2 1.3 0.6 0.7 0.4

Leading CI MoM % 3.0 1.3 4.0 0.2 -2.5 0.7

* Contracted rate is the number of contracts sold divided by the number of units for sale.Source: MIAC, Department Store Assoc., Chain Store Assoc. Convenience Store Assoc., Cabinet Office, MHLW, METI, MLIT, MoF, BoJ, JREI, Credit Suisse



07 October 2010


Japan Economic Forecasts

As of 7 October 2010

Q1 Q2 Q3 Q4 Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E 07 08 09E 10E 11E 08 09E 10E 11E

Real GDP -16.4 9.7 -0.3 3.4 5.0 1.5 1.3 0.0 0.7 0.6 1.6 1.8 1.8 -3.7 -1.9 2.0 1.0 -1.2 -5.2 2.8 0.8

Private consumption -5.5 5.2 2.5 2.7 2.2 0.0 0.8 0.4 0.4 0.4 0.4 0.8 0.9 -1.8 0.7 1.2 0.5 -0.7 -1.0 1.8 0.5

Private residential investment -25.9 -33.2 -25.8 -11.0 1.2 -5.1 -5.1 -5.1 2.0 2.0 2.0 2.8 -13.5 -3.7 -18.5 -3.6 2.2 -8.1 -14.2 -8.6 1.6

Private non-residential investment -30.9 -19.2 -6.7 6.8 3.2 6.2 4.1 5.3 4.1 2.4 3.2 3.2 2.1 -6.8 -15.3 2.9 3.5 0.1 -19.2 0.7 3.7

Private inventory (c ontribution) -5.3 0.6 -0.8 -1.6 0.5 -0.2 0.0 0.0 0.0 0.0 -0.1 0.0 0.1 -0.1 -0.5 -0.3 0.0 -0.4 -0.4 -0.3 0.1

Public investment 14.6 39.0 -4.8 -4.9 -3.5 -10.3 -15.1 -21.9 -20.3 -18.5 -5.0 -5.0 -6.3 -6.6 9.3 -12.1 -14.4 -8.5 7.4 -6.7 -16.6

Net exports (c ontribution) -3.0 8.5 0.9 2.4 2.4 1.4 0.7 -0.2 0.4 0.5 1.0 0.8 1.3 -1.2 0.4 1.5 0.5 0.1 -1.3 2.2 0.5

Exports -68.1 48.6 38.4 24.8 31.0 25.8 7 .0 1 .2 5 .0 5 .0 8 .2 8 .2 9 .3 -10.4 -9 .5 18.6 5 .9 1 .6 - 23 .9 25.0 6 .3

Imports -53.8 -18.3 27.6 6 .1 12.6 17.4 4 .0 4 .0 3 .2 3 .2 3 .2 4 .9 1 .7 -4 .1 -11.8 10.6 3 .7 1 .0 - 16 .7 10.3 4 .4

Nominal GDP (yoy%) -8.6 -6.3 -5.8 -3.8 1.8 0.7 1.1 0.6 -1.1 -0.6 0.0 0.6 0.9 -4.2 -3.6 0.3 0.2 -2.0 -6.1 1.1 -0.3

Industrial production (yoy% ) -34.6 -27.4 -19.4 -4.3 26.7 22.0 15.0 10.0 2.7 -12.7 -9.0 13.2 3.2 -3.4 -21.9 18.4 3.7

CPI (core, yoy%) 0 .0 -0 .9 -2 .3 -1 .7 -1 .2 -1 .3 -1 .0 -0 .8 -0.8 -0 .6 -0 .6 -0 .5 0 .3 1 .2 -1 .6 -1 .0 -0 .5 1 .5 -1.3 -1 .1 -0 .6

CPI (excluding food and energy, yoy%) -0 .2 -0 .5 -0 .9 -1 .1 -1 .1 -1 .6 -1 .6 -1 .5 -1.4 -0 .9 -0 .8 -0 .7 -0 .2 0 .0 -0 .9 -1 .5 -0 .8 0 .0 -0.7 -1 .5 -1 .0

Unemployment rate (%) 4.6 5.2 5.4 5.2 4.9 5.2 5.3 5.2 5.1 5.0 4.9 4.8 3.8 4.1 5.2 5.2 4.9 4.0 5.1 5.2 5.0

Current account balance to GDP (%) 1.8 3.0 3.1 3.3 3.9 3.1 3.2 3.3 4.8 2.5 3.3 3.3 3.4 3.2 2.8 3.4 3.5

Overnight call rate (%) 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.5 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

5yr JGB yields 0.8 0.7 0.6 0.6 0.6 0.4 0.4 0.3 0.3 0.7 0.8 0.6 0.3 -- 0.7 0.6 0.3 --

10yr JGB yields 1.4 1.4 1.3 1.3 1.4 1.1 1.2 0.9 0.9 1.3 1.4 1.4 0.9 -- 1.2 1.3 0.9 --USD/JPY 99 96 90 93 93 89 86 86 89 93 100 99 93 89 -- 91 93 86 --

Notes: 1. q/q percentage changes at annualized rates

2. IP grow th is calculated by using non-seasonally adjusted actual figures, w hile forecast f igures are calculated based on seasonally adjusted figures

3. Current account balance as a percentage of GDP

4. Policy rate and JGB yields are end of period data

2010 2011 FY CY2009

Source: Cabinet Office, MoF, METI, Statistics Bureau, Credit Suisse estimates



FIXED INCOME RESEARCH > ECONOMICS RESEARCH > DEVELOPED COUNTRIES

Dr. Neal Soss, Managing Director Chief Economist and Global Head of Economics

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EURO AREA AND UK ECONOMICS

Robert Barrie, Managing Director

Head of European Economics +44 20 7888 [email protected]

Christel Aranda-Hassel, Director

+44 20 7888 [email protected]

Neville Hill, Director


Giovanni Zanni, Director

European Economics – Paris+33 1 70 39 [email protected]

Violante di Canossa, Associate


US ECONOMICS

Dr. Neal Soss, Managing Director

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Jay Feldman, Director

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Dana Saporta, Director


Jonathan Basile, Vice President


Jill Brown, Vice President


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ASIA

JAPAN ECONOMICS

Hiromichi Shirakawa, Managing Director


Satoru Ogasawara, Vice President


Takashi Shiono, Associate


NON-JAPAN ECONOMICS

Dong Tao, Managing Director

Head of Non-Japan Asia Economics+852 2101 [email protected]



Disclosure Appendix

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