#1Japan in the World The global economy as the pandemic endgame approaches January 2022 NOMURA Connecting Markets East & West#2Japan in the World NOMURA The global economy as the pandemic endgame approaches Approaching the pandemic endgame 1 Accelerated inflation due to supply constraints 2 Emerging concerns of economic slowdown in China 3 Reopening of economies looks set to ease supply constraints 4 Low probability of financial disequilibrium 5 A risk of greenflation 6 Risk of asymmetric reopening of economies Japan enters the reopening phase Significant job losses have been avoided in Japan Subdued wage growth remains unchanged 7 8 9 10 Disadvantages of a cheaper Japan To reboot Japan's potential growth rate Green and digital will drive structural reform in Japan 11 12 13 This document is copyrighted material belonging to Nomura Securities Please see the last page for details 1#3NOMURA Approaching the pandemic endgame Deviation of real GDP level from past trend (2010-19) (%) 4.0 2.0 2021 2022 0.0 -2.0 -4.0 -6.0 H T *p*|| Having faced repeated surges in infection, progress in vaccination has started to lead the global economy to the eventual endgame of COVID-19. Despite differences in timing and degree of recovery among advanced and emerging economies, the world economy will more or less return to the pre-COVID growth trend in 2022. -8.0 ASEAN-5 Note: To estimate GDP deviation from the trend in 2021 and 2022, we measures the projected real GDP level based on IMF forecasts. Source: Nomura, based on IMF data 2#4Accelerated inflation due to supply constraints Core consumer price inflation rate in major developed economies (y-o-y, %) 5.0 Eurozone -Japan 4.0 US -UK 3.0 2.0 1.0 0.0 -1.0 NOMURA At the same time, we are facing a sort of growing pain ahead of the endgame. The production of various durable goods, the demand for which surged during the pandemic as stay at home and work from home became common, now suffers supply constraints for intermediate parts including semiconductor chips. Mismatches in supply and demand caused by supply constraints are leading accelerated inflation, driven by elevated international commodities prices. -2.0 -3.0 00 02 04 06 90 08 80 10 10 12 14 16 18 20 (CY) Note: Definition of 'core' depends on particulars for each economy. Japan's core inflation includes impacts of consumption tax hikes and free education policy. Source: Nomura, based on Haver Analytics data 3#5Emerging concerns of economic slowdown in China China's official manufacturing PMI and Credit Impulse Index NOMURA (y-o-y, %) 20.0 15.0 10.0 5.0 0.0 -5.0 (DI) Credit impulse index (LHA) 58.0 Official manufacturing PMI (RHA) 56.0 54.0 52.0 50.0 48.0 46.0 44.0 42.0 -10.0 40.0 05 07 09 11 13 15 17 19 21 (CY) Source: Nomura, based on Haver Analytics data Concern for the Chinese economy is casting a shadow over the global economy heading toward reopening. Besides the deceleration of production activities due to supply constraints, 'Common Prosperity' policy enacted by the Xi Jinping administration is involving various tightening. and controlling measures on economic activities. 4#6Reopening of economies looks set to ease supply constraints Decomposition of US real private consumption (2020 Q2=100) 140.0 -Durable goods NOMURA -Nondurable goods 135.0 Services 130.0 125.0 120.0 115.0 110.0 105.0 100.0 95.0 1Q 2Q 2019 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q (CY) 2020 2021 Source: Nomura, based on US BEA data Nomura does not consider it likely that accelerating inflation, serious downturn of the Chinese economy, or a state of stagflation combining the two will hinder the reopening of the global economy from the pandemic. The reopening of economies from the pandemic will shift the axis of demand from durable goods to services. Such a shift will ease the supply constraints along with expansion of overall demand. 5#7Low probability of financial disequilibrium Net savings by sectors in G3 economies (as % of nominal GDP) NOMURA US 20.0 Private non-financial sectors EZ -JP General government EZ JP - US 16.0 12.0 8.0 4.0 0.0 -4.0 -8.0 -12.0 -16.0 -20.0 00 02 04 06 90 bay 08 10 12 14 16 18 20 (CY) In the financial markets in 2021, a concern emerged that a frontloaded tightening of monetary policy and the resulting rise in interest rates may hinder the reopening of economies. However, we believe it unlikely that a significant surge in rates will occur, as the private sectors of major economies now have huge net financial surpluses. Subdued spending as well as policy driven fund transfer to household and enterprises in the form of financial aid has increased private sector net savings, which is sometimes called 'forced savings'. This is the main source of financial surplus. Source: Nomura, based on US Fed, ECB, and BOJ data 60#8A risk of greenflation Major fossil fuel commodity index (USD/mil BTU) 7 New Castlle coal future (RHA) -WTI future (RHA) NY LNG future (LHA) 6 5 4 3 2 1 0 2017 2018 NOMURA (USD/bbl) (USD/metric ton) 300 250 200 150 100 In the longer run, however, we cannot totally rule out the possibility of stagflation. A move toward carbon neutrality in the middle of the 21st century ironically raised concerns of a lack and halt of investment in mining and production facilities for fossil fuels like oil, LNG, and coal. Markets have started to worry that a resulting persistent supply shortage may steadily elevate commodity prices and result in accelerated inflation. 