Debut of BOJ Governor Haruhiko Kuroda（April 2013）

◆Debut of BOJ Governor Haruhiko Kuroda: With his monetary policy set on a different horizon, the debut of Haruhiko Kuroda as governor of the Bank of Japan (BOJ) sent a positive shockwave through the market. Monetary easing introduced by the new BOJ regime on 4 April was bolder than market expectations. Now that Kuroda’s magic ball has been passed to the government, the market will watch the ability of the Abe administration to achieve three tasks, namely 1) to thoroughly improve Japan’s foundations for economic growth, 2) to maintain fiscal discipline, and 3) to increase employee income.

◆Main scenario for Japan’s economy: Japan’s economy slipped into recession after peaking in March 2012. It now appears to have hit bottom in November 2012 and to have bottomed out, and is expected to continue expanding, supported by (1) the recovery of the US and Chinese economies, (2) the continuation of reconstruction demand and the formation of a large-scale supplementary budget, and (3) the ongoing depreciation of the yen/ascent of share prices accompanying the BOJ’s adoption of inflation targeting. With regard to the last, we believe that a correction of the yen’s excessive appreciation is currently underway in foreign exchange markets. Also, a comparison with the real economy suggests that stock prices are potentially still undervalued at current levels.

◆Risks facing Japan’s economy: In this report, we examine four risk factors facing Japan’s economy: (1) any deepening of the European sovereign debt crisis, reflecting likely political instability in Italy and Spain, (2) any worsening of Japan-China relations, (3) the US fiscal issue, and (4) a surge in crude oil prices stemming from geopolitical risk.