Sumitomo Mitsui Banking Corporation Japanese Economic Outlook “Abenomics” as a new economic policy in Japan August 31, 2015 Fumio Hoshi Advisor Sumitomo Mitsui Banking Corporation

Japanese New Economic Policy – Abenomics 3 arrows Abenomics so far Table of Contents Japanese New Economic Policy – Abenomics 3 arrows Abenomics so far Opportunities and challenges 本講演では、 はじめに ASEAN経済共同体・いわゆるAEC、 次に 東アジア地域包括的経済連携・いわゆるRCEP、 のご説明 最後に、簡単に 役割の変化が期待される統括会社について簡単に申し上たいと思います。 では、３ページ目をご覧下さい。 This material is intended for information and discussion purposes only and it is not a solicitation to participate in any particular transaction. Although the information is obtained from sources considered reliable by Sumitomo Mitsui Banking Corporation (hereinafter “SMBC”), SMBC makes no representation or warranty as to, and does not take any responsibility for, the accuracy or completeness of the information contained or opinion expressed herein. The information contained in this material may be amended from time to time without prior notice. This document should not be quoted, copied, forwarded or distributed to any other party by using electronic or mechanical methods without our consent.

Japanese New Economic Policy - Abenomics Background Japan lost 2 decades after the bubble economy collapsed – recession, strong Japanese Yen, stagnant stock prices, etc. Key challenge – “Pulling out of continues deflation” Peak of the bubble economy” Data from 1985 to 2012 Source: IMF, Nikkei

Japanese New Economic Policy - Abenomics Early 2013, Abe Cabinet launched a new economic policy – Abenomics Ultimate objective - “Change mindset of Japanese people from deflation to inflation - 2% inflation target” Abenomics - consists of “3 arrows” Unlimited monetary easing through the central bank (Bank of Japan - BOJ) Massive fiscal stimulus through public spending Structural reform to improve economic growth potential

3 arrows / 1st arrow - monetary easing Measures 2% inflation target Unlimited money supply / asset purchase through BOJ e.g. Japanese Gov Bond purchase: Apr 2013 +JPY50trillion (USD500bil), Oct 2014 +JPY30trillion (USD300bil) Negative interest rate Objectives Reduce (negative) interest rates Weaken Japanese Yen vs USD Increase exports Lift up stock prices

3 arrows / 2nd arrow – public spending Measures Massive government spending (As of Jan 2013, JPY10trillion (USD100bil) extra budget approved) Objectives Contribute GDP growth – impact estimated 2% 600 thousand job creation expected Stimulate private sector investment

3 arrows / 3rd arrow – structural reform Measures Deregulation / regulatory reform (e.g. medical regulation easing, labor market reform, adopting TPP - Trans-Pacific Strategic Economic Partnership Agreement) Corporate tax reduction Objectives Facilitate private sector investment Promote Japanese businesses globally Improve Japan's human resources potential Create new business opportunities – agriculture, energy, etc.

Abenomics so far Economic recovery Abenomics launched Data from 2011 to 2015 Source: Japanese Gov, BOJ Abenomics launched Data from 2011 to 2015 Source: Nikkei

Opportunities and challenges Change mindset from deflation to sustainable growth De-regulation against “bed rock regulations” – agriculture, medical, health care, labor market, etc. Real estate investment increase – office vacancy rate low, high-end residential condominium Investment opportunities toward Tokyo Olympic in 2020 Increase number of tourists to Japan Wage increase, job applicant ratio improve Employment opportunities for women

Opportunities and challenges Fiscal reconstruction – huge negative primary balance, government debt over 200% of GDP, etc. VAT hike in 2017, other tax reform necessary Post monetary easing Falling oil prices (negative to inflation) Demographic composition for labor market Narrow path but may be achievable