50 50 0 2019 2020 2021 2022 (CY) Source: Nomura, based on Bloomberg data 7#9Risk of asymmetric reopening of economies USD/JPY rate and USD nominal effective exchange rate (\/$) 118 USD/JPY (LHA) 105 USD nominal effective exchange rate (RHA) 116 114 112 110 108 106 104 102 NOMURA 100 95 95 90 90 Monetary policy normalization leading up to the pandemic endgame may put financial stress to global economy as a whole. Given the asymmetry in degree of economic reopening among developed and emerging economies, rise in rates, and currency appreciation, higher USD in particular, caused by monetary policy normalization in developed economies, may lead to capital outflow and tightening of financial conditions in emerging economies, resulting in the destabilization of financial markets and financial systems. 100 85 20/1 20/4 20/7 20/10 21/1 21/4 21/7 21/10 22/1 (yy/mm) Source: Nomura, based on Bloomberg data 8#10Japan enters the reopening phase Nomura's estimate for Japan's real GDP (Q1 2019=100) 104.0 Actual 102.0 · Nomura est. as of 8 September 2021 Nomura est. as of 8 December 2021 100.0 98.0 96.0 94.0 92.0 90.0 NOMURA →> CY21 CY22 +4.3% We expect more or less full normalization of economic activity for Japan to be achieved in 2022, overcoming supply constraints and the 5th wave of infection in the summer of 2021. Nomura expects real GDP growth for 2022 to exceed 4% year on year, well above the potential growth of Japan, driven both by corporate related demands of real exports and capital expenditures which will overcome supply constraints and household demand relieved from public health measures. 88.0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q (CY) 19 20 Source: Nomura, based on Cabinet Office data 21 22 23 9#11Significant job losses have been avoided in Japan A breakdown of the number of employees by contract type (y-o-y, %) 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 ■Full-time employees Dispatched workers Others Part-time employees Contract workers Total -2.5 Jan Apr Jul Oct 2020 Jan 2021 Apr Jul Oct (CY) NOMURA One reason for the smooth reopening of Japan's economy after the pandemic is the relatively small scale of job losses during the pandemic. Employment and income conditions for Japanese households avoided the serious deterioration and jump in unemployment seen in the US and European countries. The risk of employment and household income acting to hinder economic recovery may thus be lower. Avoidance of large scale job losses, on the other hand, may mean that little progress has been made in reforming Japan's unique employment customs and system characterized by terribly low employee mobility. Following reopening after the pandemic, these characteristics of Japan's labor market could pose a serious challenge to economic growth. Source: Nomura, based on MIC data 10#12Subdued wage growth remains unchanged Per capita real wage growth in G3 economies (2005 average =100) 120 -Japan US 115 -Eurozone 110 105 100 95 95 00 90 05 95 07 09 11 13 15 17 19 21 (CY) Source: Nomura, based on Haver Analytics data NOMURA The preservation of Japan's unique employment customs and system may also lead to stagnation of wage growth compared to overseas economies. The administration of Prime Minister Fumio Kishida is trying to address this issue by giving more tax incentives for wage increases and conducting a direct revision of publicly- stipulated salaries for some types of jobs. However, we expect that solving the issue of low wages and stagnated wage growth will be difficult without comprehensive structural reforms of the labor market.. 11#13NOMURA Disadvantages of a cheaper Japan USD/JPY and JPY effective exchange rates (USD/JPY) 70 (2010 average=100) 160 120 170 220 270 USDJPY (LHA) JPY nominal effective exchange rate (RHA) JPY real effective exchange rate (RHA) 140 120 100 80 00 60 60 40 40 20 20 0 320 73 77 81 85 89 93 97 01 05 09 13 17 21 (CY) With the end of the pandemic, the addressing of issues if low wages and low wage growth is becoming ever more urgent. As inflation accelerates in the world economy and the Japanese yen starts to depreciate following the normalization of monetary policy and rise of rates in overseas markets, the discrepancies of price levels between Japan and overseas grows more apparent. This means a growing risk that we Japanese residents may one day face price discrepancies and suddenly realize a significant loss in the yen's purchasing power. This may also be a reason why the discussion on 'cheap Japan' and 'cheaper yen' is becoming more and more popular. Source: Nomura, based on BOJ data 12#14NOMURA To reboot Japan's potential growth rate Decomposition of Japan's potential growth rate (BOJ estimate) (y-o-y, %, contribution) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Hours worked Capital stock Total factor productivity Number of employed Potential growth rate In order to escape the trap of 'cheap Japan', we need to raise per capita value added to receive proper compensation. By raising per capita value added of all employees and raising productivity, we can also improve growth potential of the overall Japanese economy. A policy-based effort to promote recurrent education and reskilling is important. Private enterprises and their employees should also recognize its importance and intensify efforts for job training. -1.0 -2.0 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 21 (CY) Source: Nomura, based on BOJ data 13#15Green and digital will drive structural reform in Japan NOMURA Impact of carbon neutrality on global employment (IMF estimate) (Versus baseline, %) 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 Other Services Renewable Energy All industries Fossil fuels Manufacturing Construction We saw many seeds of structural changes during the pandemic; new work styles that we were forced to adopt accelerated the speed of digitalization. The birth of the Biden administration in the US also accelerated the trend towards carbon neutrality. The shift to carbon neutrality is sure to be a large scale structural shift that produces clear winners and losers in various industries. The keys for revitalizing Japan's economy will be efforts by enterprises to be the winners in these rapid structural changes and policy efforts by the government to create as many winners as possible in the domestic economy. 2020 2024 2028 2032 2036 2040 2044 2048 2052 (CY) Note: IMF estimates. Envisages 80% decline in greenhouse gas emissions by 2050 driven by national and regional policies aimed at mitigating climate change. Shows outcome of (1) phased increases in carbon taxation, (2) green stimulus including infrastructure investment and renewables subsidies, and (3) compensatory transfers to households. Also assumes avoidance of economic losses due to climate change. Source: Nomura, based on IMF data 14#16Biography NOMURA Takashi Miwa Chief Japan Economist Takashi Miwa is the Chief Japan Economist of Nomura Securities Co. Ltd. He provides in- depth analysis and forecasts of the Japanese economy, based on interregional analysis of the macro economy and financial market analysis across various asset classes. He has a particular strength in analyzing the macro economy from legal and administrative perspectives Since joining Nomura Research Institute in 1990, he has engaged in macroeconomic analysis and financial market forecasting for various regions. In 1994-96, he moved to the Fixed Income Department of Nomura Securities and analyzed the macro economy from more market-oriented perspectives while engaging in forecasting monetary policy and interest rates. He also made feasibility studies and conducted investment strategy planning with a view to the start of European Monetary Union in 1999 He received his master's degree in Law from the University of Tokyo in 2001 and his bachelor's degree in Liberal Arts and Science (majoring in Russian culture and society) from the University of Tokyo in 1990. While in the graduate school of law, he studied contract law, corporate law and bankruptcy law, and made an analysis of financial contracts and corporate behavior from the perspectives of 'Law and Economics'. This experience proved useful in analyzing banking behavior, administrative responses and price reactions of fixed income and other securities during Japan's financial turmoil through 2003 and the global financial crisis after the collapse of Lehman Brothers in 2008 From 2001, he provided economic analysis and investment ideas for major regional financial institutions including regional banks in Japan and gained an extremely good reputation among the top management of those clients. He has also authored several textbooks on economics and finance for beginners that are popular among university students and young graduates starting careers in financial institutions He moved to Nomura Securities in 2004. After belonging to the Economic Research, Investment Research, and Investment Research and Investor Services departments, he took his current position in May 2016. Since August 2018, he has been serving a dual assignment as head of the Economic Research Department 15#17A Notice from Nomura Securities NOMURA This material is intended solely for the purpose of providing information on the overall macro economy and is not to be construed as solicitation for securities or any other financial product. Furthermore, while the contents of this material are based on sources believed to be reliable, Nomura Securities does not warrant or represent that this document is accurate or complete. Economic results, appraisals, future trends, and other information expressed herein are current opinions as of the original publication date, and are subject to change without notice. This material is for the sole use of clients to whom it has been provided. 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In addition, all products carry the risk of losses owing to price fluctuations or other factors. Fees and risks vary by product. Please thoroughly read the written materials provided, such as documents delivered before making a contract, listed securities documents, or prospectuses. Nomura Securities Co., Ltd. Financial instruments firm registered with the Kanto Local Finance Bureau (registration No. 142) Member associations: Japan Securities Dealers Association; Japan Investment Advisers Association; The Financial Futures Association of Japan; and Type II Financial Instruments Firms Association Publication date: January 2022 This material was created as reference material for Nomura Securities' Japan in the World event to be held in January 2022 16#18NOMURA